Carmakers on road to recovery in China
Industry can expect further policy support after October turnaround, say analysts
China’s car sales rebounded in October after the government halved sales tax to 5 per cent for small vehicles, and analysts say continuing policy support should deliver modest growth for this pillar industry into the coming year.
Sales volume of passenger vehicles increased 13.3 per cent year on year after it shrank between June and August, while September’s tax cut for cars with engine sizes of up to 1.6 litres boosted the monthly market share for that class from 65.5 to 69 per cent.
Major domestic players SAIC, Dongfeng Motor, China Chang’an Auto and BAIC posted double-digit volume growth, although FAW missed out. Leading joint-venture manufacturers also reported positive returns.
“Generally, we believe investor sentiment on the China auto industry has improved since the purchase tax cut at the end of September 2015, though the actual impact could be a mixed bag,” wrote Daiwa analyst Kelvin Lau in a November 20 note.
Lau singled out sales of luxury models from “4S” authorised dealerships, which continued to struggle in the face of an official austerity drive.
Fitch analysts say the industry in China suffers from excessive inventory, stiff price competition and margin pressure. Rising labour costs are also hurting margins and could increase the sector’s vulnerability to outside competition from the likes of Mexico, according to Standard Life Investments.
The SUV segment has been this year’s bright spot, growing 48 per cent year on year in the first 10 months, accelerating further from 36 per cent in 2014. Fitch analysts expect consumer preference for SUVs to continue to drive the market but warn that a manufacturing ramp-up may ultimately weaken profits.
“The current fat margins have drawn many new entrants, setting the stage for more competition in the years ahead,” they wrote in a November 24 note.
But with China’s consumers preferring imported brands overall, Fitch analysts back carmakers with diversified joint venture and brand portfolios, including Dongfeng and BAIC – rather than manufacturers that rely on indigenous brands which continue to show “lacklustre performance”.
According to Daiwa, BAIC projects 2016 sales of its self-owned brand at 420,000 to 460,000 units, well below the break-even point of 600,000. But it is already profiting from its joint ventures with German carmaker Daimler and Korea’s Hyundai.
With climate change negotiations under way in Paris and China’s anti-pollution campaign gathering steam, green credentials are another factor weighing on investment decisions.
“We think auto manufacturers will face more scrutiny over the emissions profile of vehicles. Governments are already tightening fuel consumption standards and offering incentives for low- or zero-emission vehicles,” wrote HSBC’s Zoe Knight.
With China’s state council urging the development of new-energy vehicles, companies that are progressing with electric vehicle programmes, like BYD, or developing components and facilities, particularly batteries and charging, can expect to benefit from policy support.