Across The Border

China’s carmakers head into tough 2016 as tighter competition forces price cuts, production changes

A government tax cut aided sales and a just 1.5 per cent sector-profit increase in 2015. This year looks just as tough.

PUBLISHED : Friday, 01 April, 2016, 12:17pm
UPDATED : Friday, 01 April, 2016, 12:17pm

China’s automotive industry sputtered over the line last year and 2016 looks equally tough due to competition that forced market leaders to slash prices and upend product roll-out plans because of the runaway popularity of sport utility vehicles (SUVs).

The sector had net profit growth of 1.5 per cent in 2015. That result was only possible after the government halved the small car purchase tax to 5 per cent in late September, a move that helped fourth-quarter sales jump 18.6 per cent year-on-year.

Year-end sales incentives dissipated and lunar new year arrived early, the surge was followed by a slump. Passenger vehicle sales grew 6 per cent year-on-year across January and February, a big step down considering the lower base for comparison.

China’s four largest automakers by sales volume — SAIC Group, Dongfeng Motor Corporation, China Chang’an Auto Group and FAW Group — had low-single-digit or nearly flat sales growth. Sales at fifth-placed BAIC Group declined.

Inventories grew. The Vehicle Inventory Alert Index climbed to 59.6 per cent in February from 56.6 per cent a month earlier, well above the 50 per cent line demarcating profit and loss. Fitch analysts have said that may pressure average selling prices downwards.

Shrinking sedan sales, down 12.4 per cent in the first two months of the year, are hurting most car makers. SUV sales soared 54.4 per cent by contrast, increasing their share of China’s passenger vehicle market to 35 per cent.

Guangzhou’s GAC Group and Anhui-based JAC Motors each registered over 30 per cent year-on-year sales growth thanks to their SUV models. That was even as the average daily sales for GAC’s GA3 and GA5 sedans plunged by 70 to 80 per cent.

Nomura analysts noted that over 90 per cent of GAC’s sales volume came from its GS4 SUV, giving rise to ‘eggs-in-one-basket’ risk which the manufacturer hopes to mitigate with its planned launch of new Jeep models with joint venture partner Fiat.

There is also no shortage of external competition.

Hong Kong-headquartered Geely Automotive launched its Boyue SUV this month. It was lauded as “a game changer” by investment bank Jefferies and the company has three more SUV models in the pipeline, including some jointly developed with Volvo.

Despite the surging demand for SUVs, Great Wall Motor Company, the industry leader in that vehicle class, had flat sales growth because an increase of competitors’ models onto the market forced it to drop prices to protect its market position.

Great Wall’s chairman Wei Jianjun has described the price cuts as an offensive measure aimed at suppressing competitors’ growth — a short-term sacrifice with long-term benefits, Jefferies reported.

Daiwa analyst Kelvin Lau doubted Great Wall’s strategy and said competition was likely to intensify faster than the market expected.

“We believe that [Great Wall]’s weak product pipeline will lead to it losing market share in the SUV segment throughout 2016,” Lau wrote in a report last week.

Nomura analysts described the carmaker’s plans as “lacklustre” and warned the worst was still to come — despite Great Wall already underperforming the Hang Seng’s China Enterprises Index by 22 per cent so far this year — as earnings momentum was still negative.

Other major carmakers, like BAIC Group, are attracting more positive attention. BAIC’s joint venture with Hyundai has delivered modest returns lately, but Daiwa analysts said the new Elantra model should fuel sales, and its joint venture with Mercedes Benz is strengthening.

Views are mixed on Brilliance Auto Group and its tie-up with BMW. New releases including the X1 and the 2 Series are awaited but group profit fell 35 per cent last year as the local brand’s losses increased. Jefferies analyst Zhi Aik Yeo said the saga of the Huasong minibus line, a retail failure, revealed a muddled strategic approach.

“[Management] was candid about its missteps in pricing and market positioning,” Zhi wrote in a note this week. “Meanwhile, quality issues plagued the new product.”

“[In 2016] the strategy is not to reduce price, but rather to introduce refreshed products, improve the sales channel and fix quality issues. We are afraid that would simply mean throwing more good money after bad,” he said.