Automakers in China face further margin pressure amid slowing economy

Annual growth rates will fall to 5 per cent over the next five years, says Fitch Ratings

PUBLISHED : Tuesday, 14 June, 2016, 7:00pm
UPDATED : Tuesday, 14 June, 2016, 7:00pm

The next five years will see a decline in the growth rate of China’s passenger vehicle marketas car ownership in big cities becomes saturated, said Fitch Rating.

The compound annual growth rate is expected to drop to 5 per cent – it was 7.3 per cent last year – amid the slowdown in China’s economic growth and restrictive policies on car purchases and usage in top-tier Chinese cities.

“The vehicle ownership in China’s first-tier cities is high, and we do not expect a continuing strong growth of the [passenger vehicle] market in these top cities,” said Jing Yang, associate director at Fitch Ratings. “Demand from lower-tier cities will be the major growth catalyst. The increasing income and low vehicle ownership rates in these cities will stimulate vehicle demands in these cities.”

Roy Zhang, associate director of Fitch Ratings, said he did not expect a big reduction in automotive prices even though market growth is slowing down because “automakers have no great pressure on reducing excess inventory this year”.

Zhang said sports utility vehicles (SUVs) will continue to gain market share from sedans, however he warned the competition in the SUV market is increasingly fierce with more participants involved. “SUV sales and profitability will vary [depending on the ] vehicle model in 2016,” said Yang. “Once a price war starts in the SUV market, margins may deteriorate quickly for manufactures that are highly reliant on their SUV business.”

Lo Ka-leung, a Hong Kong-based analyst at Kim Eng Securities, agreed, saying the profitability of the SUV market will weaken with intense competition.

Zhang from Fitch said leading joint-venture brands will be able to sustain a low leverage ratio even if industry-average margins trend down. “JV brands can lower concentration risks with diversified brands and product portfolios,” said Zhang. “The JVs account for the majority of the vehicle shipments and profits of the Big Five, and support the groups’ internal liquidity with continuous cash dividends.”

China’s monthly vehicle sales in May grew 9.8 per cent year on year to 2.09 million units, according to data from the China Association of Automobile Manufacturers (CAAM). A tax cut on small-engine cars and weak year-on-year comparisons helped push up the growth rate.

Lo said the overall auto industry seems to have warmed up somewhat compared to last year, thanks to the sales boost given by the tax cut on small-engine cars. The passenger vehicle market experienced tough times in mid 2015, prompting the government to introduce tax cuts for low-emission vehicles in the fourth quarter of last year, driving a recovery in full-year shipments which grew at 7.3 per cent.

CAAM has called on the central government to make the tax cut on small cars permanent to encourage the development of fuel-efficient vehicles, according to a Bloomberg report. The state-backed auto industry group is lobbying the National Development and Reform Commission and Ministry of Industry and Information Technology to include such a policy in their future planning.