All is not well with China’s auto market. On the surface, as the chart shows, sales appear to have picked up after January’s poor performance:
• Q1 sales (red line) were flat versus 2011 (green)
• Q2 sales were up 12%, due to a strong May and June performance
But….
• It is unclear if these increased ‘sales’ are real
• China measures retail sales when cars leave the factory
• Auto inventories are now 2.2m, versus 1.3m at the start of 2012
If inventory levels were normalised to the 1.3m level, then sales are actually down 6% YTD, instead of being up 6%.
Further evidence for this analysis is the wave of price-cutting now underway. Even China’s best-selling vehicle, the Buick Excelle, is being offered at a 25% discount to list price (RMB 139k, $20k). Whilst China’s official National Development and Reform Commission says “facing sluggish demand and rising inventory, dealers will increase discounts and incentive offerings in the coming months.”
More cities are also now joining Beijing, Shanghai, Guiyang and Guangzhou in limiting car purchases. Xian is the latest, showing that the trend is now spreading to second- and third-tier cities. The reason is the vast traffic jams, which would require enormous investment in new roads and highways to solve.
Thus China’s domestic producers are instead focusing on export markets. This is likely to hit existing players hard, as China’s prices are extremely low. Its exports were up 28% in H1 at 488k, with May and June each seeing >100k sales. But even this area has its difficulties.
23k cars in the fast-selling Chery and Great Wall model ranges have been recalled in Australia due to the use of asbestos in engine and exhaust gaskets. This is still common practice in China, but illegal in most Western countries.