China still the shooting star
The Chinese automotive market is still full of opportunities, but it is not without its challenges according to John Zeng, Co-Head J.D. Power Asia Pacific Forecasting, at the company’s Global Automotive Outlook Spring Conference in London.
The Chinese auto market is the world’s largest. Its share of global demand reached 24% last year and will account for 40% of the growth in the 2011 global automotive industry. China is also likely to account for over 70% of the total growth in Asia Pacific during the period 2011 to 2016.
Zeng pointed out that most of the key factors driving the auto market are still in place to support the increase, although some are more positive than others. China’s GDP growth will decrease to 8% this year from 10.3% in 2010 and future growth will be moderate as government stimulus policies are gradually ended. Inflation is rising, as are short-term interest rates, but vehicle prices are coming down and income levels increasing.
Most of the 2010 government incentives to drive passenger car sales are no longer in place. The subsidies now focus more on fuel-efficient cars and new energy cars. Zeng predicts that China’s passenger car market will grow from 12 million units this year to a potential 21 million in 2015, something which presents a tremendous opportunity for Chinese car makers, although imports are also rising rapidly.
China’s low vehicle density allied to strong economic growth offers significant scope for increased car sales. The huge demand for transportation is also being driven by urbanisation which is expected to reach 60% by 2020. In general, an urban population travels eight times more per year than people who live in a rural area.
Zeng believes that the new growth engine for China’s car sales will be what he describes as the Inner Land, the rapid development of second level towns and cities outside the relatively high-income areas around Beijing, Shanghai and Guangdong. This will come as a result of the low vehicle parc, lower car prices, growing incomes and fast dealer network expansion in these regions. He sees the more affluent areas as the battleground for the medium to high-end car market where consumers are increasingly looking for second cars and considering more luxury, lifestyle vehicles such as SUVs and sports cars.
The acceleration of car sales in the Inner Land will, Zeng believes, be driven by local brands. Chinese OEMs mainly focus on low-end vehicles and are not taking significant share from foreign carmakers. However, he expects rising conflicts as domestic brands move upscale while global brands tap into the low-cost car segment.
There has always been a perception of a quality gap between Chinese and global brands but Zeng believes that domestic brands will catch up with their rivals and close the gap during the period 2015 to 2018.
In terms of brand competition, Volkswagen’s leading position in the market has weakened substantially in the last decade but it remains the leader with 13% share last year (down from 48% in 2000). Downward pressure on prices has led to increased competition: the retail price of the mini/sub compact segment is already lower than in the United States. However, in the compact/midsize segment the retail price is still 20% - 40% higher than in the US.
One consequence of the boom in vehicle sales is China’s rising reliance on foreign oil – 53% in 2010. The 100 million tons of oil refining capacity added during the last five years has been completely consumed by the increased sales volumes. This has led to a hike in the retail fuel price. The current price of 93 octane petrol is US$ 1.2 per litre, around 55% of the UK price but 35% higher than in the US. This trend is likely to continue but is unlikely to impact the car market seriously until at least 2013, by which time a significant improvement of fuel efficiency or a non-fossil fuel solution may be needed to support growth.
Zeng pointed out that, in many ways, China is an undesirable environment for car consumption. The consumption environment in big cities tends to be more and more restricted. The variety of taxes and fees in cities such as Shanghai and Beijing impose a premium for vehicle registration or limit the number of such registrations. There is inflation of insurance premiums, expensive maintenance costs, expensive parking fees and tolls for expressway use. To this can be added heavy traffic jams, limited parking availability and air pollution. Rising fuel prices and potential pollution tax are also expected to increase the cost of car ownership.
The world’s largest high speed rail network will help to reduce reliance on the car. By 2012, the total distance of high speed railway in China will reach 13,000 KM, and is expected to further increase to 26,000 KM by 2020. The average speed will typically be above 250 Km/h and average car driving mileage per year is expected to decline. Over $300 billion investment by 2020 will provide a tail wind for Inner Land economic growth, improve the infrastructure and attract more investments. High speed rail also frees up older lines for freight, which in turn allows freight to travel faster and cheaper. Electric car development could benefit from the technology breakthroughs of high speed trains.
China is introducing tougher CO2 emission standards over the next five years. The Phase III Limits of Fuel Consumption for Passenger Vehicles legislation is expected to be rolled out as early as this year. New models developed after the implementation of Phase III must meet the new limits and models already in production must meet the limits by 2015. The Phase III standard aims to encourage advanced powertrain technology and reduce the average fuel consumption rate of the Chinese new passenger vehicle fleet in 2015 to 7L/100km, around a 20% increase from the current standard. Models which fail to meet the standard may face the financial penalties (the proposed environmental tax etc.).
Car taxation is now one of the Chinese government’s drivers to promote clean energy. A new draft car tax law was passed at an executive meeting of the State Council in February this year. The draft is expected to be finalised very soon and aims to cut taxes on fuel efficient, clean energy vehicles while imposing higher taxes on larger engine displacement vehicles.
The dealer network in China has expanded rapidly to meet the market growth. The number of passenger vehicle dealers has grown from 5,400 in 2005 to an estimated 16,000 last year. The market has seen the emergence of large dealer groups, the top ten of which account for nearly 19% of the total market share, much higher than in the US at 13%. Servicing and parts sales are the main sources of profit for US dealerships. China is likely to follow, and used car sales will also be a profit generator.