The Chinese car market needs a more sustainable approach to growth in the wake of rising overcapacity in production that, combined with an unbridled price war amongst dealers, has curtailed its development and led to a dangerous rise in vehicle inventory, according to Shen Jinjun, executive vice chairman and secretary general of the China Automobile Dealers Association (CADA).
Speaking at last week’s Automotive Logistics China conference in Shanghai, Shen said that the industry had been hit by three problems – a raging price war that hit dealer margins, an unacceptable rise in inventory levels and a surfeit of dealerships that has hit profits. Together with other speakers, Shen warned that the industry must now look for inherent growth drivers, not government incentives, as well as develop the aftermarket further in tune with other mature markets.
China’s vehicle market hit records levels in 2012, but sales of new passenger and commercial vehicles rose by a small margin to 19.3m units. It was the second straight year of low growth for the sector, and a slower rise than in 2011.
“In 2011 we saw very limited growth for the car market and misjudged that it would remain the same in 2012,” said Shen. “The car manufacturers who wanted to increase their market share decided to lower their price. Unfortunately the price war went rampant and dealers were forced to give up their margins.”
CADA’s monthly data suggested that vehicle inventories were again on the rise in China. Shen also pointed out that there are now too many dealership outlets in China.
“Last year we saw a rapid expansion of the dealer network across the country, about 20% higher than manufacturer growth,” observed Shen. “Some of the dealerships have between at least 20-25 stores in the same region. So dealers selling the same brand are fighting against each other.”
This shift also has implications for dealerships in terms of aftermarket supply. Picking up on Shen’s three points, Jesse Hu, senior project manager at analyst Technomic Asia, said that as growth for new vehicles slowed, the industry needed to shift its attention from car sales to the aftermarket.
Hu said that growth in the aftermarket was already heralding good growth prospects for logistics providers, and pointed out that they were already seeing an 18% growth rate.
While the Chinese market is the world’s largest for new vehicle sales and production, Shen revealed that there is actually considerable room for growth besides the new vehicle market. Taking together the new vehicle market with used-vehicle sales, which were 4.8m sales in 2012, as well as imports (1.13m vehicles) and exports (1.01m), the total consumption was 24.2m vehicles. This figure was significantly lower than in the US, which was 40m units in 2012 and driven by a much stronger used-car market, as well as more imports and exports.
Shen pointed to several areas in which the Chinese industry could improve, including the used-car market, better standards for scrapping and recycling vehicles, more developed financing and better access for growing rural markets. Each of these areas would also represent further opportunities for the logistics sector.
“First, we must take full advantage of financial leverage,” he said. “Right now the automotive financial market [in China] is underdeveloped. For example, leasing accounts for only 20% of the total market but in the US it is as high as between 70%-80%.”
China’s used vehicle market also has significant potential, Shen said. Restrictions on new car sales in Beijing last year led to a growth in used car sales to 60%, for example.
Shen also said that the industry needed better support for scrapping and replacement. “Before 2012, China’s automotive market was a sellers’ market,” he said. “The government authorities and the carmakers were not interested in extending capacity for satisfying demand; production was a priority and definitely not scrapping.”
Finally, Shen said the industry needs to look at the growing rural market, where there is still a lot of room for passenger vehicle sales to grow.
On the whole, Shen stressed that Chinese manufacturers and dealers needed to find inherent growth drivers for the market, rather than government incentives. The shift from a seller’s market to one that would be more focused on service and quality would also necessitate better logistics.
“In 2012 China’s automotive market saw a turning point,” said Shen. “It is now a strong buyers’ market and its emergence as such indicates that it is becoming mature and more sophisticated. The development of the buyers’ market will drive growth in the logistics segment.”