May Arthapan, Director, Asia Pacific Forecasting
04 February 2019
04 February 2019
Global Light Vehicle industry: where next to look for growth?
As the world seeks to identify the next economic miracle that will drive global growth, it is unlikely to be found beyond the frontiers of China. Could another country ever be capable of replicating China’s explosive expansion and its impact on the world economy, particularly in terms of scale? Doubtful.
The drivers behind China’s economic success are unique: a huge population (just below 1.2 billion in the early 1990s, when the economy started to take off, and 1.4 billion currently); a visionary and astute leadership capable of implementing and sustaining a communist political regime alongside a capitalist economic system, allowing for complete control of industrial and economic development, while at the same time incentivising productivity and innovation; and, finally, an unprecedented culture of entrepreneurial and commercial spirit amongst its people.
“China is a Goldilocks economy”
To borrow an analogy from the origins of life on Earth. Many among the scientific community believe that our planet is unique and, indeed, a Goldilocks planet in its ability to sustain human life through its specific set of physical characteristics – and that our quest for another planet that could sustain life is unlikely to succeed. They argue that it takes a rare set of conditions to sustain complex living organism such as humans, including optimum levels of oxygen and carbon dioxide, the right planet size (which dictates gravitational force), the existence of a protective layer of atmosphere that acts as a shield from the sun’s radiation and, most importantly, the ideal distance from the sun – a vital source of energy, but one that would annihilate anything that gets too close.
China is a Goldilocks economy and finding the rare set of circumstances that led to the Chinese economic boom elsewhere in the world is unlikely.
“The Light Vehicle market expanded at a compound annual growth rate of 17% over the last 18 years”
The automotive sector has clearly been a key beneficiary of China’s phenomenal economic development. The Light Vehicle market expanded at a compound annual growth rate of 17% over the last 18 years, reaching a whopping 27.74 million units in 2018. Indeed, since 2009, China has topped the charts as the world’s largest vehicle market, ahead of the US, and currently accounts for around 30% of global sales. So, the concerns behind the recent slowdown in the Chinese market and its impact on future global growth come as little surprise.
But we are still some way off the point of despair as China may well get a second wind. Right up until the start of the slowdown in 2015, the phenomenal pace of growth seen in the vehicle market over the last few decades, during the initial phase of motorisation, was driven by rapidly expanding demand in China’s tier-one and tier-two cities. They alone accounted for around a third of Passenger Vehicle sales, with lower-income tier-three to tier-six cities making up the balance. As the markets in the higher-tier cities mature, the next impetus for growth is likely to come from these lower-tier cities. As they develop and income levels rise, we could see a second wave of mass motorisation.
This will not happen overnight, however. GDP per capita in tier-three cities, for example, is still less than 60% that of tier-one cities on average. A typical tier-three city is around 40% of the size of an average tier-one city in terms of population. The stats for tier-four cities are even lower when compared to tier-one cities, with per capita GDP around 62% lower on average. But given that 81% of the Chinese population resides in tier-three to tier-six cities, these locations represent a massive source of potential future growth. After all, China’s vehicle density is still low, at less than 200 per 1,000 adults, leaving ample room for expansion, particularly at the bottom end of the market.