Zita Zigan, Global Commercial Vehicle Forecasting
12 July 2018
12 July 2018
This blog post follows on from Part 1 of the evolution of the Chinese truck demand, which can be read here.
The evolution of Chinese truck demand – Part 2: the longer term
In 2017, sales of medium and heavy trucks in China amounted to 1.346 million units. US truck sales came in at 439,000 units.
“Why does an economy less than two-thirds the size of the US economy require three times as many trucks?”
The size of the Chinese economy amounted to US$12.01 trillion and nominal US GDP came in at US$19.39 trillion. [Source] Why does an economy less than two-thirds the size of the US economy require three times as many trucks? And can this continue to be the case?
To answer these questions, we need to look at the key drivers of truck demand. In the long term, the Chinese truck market’s development will be governed by the development of
4) regulations; and
Trucks have a number of applications. Chief among these are long-distance freight haulage (mostly road tractors), construction (mostly heavy rigids) and urban distribution (mostly medium-duty).
The outlook for heavy-duty trucks, which are the primary carriers of freight, is heavily dependent on the overall outlook for road freight. And the latter is highly correlated with overall economic activity. The data series we study indicate that Chinese road freight has grown almost precisely in proportion with economic growth (GDP). Or, to put the same point in more technical economic terminology: the average long-term elasticity of freight transport (measured in tonne-kilometres or tkm) with respect to GDP has been close to unity (0.98) in recent years, and, as a corollary, freight intensity – the ratio of freight to GDP – has been very stable.
This phenomenon is not unique to China. EU road transport demand, for example, has exhibited the same long-term behaviour, and indeed one would expect to see a similar pattern in other mature or semi-mature markets.
“can we just assume that freight will continue to develop in tandem with overall economic growth in China?”
Given the critical role played by freight in shaping truck demand, can we just assume that freight will continue to develop in tandem with overall economic growth in China – and will its efficacy as a driver of truck demand remain unchanged? Answering these questions is trickier than it may seem.
Freight demand is more complex than simple derived demand – changes in freight transport volumes depend on more variables than changes in GDP alone, including changes in the internal characteristics of the transport sector itself.
One part of the difficulty is that freight transport demand is more sensitive to some components of GDP (such as industrial production) than to others. The targeted rebalancing of the Chinese economy – towards the consumer – should, other factors remaining equal, result in reduced freight intensity with respect to GDP, meaning that the truck market may, in the longer term, not respond to overall economic growth with the same degree of exuberance as it has done over the past decade or so.
Another difficulty further clouding the issue is that tkm (tonnes x kilometres) is, itself, an awkward measure that can be pulled in different directions by similar economic trends. Thus, on the one hand, the trend away from traditional heavy industries towards lighter, high-value, high-tech goods (= higher product value density) decreases average load weight; on the other hand, the transition to a modern supply chain structure and the shift of industry towards inland areas to the west has the effect of increasing average haul lengths. The combined effect is mixed, with more and longer trips (km increase) needed to deliver lighter and more valuable goods (t decrease).
We also need to consider the modal share of road vis-à-vis other modes of transport (rail, waterways, short-sea shipping, pipeline). Road has outgrown other modes of transport by a substantial margin over the past decade, according to OECD statistics, as China’s expressway network has expanded. According to the statistical bulletin published by the Ministry for Transport at the end of March, the overall length of China’s expressways had grown to 136,500 km at the end of 2017. The target – under the revised NTHS/7918 Plan of 2007 – had been an overall length of 85,000 km… this was to be achieved by 2020! The ascendancy of road, compared to other modes of transport, has provided a very substantial boost to truck demand over the past decade – both via applicability, as more remote regions have become accessible by long-haul freight carriers, and via requirements for HD trucks within the road construction sector itself.
The latest five-year plan for transportation, issued by the State Council in 2017, suggests that the impetus from this demand driver is likely to be reduced in coming years. The expressway network is to be expanded to 150,000 km by 2020, implying an additional 4,500 km per year over the next three years (compared to 8,000 km per year added between 2013 and 2017).
Regulations (emissions, overloading etc.) do not alter the level of underlying – macro-economically driven – demand for heavy Commercial Vehicles, but they can distort the SAAR profile in the short term. Regular readers of our reports will be familiar with the way such pull-forward/payback scenarios typically play out whenever a new emissions regime comes into effect, unless the impact on demand is otherwise mitigated: typically, truck operators pre-buy older (cheaper) trucks as the relevant deadline approaches, before these vehicles become illegal and unavailable. But the sales gained in advance of the deadline are lost subsequently, so the overall effect is zero. One such distortion is on the medium-term horizon, with China VI due to come into effect in 2021.
Beyond their highly visible short-term impact, however, changes to the regulatory background can and do also drive technological change and progress, and this can be reflected in (a) greater freight transport efficiency, as well as (b) the longer-term composition of demand across the segmental mix.
“fewer vehicles will eventually be needed to transport an equivalent amount of freight than at present “
As vehicle quality and durability rise in line with increasing buyer sophistication, the truck fleet is gradually becoming more efficient at delivering freight (freight efficiency is expressed as freight/parc, or tkm per vehicle). This means that, over the longer term, as the economy continues to mature, not only will fleet building level off, with replacement taking over as the key driver of sales, but fewer vehicles will eventually be needed to transport an equivalent amount of freight than at present (recent short-term effects of new overloading restrictions notwithstanding). This, combined with freight growing at a more sedate pace, would imply a much-reduced rate of Chinese truck market growth over the coming decade, compared to the past decade. Our model suggests a decline in the CAGR from 6% (past decade) to ~3% over the decade ahead.
Rising buyer sophistication, characterised by an increased focus on the total cost of ownership over a vehicle’s lifetime that takes into account fuel efficiency and vehicle longevity, will continue to drive shifts in the segmental spectrum from which producers of higher-end and Premium Vehicles stand to benefit as these segments are projected to outgrow the overall market. Digital offerings, too, will increasingly play a role in purchasing decisions, in line with the rise of large fleets requiring effective management.
Western manufacturers of high-spec vehicles will be well-placed to benefit from these trends, particularly in light of the recent announcement that foreign ownership caps for automotive ventures are to be lifted – with caps for foreign producers of fully electric and plug-in hybrid vehicles removed in 2018, Commercial Vehicles in 2020, and the rest of the automotive sector in 2022. Indeed, this development could prove to be a game-changer for companies that have been reluctant to engage fully in China in the past.