China

China Light Vehicle Sales Update
October 2019

Downside Risk Looms Over China’s PV Market as Q4 Brings Little Respite

China’s Passenger Vehicle (PV) sales (i.e., wholesales) in September fell by 6% year-on-year (YoY) to 2.0 mn units, while the Light Commercial Vehicle (LCV) segment grew by 1.3% YoY to 0.27 mn units. The overall Light Vehicle (LV) market ended the month with a 5.2% YoY decline, on total sales of 2.27 mn units. PV production fell by 7.9% to 1.84 mn units, mirroring the contraction in wholesales. LCV output, however, rose by 2.6% to 0.28 mn units. LV production as a whole was down by 6.7% YoY, with a total of 2.11 mn units built in September.

The seasonally adjusted annualized rate (SAAR) of LV sales in September was 26.6 mn units. This represents a 2.2% decline from August, suggesting that market demand remains muted, with little obvious impetus for strong growth.

If we add September’s numbers to the tally, wholesales in Q3 fell by 6%. While still negative, this result is a clear improvement on the steeper contractions seen in the first (-14%) and second (-12%) quarters.

To understand the double-digit drop in wholesales in Q1, we must look to the end of 2018 when dealership inventories were unusually high. Additional stocks of around 1.4 mn vehicles were delivered to dealers. When the market failed to perform as expected, OEMs had no choice but to limit production and wholesale volumes in order to reduce these bloated stocks.

The double-digit decline in Q2 can be explained by the implementation of State VI (a) and State VI (b) emissions standards being brought forward in several regions of China to 1 July 2019, well ahead of the original date of 1 July 2020 for State VI (a) and 1 July 2023 for State VI (b). This early deployment of the new regulations played havoc with automakers’ regular production and wholesale schedules as distributors in the regions where the new standards came into force suspended all new vehicle purchases until they had successfully depleted existing stocks of State V models.

Given the discernable improvement in the rate of decline in Q3, when compared to the two previous quarters, we can safely assume that a recovery is in progress. Now that stocks have been unwound and the turbulence created by the shift from State V to State VI regulations has dissipated, the danger to the wholesale side of the market should have passed.

But the retail side of the market paints a very different picture. Retail demand for domestically produced models declined by 3.9% in the first nine months of this year – vastly better than the 11.4% plunge for wholesales in the same sector. More recently, however, the trend has been far less promising, with retail sales of locally built vehicles dropping by 10% in September. This marked the third consecutive month of decline, following booming demand in June.

If, as the recent downtrend seems to indicate, the retail market is now subdued, then the chances of a strong rebound in wholesales in the final quarter of 2019 are fast evaporating.

While some component suppliers have reported a rise in orders for Q4, this could be misleading. If output volumes increase in the final period of 2019, but the retail market fails to rally, then these unsold vehicles will do little more than bloat stock levels in 2020. The market would then have travelled full circle back to where it was at the start of 2019.

For further information contact Ms. Angela Chen
Phone +86 21 5283 3568

 

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