China Downturn Hits US Automakers

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China is GM’s largest market.

The People’s Bank of China cut interest rates for the third time in six months on Sunday due to “big downward pressure,” as it said; it wasn’t kidding.

For years, the smartphone market was in a frenzy. The 1.35 billion Chinese consumers couldn’t get enough. In 2011, China surpassed the US in smartphone sales. New brands muscled in. Growth rates were phenomenal. But that’s over. Industry analyst IDC announced on Monday that shipments in the first quarter dropped 4.3% from a year ago. The culprit: “market saturation.”

From now on, selling smartphones in China is going to be a blood sport where companies are fighting for share in a stalled or shrinking market.

But in terms of magnitude, it pales compared to what is happening in the auto market.

After being in the double digits for years, vehicle sales growth slowed to 6.8% in 2014, with total sales hitting 23.5 million; 19.7 million light passenger vehicles and 3.8 million commercial vehicles. No other country has ever come close. In the US last year, automakers sold a glorious 16.5 million passenger vehicles.

That’s how staggering sales growth was in China. All global auto manufacturers have been building new plants and expanding existing ones. Announcements of capacity additions are made on a near daily basis. Automakers invested billions of dollars in China every year. The constraint was capacity, not demand. It was the greatest auto party the world has ever seen. Executives are still intoxicated from drinking too much of the industry’s optimism.

But problems were already bleeding through last year.

Dealers revolted against inventory dumping by foreign automakers who were trying to make sales look better and pressure dealers to sell more. Dealers were suffocating under mountains of inventories and were discounting heavily to get rid of the units. Hence their revolt. Automakers caved, compensated their dealers, and lowered their sales goals – and thus the flow of vehicles to individual dealers, even as they added new dealers.

In the US, monthly auto sales reflect units that dealers deliver to their customers. In Europe, auto sales are based on registrations. In China, auto sales are what the China Association of Automobile Manufacturers reports, and it reports the number of vehicles automakers were able to stuff into their channels.

And on Monday, CAAM reported April sales of 1.7 million units, up a measly 3.7% from a year ago. Growth in the first quarter had been 9%. The statement didn’t speculate on the cause of the sharp slowdown.

Sedans, the largest category, are now officially dead.

Sedan sales plunged 10% in April to 932,000. But sales of the other categories were strong: microvans up 10% to 108,000; SUVs up 49% to 462,000; and MPVs up 22% to 167,000. In January, CAAM still expected light passenger vehicle sales to rise by 8% to 21.3 million units. That now appears to be a pipedream.

For foreign automakers, China plays a big role. Industry consultant IHS Automotive estimated that, in 2013, China accounted for 59% of net profits at Volkswagen, 45% at BMW, and 37% at GM.

GM, for example, sold 939,000 vehicles in China in Q1 through its joint ventures. In the US, it sold 684,000 vehicles. China accounted for 39% of GM’s global vehicles sales, the US for 28.5%! GM has been on a sizzling expansion drive in China: new plants, new models, more production…. For GM, the music plays in China.

Alas, that music has stopped.

In April, according to CAAM, GM sold 258,484 vehicles in China, down 0.4% from a year ago. A similar scenario is playing out for Ford. Total vehicle sales in April were essentially flat at 96,889 vehicles.

It was a mixed bag for other automakers. Audi, the number one luxury brand in China, sold 45,296 vehicles, up a paltry 0.2% from a year ago. Audi has introduced a slew of new models and additional manufacturing capacity to boost sales. And that’s what it got. Number two luxury brand BMW hasn’t reported yet as I’m writing this. But Mercedes, which engineered a management shakeup in China last year, was able to goose sales by 21% to 27,069 vehicles.

While many of the dozens of often state-owned Chinese automakers are in serious trouble, there were some standouts. For China’s biggest SUV maker, Great Wall Motor, sales in April soared 45% to 80,419 vehicles. Its SUV sales skyrocketed 71%, while sedan sales dropped 7% and pickup sales 10%. This brought year-to-date sales growth to 23%. Geely Automobile increased sales by 13% to 40,120 vehicles, with domestic sales soaring 45%, and export sales plummeting 84%, to less than 1,500.

Exports have been in terrible shape.

Exports reached promisingly 1.06 million vehicles in 2012. But by 2014, exports were down to 910,400 vehicles. In addition to the fiasco in key markets Russia and Ukraine, which Geely blamed for the collapse of its exports, sales have struggled in Argentina where the currency has crashed, and in Algeria and Iraq where the price of oil has crashed. It’s tough out there.

So in April, exports plunged 22% from the already week levels last year to 61,600 vehicles. Year-to-date, exports are down 15%, with the slowdown accelerating. The already miserably low export target of 860,000 vehicles for the year has likely moved out of reach.

The culprit that is mauling smartphone sales in China – the dreaded “market saturation” – is starting to move into view for the auto industry. But the auto industry, which has been on an immensely capital-intensive expansion drive, is facing the even more terrible term, the disease that brought down the industry in the US and Europe:

“Overcapacity.”

The industry has known for years that someday, this would happen, that the horrendous pace of investment would lead to an error in the calculus, a lack of discipline in the industry, and a return to reality, and thus overcapacity. Pundits have been fretting about it, but executives have consistently said, not yet, maybe never, China is different. Demand by 1.35 billion people would continue to outrun supply even if there is no room to park or drive these cars, even if numerous cities impose limits on registrations, and even if there is no air left to breathe.

But April was a signal for the auto industry to get ready to fight it out in a stagnant or declining market, wrecked by overcapacity. For US automakers, it will be familiar pain from a forgotten time.

China’s imports and exports have plunged, freight rates from China to Europe have collapsed, and the China Containerized Freight Index has dropped below the level of 1998. Read… Global Demand for Chinese Goods Sinks, Chinese Leaders ‘Caught Off Guard by Sharpness of Downturn’

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  8 comments for “China Downturn Hits US Automakers

  1. night-train
    May 12, 2015 at 3:41 am

    “China is different” sounds a lot like the old standby “This time it’s different” which has been put out for consumption as far back as I can remember. Liberally applied to the stock market, oil industry, actually anything subject to cycles, especially the boom and bust sort. Here is another “Here we go again”.

  2. MC
    May 12, 2015 at 4:29 am

    China will probably take a hint from Europe.

    For readers outside of the Continent let me make a long story short: at the beginning of 2014, car sales in europe, comatose for nearly six years, literally jumped forward overnight. Just in the first six months of 2014, basketcase Italy saw an amazing 39% year on year increase in registrations.
    Italian newspaper La Repubblica dug a little deeper and found car loans in the same period increased by an amazing 42%. In short financing accounted for every single extra new car sold and some.
    While Europe has no “subprime” auto loans in the US sense, the main driver behind this unprecedented expansion was exactly the same: Santander.
    The consumer-oriented Spanish bank was joined by other similar financial outfits such as France’s Credite Agricole in providing a flood of cheap credit to the car market.
    And we are talking really cheap here: a famous Japanese car maker was advertising 1.54% EAPR financing on all their model range just last month.

    As we all know fundamentals in Europe remain abysmal: real wages have not only stagnated, but contracted as well. Household leverage, despite timid attempts at deleveraging, remains off the charts, especially in France and Spain. Unemployment, especially among youths, remain dramatic. And unless you believe in the myth of “deflation”, the cost of living has gone up everywhere as all of Europe’s central banks have joined the currency war initiated by Kuroda’s Bank of Japan(demonium). Bananas don’t lie.
    To make the situation worse, many European big box store chains (the bulk being French owned) have started plans to “reorganize”. This means massive layoffs and, in many areas, goodbye to the only jobs available as manufacturing has completely evaporated and the service industry is not only saturated but struggling to cope with less and less discretionary spending.

    In short, the much vaunted “green shoots” hailed from Rome to Lisbon are nothing more than yet another bubble, as irrational and massive as the mother of them all: sovereign bonds.

    Once China’s car market starts sagging a little, the central planners in Beijing will rush in with armored vans full of freshly minted renmimbi, just like they are doing with their stock market and local government debt. If you think China has a debt problem (and she does), just wait a few years.

    In 2001, China quietly cleaned her banks (especially the State-owned Big Four) of unperforming loans by using crude and unsophisticated methods. Many raised an eyebrow or two, but in a few years everybody had been infected with the myth of Red Capitalism, and everything was forgiven and forgotten.
    Right now the situation has worsened so much even the People’s Bank of China is having problems keeping a lid on unperforming loans data leaking to the outside world. The data are frightening if not downright terrifying: this time it will take far more than a few crude accounting tricks and a heavy hand to solve the problem… if it can be solved.
    But times have changed: apart from a few brave analysts, the myth of Red Capitalism holds on. It fits very well in the modern infatuation with central planning.
    sadly, we know very well what happens to centrally planned economies.

  3. Julian the Apostate
    May 12, 2015 at 6:59 am

    The car biz is a strange one. As the sector has matured. I’m glad I didn’t opt for a career in it. When was the last time you heard a popular song singing the praises of boy meets car. Such songs were a staple in the 50s thru the early 70s – cars were ‘sculpture you can drive’ then by the late 80s they all began to resemble bugs. Now they’ve become ‘appliances’, like your toaster. There are a few exceptions of course, like the 2009 Sonata, extolled as the ‘Camry Killer’, but the latest incarnation looks like the Camry it ostensibly murdered. In the late 70s Chrysler was in trouble, rather like Ford in 1927 in didn’t keep up with times and was a drug on the market. Iacocca stepped in with govt loans and reinvigorated the company, and paid back the loans, but it was only a reprieve – and also the first time I heard the phrase ‘to big to fail’

    • Mike R.
      May 12, 2015 at 7:53 am

      Interesting thoughts on autos and the industry. I agree with your sentiment about style. They all look the same anymore. I drive a ’66 Volvo 122s that has some style/curves. Maybe that will come back, just like fashion. Not sure when.

      Auto industry is starting downturn here in the US. You see it in number of very new used cars advertised in paper. These are more recent than 3 year lease expirations. Probably close to saturating the junk car loan business.

      • Philip
        May 12, 2015 at 1:57 pm

        I also drive a Volvo 122S, 1968 model though. Brilliant car!

  4. Dave Mac
    May 12, 2015 at 9:42 am

    Looks like China has imported the Deflation from Japan.

  5. ERG
    May 13, 2015 at 12:40 pm

    You can blame all cars looking the same on Computer Aided Design, wind-tunnel tests, air-bags in the doors, and fuel economy standards. Follow the same design rules and you get the same design. If it looks different, somebody made a mistake.

    :-)

  6. p
    May 14, 2015 at 9:49 pm

    reason for chinese auto slowdown may be that chinese road infrastructure has not kept up with growth in auto ownership and use. result = awful traffic jams. no fun to drive anymore. solution will probably come chinese style – they’re just going to make up their minds to build the biggest road network in the world and do it, knocking down whatever is in the way.

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