The Chinese economy is experiencing a slowdown from a growth rate of around 10 per cent last decade to four to six per cent over the next six years.
The key reason for this is the country’s endeavour to rebalance itself from investment and export-led growth to domestic consumption. This transition is expected to be painful in the short term but the economy could end up becoming more market-driven in the future.
The other issues that are of concern include the country’s ageing population, environmental challenges, deflation, rise in corporate loan defaulters and high capital outflow.
The Chinese automotive sector grew in the second half of 2015 mainly due to stimulus provided by policies. Despite strong double digit growth in the final quarter of 2015, the year finished roughly with seven per cent. Going forward, this slowdown is expected to moderate overall industry growth.
Evolving sector
As the automotive market continues to mature and move beyond a glut of first time buyers, growth is expected to shift from rapid to a more modest and sustainable level. Peripheral sectors also reflect this maturity in the Chinese market.
The emergence of auto finance and leasing as well as growth of used cars is a sign that the market is moving beyond the flood of first time buyers to a diversified maturing arena. The Chinese customer’s preference to buy a vehicle with lump sum cash payment has led to low auto finance requirements. The penetration rates are now only 20 per cent as against 50-80 per cent in other mature markets.
As China’s auto sector evolves, new vehicle sales and assembly will grow at a slower pace while used car sales will continue to surge. From 2010-15, used car sales grew at 20 per cent compounded annual growth rate and volumes are around 10 million units today. As customer preferences continue to be dynamic, related technologies within the automotive sector will also change.
New energy
Pollution and smog continue to plague the Chinese automotive market. The Government has offered (and will continue to do so) incentives for new energy vehicles as one of the steps to tackle environmental concerns. Sales of these vehicles have grown almost three times to 330,000 units in 2015 compared to previous years.
PwC Autofacts expects the new energy vehicles to eclipse the one million mark by 2022 representing around 30 per cent CAGR between 2015 and ‘22. Consumers are increasingly demanding connectivity and technology to be added in vehicles. At present, mobile penetration is very high in China and by 2020 over 60 per cent of its population is expected to live in urban cities. This transition will result in a need for more mobility and technologies.
Local technology stalwarts like Baidu, Alibaba and Tencent are proactively firming up strategies within the auto space just as tech companies abroad are playing a critical role in design and manufacturing. Internet companies are now launching aftersales services which in some cases are faster than their counterparts abroad.
These developments only confirm that cross sector collaboration and partnerships between Chinese OEMs and private enterprises are not only inevitable but will also serve as an opportunity for the industry to grow.
Parallel to these growth opportunities are a host of challenges to reckon with. The key is changing customer preferences towards personal mobility and the rise of cab aggregators and cab sharing. Consolidation of brands and manufacturing companies, particularly domestic players, is also a growing concern.
At present, the Chinese market is home to 76 OEM groups and 184 vehicle assemblers. Since 2013 the Ministry of Industry and Information Technology has pushed regulators to eliminate so-called zombie automakers (assemblers with little or no outputs) by revoking their production licences. Though this process is slow, it is an important for consolidation. As the market cools and matures, internal and external forces will drive merger and acquisition activities.
Over capacity continues to plague the market and excess capacity could reach 10 million units in 2016 and higher as the market slows down. We have seen mature markets like the US and some EU countries facing tough times during the economic slowdown where plants were either idle or shut down. Assemblers in China will also face the same problems and hopefully once complete utilisation rates jump to more profitable levels, capacity will be rationalised across OEMs and assembly units.
The writer is Partner, Price Waterhouse