Why you should care
For the younger generation, buying a car holds little interest. That’s bad news for those who sell them.
According to the lunar calendar, 2019 is the Year of the Pig. But clearly, the greed that it symbolizes doesn’t extend to the desire to buy a new car in China.
In fact, the U.S. dream of car ownership, which 20 years ago was the definition of everything good that America represented, seems to be dying across the Pacific. The slowdown in car sales is part of a general, broader slowdown in retail sales in China. Among the factors accounting for the drop are bearish consumer sentiment in the wake of friction with the United States; tighter credit conditions, especially for households; lower stock and property prices; and the end of tax breaks that upped demand when they were introduced three years ago. But the shift in the car industry marks a sea change.
In December, Chinese car sales were down a fifth from the previous year, and 2018 saw a year-on-year dip for the first time in decades.
In 2017, 70 percent of the growth in car sales worldwide came from China. That means the subsequent drop in mainland sales has global implications given how many international car companies have operations there. And most analysts think there is worse to come.
“Inventory is at a multiyear high, and volumes have deteriorated continuously,” says a Goldman Sachs analyst, predicting that Chinese car sales will be lower in 2021 than they were two years ago.
Goldman entitled its recent report “Not Yet” — a reference to a possible recovery in demand. But should the brokerage have instead called it “Maybe Never”? Most of the reasons cited for the slowdown in sales are cyclical factors. But what if there is more to it than that? In fact, there are factors at work as well that suggest lower sales are not simply a passing phenomenon.
Cars are at the forefront of a larger transformation that is part of the sharing economy, and the sharing economy is fundamentally deflationary. Cars are going from being a manufactured good that households aspire to own to being a service, and China is the front line of this transformation.
Virtually every local government in the country wishes to champion local electric vehicles and battery producers.
That is why many hedge fund managers are short many carmakers in China, including the stronger domestic ones such as Geely Automobile, Guangzhou Automobile, Dongfeng Motor and those with joint ventures including American carmakers such as General Motors and Japanese manufacturers like Toyota and Honda.
Meanwhile, government policy, which is a big influence on demand, aims to encourage a shift from traditional polluting, fuel-guzzling vehicles to cleaner electric ones. Virtually every local government in the country wishes to champion local electric vehicles and battery producers. And some hedge funds are strong believers in eco-friendly Chinese automobile manufacturer BYD as an alternative to both traditional carmakers in China and international competitors in the new world of electric vehicles, notably Tesla. In 2018, “BYD sales grew 118 percent and it is profitable, and yet it only has a market cap of $20 billion, compared to Tesla, which makes losses and has a market cap of $58 billion,” says Zhang Wei, founder of Yuanhao Capital Management in Shanghai.
While new economy plays such as BYD may well turn out to be the future of China’s car industry, even they will not be exempt from the more sobering math facing the country’s consumers these days.
Looking at the data on retail sales, China seems to be on the verge of a much more drastic slowdown than the 6.2 percent growth that analysts at JPMorgan are predicting for this year. But retail sales data only capture part of the picture, notes Chris Wood, an analyst with the CLSA unit of Beijing-based Citic Securities. “The quarterly household survey shows a better growth rate since it includes services,” and not just physical goods (unlike the retail sales data), and services account for 40 percent of all household spending, he says.
For example, ride-sharing and car-sharing services are a big part of the reason fewer people wish to buy cars in urban areas, even though incomes are much higher than in the countryside, meaning affordability is less of an issue.
But there are generational shifts as well. “Everything happens earlier in China,” says one mainland hedge fund manager. “We are a nation of early adopters.”
Young people who have a penchant for spending rather than saving as their parents’ generation has done express little desire in owning a car, not least because they cannot text while they are at the wheel.
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