Personal Finance

Light vehicle sales boom amid recovering economy

By Jenny Gu (China Daily)
Updated: 2009-09-21 08:48

At the auto show: Sales of passenger cars and commercial vehicles less than 6 tons reached 1.1 million units in August, the second-highest monthly total for the year. [China Daily]

In stark contrast to a year ago, light vehicle sales in China for the month of August were among the strongest for the year.

China registered the lowest monthly vehicle sales for the year in August 2008 as the global recession took hold of consumer wallets.

With the full effects of government stimulus efforts at work, sales of light vehicles - passenger cars and commercial vehicles less than 6-tons - reached 1.1 million units in August, the second-highest monthly total for the year.

China's August economic figures offered a positive signal. International trade improved as both import and export of goods stopped declining. Investment figures showed an upturn as did consumption figures. Asset, housing and stock prices are all picking up. The consensus is growing that China's economy has bottomed out.

Strong August vehicle sales, up 78 percent year-on-year, contributed to other positive economic data and leaves China's automotive market up 32 percent year-to-date in 2009.

Both the passenger vehicle and light commercial vehicle segments enjoyed similar growth rates. Sales of passenger vehicles jumped by 76 percent to 737,000 units for the month, while light commercial vehicles increased by 81 percent to 338,000 units.

Adjusting for seasonal differences, August light vehicle sales suggest an annual market of 14 million units, matching the seasonally adjusted sales rate in July and up significantly from the 8 million unit sales rate witnessed in January of this year.

While the recovery of China's light vehicle sales from their January lows was initially dependent on government tax incentives and subsidy policy, this is changing.

The light vehicle sales boom today is less dependent on these two drivers. While sales were strongest in the segments that enjoy the tax incentive, mini car, sub-compact car and compact car, all other segments reported sale growth of more than 50 percent in August.

The MPV segment supported by the recovering economy and an increase in auto financing managed to embrace the largest growth in August since July last year, with a 58 percent rise, shifting its year-to-date growth rate from zero to positive.

Sales of minibuses declined for the fourth consecutive month as the demand seems to have been met through implementation of the "go rural" policy.

Manufacturers have started to expand their capacity to meet the rapid growth in vehicle demand. GAC Honda's two plants began operating three shifts instead of two in August with 1,200 more workers added. Chang'an Mazda has doubled monthly output at its Nanjing plant by adding a second shift.

In the long term, we see BAIC adding a new minibus production line at its Zhuzhou plant with an annual capacity of 200,000 units by March 2010. Chang'an is expanding capacity of its Nanjing plant with an investment of $15 million, which will double the annual capacity to 200,000 units starting in 2010. Optimistic about the future, Geely is building new plants in Jinan, Shandong province and in Chengdu, Sichuan province.

Not all share this unbridled enthusiasm. The National Development and Reform Committee has recommended that OEMs to be cautious with capacity expansion due to the risk of slowing demand growth in the years ahead.

A divided opinion seems to be the norm on China's future. Government incentives have generated strong light vehicle demand, while hot August sales across all segments along with positive economic news suggest that a recovery is taking hold.

It's uncertain whether the government will extend the tax incentive policy to next year or carry out new stimulus measures. We also believe a payback is in order for the stimulated demand growth in 2009. We maintain a cautious outlook for passenger vehicle demand in 2010, with growth decelerating to a rate of 2 to 3 percent and for total light vehicle demand to match the 2009 total.

The author is a senior market analyst of JD Power Consulting (Shanghai) Co Ltd.