At first glance, foreign car companies seemingly exert a near stranglehold on China’s car market. However, the reality is rather more complex, with most sales derived from Sino-foreign joint-ventures (JVs), thereby benefiting domestic and foreign automakers. In addition, both foreign and domestic-foreign JVs are facing more competition from domestic brands that are consolidating their share of the fast-growing SUV market in particular.
According to our 1Q15 Consumer Brands Survey of sophisticated urban consumers, 86.5 per cent of prospective buyers plan to purchase a foreign-brand car in the coming 12 months. While this was down 1.1 percentage points year-on-year, it nevertheless points to the dominance of foreign car brands over their domestic counterparts. However, foreign automakers are not the sole beneficiaries of this trend, with joint ventures between domestic and foreign automakers accounting for the bulk of foreign-brand sales in China. Based on available company and industry-association sales and delivery figures, we estimate that around 90 per cent of Volkswagen-brand vehicles sold in China during the first five months of 2015 were made by its two China production joint ventures – Shanghai Volkswagen, a JV between Volkswagen and SAIC, and FAW Volkswagen, a JV between Volkswagen and China FAW Group Corporation.
Sales and production slowdowns
Volkswagen remains the most popular car brand in our consumer surveys. However its popularity – and Volkswagen-brand sales and deliveries – are coming under strain. 20.8 per cent of prospective car buyers said they would be inclined to buy a Volkswagen-brand model in the coming 12 months, down 6.6 percentage points year-on-year. The popularity of Volkswagen’s higher-end Audi brand, meanwhile, remained flat year-on-year at 10.9 per cent. This was also reflected in both Volkswagen Group and its JV’s delivery and sales growth figures during the first five months of 2015. Shanghai Volkswagen’s sales during the first five months of the year were down 7.5 per cent year-on-year; FAW Volkswagen’s rose just 0.4 per cent year-on-year, while Volkswagen Group said its China-wide deliveries were down 1.1 per cent year-on-year during this period. That compares with 2.1 per cent year-on-year passenger vehicles sales growth during the first five months of 2015, according to the China Association of Automobile Manufacturers (CAAM).
This trend is not limited to Volkswagen, however. Faced with a less optimistic near-term view about new car sales and build-up of inventories, major JV automakers, ranging from SAIC-GM to Beijing Hyundai, have announced production cuts in 2015. Chang’an Ford has also decided to lower its production capacity in China to reduce dealers’ inventory burdens. Other manufacturers are lowering prices in a bid to rekindle sales. Shanghai Volkswagen lowered its suggested retail price for several popular models in April, in the first major round of price cuts by the JV since 2010. We expect more JV automakers to follow suit should sales remain sluggish and inventories high.
Strong SUV sales drive domestic brand surge
Meanwhile, domestic-brand sales are gaining some traction, albeit from a relatively low base. A combined 7.9 per cent of prospective car buyers said they were inclined to buy a domestic-brand car in the next 12 months, up 1.5 per cent year-on-year. CAAM, meanwhile, reported a 4.1 percentage points rise in domestic brands’ share of domestically made passenger vehicle sales during the first five months of the year to 42.1 per cent – these numbers include rural sales and do not include imported vehicles.
We see this rebound in domestic-brand vehicle sales as due to several factors. Firstly, domestic brands are well positioned to tap into rising demand for larger vehicles, in particular SUVs – especially at the lower end of the market. SUV sales rose 47.7 per cent year-on-year during the first five months of the year to 2.2m vehicles, while sales of sedans declined 4.16 per cent to 4.9m during the same period. Domestic brand Great Wall’s H6 is China’s top-selling SUV, with more than 292,380 H6 vehicles sold during the first five months of 2015, up 54.3 per cent year-on-year. The H6’s guide retail price is Rmb99,800-158,800 ($16,075-25,580), compared with a guide price of Rmb199,800-315,800 for the top-selling foreign brand SUV model in China, the Volkswagen Tiguan.
As well as outcompeting on price, domestic carmakers are also slowly closing the quality gap with foreign brands. According to a survey by J.D. Power and Associates in 2014, Chinese brands encountered 131 problems for every 100 vehicles, down from 155 in 2013. By contrast, foreign brands had 95 problems per 100 cars.
Deferring high-end purchases?
The recent stock market rally may also have exerted at least a mild temporary downward drag on high-end car sales, again likely hitting higher-priced foreign-brand car sales harder than their lower-priced domestic equivalents.
Our Car Buying Sentiment Index among consumers with annual incomes in excess of Rmb300,000 has averaged at 65.1 since November 2014, compared with an average reading of 68.1 in the preceding 12 months, suggesting that some may have deferred additional car purchases in order to allocate more money to the stock market. The likely impact on car sales has been mild, however, with our overall Car Buying Sentiment Index remaining broadly stable over this period. Moreover, with the outlook for A-share markets uncertain, the impact is likely to prove temporary.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.