China 2012 Auto market, another two tiered year.

When I saw that China Q1 2012 auto sales were down 1.2%, I wondered was this the “soft landing” or just the beginning. After growing 32% in 2010, the market slowed to a “modest” 5.4% uptick for 2011, Q1 may be disheartening; however, March sales were “up a tad.” Well, I had the chance last week to spend some time last week with executives from the Chinese auto retail sector and looked a little deeper with a front-line perspective.

Following some takeaways from my listening:

  • The PV market is and has been bifurcated. The 2010 incentives to spur growth of local brands accelerated the spread versus global brands. This explains why Chinese industry officials were less concerned with slowing 2011, performance, they know exactly where the comps were tough.
  • Overall, local brands were down in the range of 3-4% in 2011 as global brands continued in the 10-20% range, giving us the 2011 “slow” growth. Take a look here for the top automakers in China.
  • If we take a look at some of the biggest global (mid-to-upper) players: GM sales were up 10%, VW up 12.6% and Nissan sales surged 21% even with the impact of the Japan crises. This comes after local brands outperformed in 2010.
  • Take a look at the best selling cars in China last month and the record 9 out of 10 of them are global brands while last year local brands were 2 of 10 including the top slot.
  • Quality and product offering will drive performance. Contrary to the trends in the US and Europe, demand is growing in China for SUV’s and MPV’s.
  • SUV sales were up 20% in 2011 and this trend continues in 2012. Makes with strong SUV and MPV product in their lineup will outperform, both in volume but also in OEM and dealer profits. At the Beijing show we saw SUV’s ranging from Chrysler’s Wrangler intro to Bentley.
  • With any luck, Toyota, Nissan and Honda won’t face the same disaster inventory constraints this year and I expect Q2 to global performance to improve.

I like to look at the overall balance between sales and production over an extended period. In a market where makers have managed inventories well, I look to their future view of the market through changes in production plans. You can see the big production takeout in January, but February and March output suggests we will see a better Q2. It will also benefit from a base where we saw Q2 negative last year coinciding with the Japan global production disruptions.

Bottom-line: 2012 outlook for global brands remains steady in China. On the retail side, insiders see a continued steady growth around 20% for the mid-to-upper level and luxury segments. The implication here is for local brands to continue to underperform for the balance of the year. In the end, 5% overall growth is still in the picture.  Good year for Japanese in China, not bad for US, Korean and EUR brands.

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