China auto sales are in for the first half and they are slightly ahead of the consensus of 5% growth for the year. Overall PV sales are up 7.1% over last year, and again we see a two-tiered level of performance.
First-half growth was driven largely by a rebound on the Japanese brands after their hit from last year’s earthquake impact, and a push from luxury brands 2012 actions to move overbuilt inventory. Overall GM + the Japanese brands lead the increase while locals were relatively flat. June sales were extremely strong +16%, I see this as mainly driven against the constricted J3 sales post earthquake in 2011.
The Japanese brands drove market growth with newly stocked inventory. June sales were extremely strong for Honda in particular, up 84%. Nissan and Toyota had more regular supply last year leading to results more in line with YTD numbers.
However, all international brands are not the same in China. Mazda and Ford saw only modest growth year on year. These brands lack a full lineup and a strong retail network to drive sales after the astronomical growth of the past decade. This serves as a point of caution for those global brands such as Fiat and Renault who are late to the market.
Luxury sales surged in the first half, mostly compared to the same period last year when some key brands were executing new model launches with limited inventory or key model change-over.
We still have a large inventory overhang to deal with for pretty much all brands. Watch out for the huge negative pricing delta for the top end luxury brands that last year had pricing premium and this year need to push the metal with discounts.
For the mass global brands, we are up over 60 days inventory after production +20+% in Jan and Feb, however, after a few lean months, overall China production has averaged around +10% for the past two months. This will put pressure on margins, however, for the Japan brands, I would expect that pricing pressure to be largely offset by the volume regained versus last year in Q2 and Q3.
What to look for: Expect continued strong sales from Japan brands with strong volume offsetting the nominal pricing pressure. On the luxury side, beware as the lower volume numbers make it hard to offset some pretty big discounts. Local brands will continue along at low single digit growth.
Overall, I think the CAAM outlook of +5-8% growth for the year is reasonable. Longer term, global brands (especially the luxe) need to brace for more realistic margins out of this market that has come into its own. Gone are the days where you can pump out the profits by merely ratcheting up production. With more and more production coming online, new OEM’s need to be cost and feature conscious and dealers need to develop alternate revenue streams to new cars sales that today account for the bulk of their margin.