Passenger vehicle (PV)sales in China were up 7.1% in 2012. If anyone thought the market would continue with double-digit growth they are 1) disappointed and 2) delusional. In Tier 1 and 2 cities, the market is pretty much mature now. As Tier 3 and 4 cities join the auto race, the overall PV market will continue to grow. But high double-digit growth cannot be extrapolated ad infinitum and growth is not perfectly linear.
Look at chart 1 and you see that if we get only a 4% — very conservative – CAGR through the end of the decade we’ll see a market bigger than 20 million units. China is firmly the biggest global auto market. And remember from my past reports, global brands have at least half of this market.
From a performance perspective, this modest assumption shows that we will have between six hundred thousand and one million incremental units of volume per year. This is nearly 6.5 million incremental cars by the end of the decade. This is a healthy incremental base to balance rising costs with price competition.
Yes, automakers are adding new capacity; however, it’s important to know that they can only do this by buying out existing licensees of older local automakers. This should help improve the quality and productivity of auto production. Good for automakers as they face a maturing pricing environment where you need to give back 2-3% every year. And a note of caution for labor as new factories will require fewer workers.
While my forecast here is 4%, I expect an average of more in line with 5-6% and won’t be surprised if we see one or two years in the 1-2% range followed by a year or two in the 7% range – like 2013. If automakers continue to modernize production, and the overall economy continues reasonable growth, Tier 3 – 4 markets will drive growth.
- Don’t get excited over Jan 2013 big growth (+46%) was a calendar anomaly with the New Year falling in Jan last year. Expect full year around +7-8%
- Don’t panic over any one year, or any one month that are flat or down big. With the exception of Jan-Feb 2012, the industry has been very well-balanced on production vs sales.
- International brands and any brand with good SUV lineup is well positioned to beat the market. Japanese brands will come back to a market share of more than 25% from last year’s 19% — barring any renewed tensions. This means an incremental 1.2 million units for the Japanese brands.