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Fuel for Thought - China: The current engine of the automotive industry

17 November 2020 Kristen Balasia Mike Wall

Automotive Monthly Newsletter and Podcast
This month's theme: China - The current engine of the automotive industry

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The auto industry gets a lift from Chinese consumers and regulators driving growth even as a surge in COVID-19 cases in the US and Europe tempers demand elsewhere.

China has seen a welcome rapid recovery of auto sales since the second quarter of 2020. This has been supported particularly by incentives from 22 cities/provinces, including an increase in license plate quotas, subsidies for new car purchases as well as a scrappage subsidy for vehicles with China 3 emission standards and below. Light vehicle sales YTD are characterized by strong performance from premium and light commercial vehicles (LCVs) as both segments are heading for growth in 2020 in spite of the broader impact of COVID-19. Premium car sales have been supported by a personal income tax cut introduced in 2019, which particularly benefited mid-/high-income households, as well as by declining premium transaction prices with a cut in vehicle custom duty in 2018 and reduction in VAT from 16% to 13% in 2019. Additionally, LCVs are gaining traction with the help of stringent overloading control imposed since 2019, front-loaded demand with incoming implementation of China 6 emission standards starting in 2021, and a scrappage subsidy for low-emission vehicles. IHS Markit expects light vehicles sales to decline by around 6.5% to 23.2 million units in 2020 and grow by around 5.5% in 2021 as most regional incentives are phased out by the end of this year.

Mainland China Light Vehicle Sales

Strongly supported by government incentives, the light-vehicle production rebound has remained robust. LCV production surged 22% in September after another record month of 26% year on year (y/y) in August and slowed down only moderately in October. Supported by infrastructure construction investment and growing online activity, light trucks surged 30% in September and rose 25% in October. Though impacted by relatively slower rebound in private consumption, the industrial output of passenger cars resumed growth in August (1.65 million units with 1.9% y/y) and September (1.94 million units with 7.1% y/y). Passenger vehicle output dropped only slightly in October owing to longer holidays and will slump by around 10% by end of this year, mainly owning to the deep downturn in the first quarter and a high comparative base in the fourth quarter last year.

Hitting 2020 targets will be difficult owing to the forced closure of many dealerships in China after the Chinese New Year for an extended period when the COVID-19 pandemic hit. The volume of customer vehicles visiting dealership workshops was down 60% relative to the same period last year. Market data showed a catch-up growth after reopening, with China experiencing a V-shaped back-to-business-as-usual bounce that many other markets could only hope for. March was down 10% compared with previous year, well ahead of the 30% decline in new car sales volume for the same period, and subsequent monthly growth has been running at approximately 18% y/y growth among some premium brands. Longer workshop lead times compounded by backed-up warranty and retail demand has had varying impacts across the different regions. Overall, any negative impact this may have had on customer retention has been offset by overall growth in vehicles in operation, with aftersales expecting a net 5% y/y growth.

As we look forward to 2021, all brands will be looking for a strong start to the year. With servicing, customers who still follow a 12-month cycle must be ready for the possible demand shift, 12 months ahead from lockdown. For most, this means acting now can avoid idle workshops and less parts purchases in the first quarter.

Following China's rather rapid light-vehicle market recovery, the engine and transmission market also rebounded at the start of the second quarter of 2020. In terms of the New Energy Vehicle market, benefiting from NEV incentives, including central government fiscal subsidy, purchase tax exemptions, free car license plate registrations for NEVs in restriction cities, and encouragement on promoting NEV in rural areas, the NEV market has been growing rapidly since the start of the third quarter of 2020.

Regarding Battery Electric Vehicles (BEVs) in the passenger vehicle market, there is a 34.5% y/y growth in the third quarter of 2020 compared with an overall 31.5% y/y decline in the second quarter of 2020. For Plug-in Hybrid Electric Vehicles (PHEVs), after more original equipment manufacturers (OEMs) launched CN6-complied products, the PHEV market recovered well from the second quarter of 2020 as the third quarter of 2020 surged by 48.9% y/y, compared with 1% y/y growth in the second quarter of 2020. Under the challenges of COVID-19 impact, for calendar year 2020, we expect BEV will only fall by 4.2% y/y and PHEV will grow 14.7% thanks to the rapid recovery in the third and fourth quarters.

From the perspective of regulation compliance, the Dual-Credit Policy regulation will play an extremely important role as a "stick" in driving China's NEV market development. In June 2020, after two draft adjustments, the final Dual-Credit Policy regulations were issued by the government. The main changes compared with old version include the addition of low-fuel consumption vehicles into the 2020 version and the extension of NEV target quota to 2023. In terms of low-fuel consumption vehicles, we expect that full hybrids will benefit most from this rule. Accordingly, it will drive Chinese OEMs to adjust their electrification strategy, especially with regards to Japanese-designed OEMs that have strong capability of full-hybrid technology and the ability to release that into the Chinese market.

The Chinese market has seen enormous volume swings owing to the COVID-19 pandemic and previously owing to macro- and other market-specific factors that impacted demand over the prior two years. Nevertheless, as the market has been the first to emerge from the pandemic and relatively effective in controlling virus flare-ups, growth has returned and is accelerating. While not completely out of the woods given the ongoing potential for a second wave and the wait for availability of viable treatments and vaccines, China is poised to return to a position of growth and leadership in the global automotive industry.

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Posted 17 November 2020 by Kristen Balasia, Vice President and Managing Director, Automotive Advisory, IHS Markit and

Mike Wall, Director, Automotive Analysis, IHS Markit

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