Carmakers must do better just to keep up in China

The world’s largest car market is cratering and thereare few signs of a recovery. It was neversupposed to getthis bad —andeven if it got close, a helping hand from Beijing wouldsteer thingsout of any prolonged trouble. Or so people thought...

Instead, passenger carsales in Chinafell 9.5% last year, more steeply than the 4.3%in2018, which wasthe first annual sales declinein over a decade. The drop has dragged down the global automobile industry and its deep supply chain.

That leavesautomakers in limbo. After years of relying on the Chinese market for its double-digit volume growth, theydon't seem too sure about whom to buildcars for, or what kind.Beijing’s lackluster stimuluslast yearincluded a grab-bag ofmeasures: removal ofcar-purchase limits, support for buying electric carsand incentives to build infrastructure like rural gas stations. They haven't done much to revive demand. Consumers were waiting for more, which simply led to a steeper slidein sales.

With no new sweeteners and the distortions of past stimuli fading,a real picture of demand is emerging. It’s nuanced. There are fewer first-time buyers, and more who are purchasingreplacement vehicles. They’reincreasingly looking to upgrade, and also buying more used cars. In a word, consumers are being more discriminating.Luxury carmakers account for around 15% of the market and aredoing better thanthe rest. Porsche Automobil Holding SE, for instance, delivered 86,752 vehiclesto customers in China last year, up 8% from 2018. In December, BMW Brilliance Automotive Ltd.’s average daily vehicles sales rose 21% on the year, up from 5% in November.

Down the food chain, buyers of family-friendly cars areupgrading. Demand for sports utility vehicles and sedans remains depressed but is shifting towardhigher-end, in-between cars, according to analysts at Goldman Sachs Group Inc.Buyers of these so-called multi-purpose vehicles, or MPVs,have long bought the same few basic models, priced between 40,000 yuan ($5,800) to less than 100,000 yuan.As the market was flooded with SUVs, aspirational buyers stayed away. Now, manufacturers are improvingdesignand comfort, and raising prices.

A slew of MPVmodels will be released this year. Going by low discounts compared to the rest of the market, demand remains sturdy. Goldman’sanalysts estimate that inevery 1% of demand that moves to the higher-end MPVs liesan annual revenue opportunity of almost 50 billion yuan ($7.25 billion).Here’s the hard reality: The double-digit growth days of selling nearly 25million cars a year are vanishing in the rearview mirror. So areoutsize profits from China. Much like the U.S. market,the type of demand will evolve and how people get aroundwill change. Younger Chinese are more inclined to use ride-hailing services. The older people get, the less likely they’llobtain driving licenses. China’s population is aging rapidly.This is a structural slowdown.

In theory, China has plenty of room to sell more cars. Penetration rates are low and so is the national percentageof licensed drivers.The carmakersare banking on semi-urban China, ostensibly the mostupwardly mobile consumers. But sales are unlikely to top 20-somemillion a year, evenwith the pushtowardelectric vehicles (only 5% of carssold now)and regulations that will eventually force buyers to go green. For now, higher technology onlyraises the cost of car ownershipout of reach.

The market is oversupplied, no doubt. The good news is that inventoriesare coming down as automakers try to stay in the black.Toyota Motor Corp. has increased the types of models it sells in China and gained market share. As weaker players dropout and the industry consolidates, the likes of Honda Motor Co.and Volkswagen AG are taking a bigger piece.

Failure to rigorously manage output will mean a pile of clunkers. Changan Ford Automobile Co. is sitting on some of the highest levels of inventory, as is SAIC General Motors Corp.’s Baojun. GMcontinues to lose market share. Ford Motor Co. said last week that its sales in China dropped 26% in 2019.European carmakers have also struggled.

Making money by churning the assembly lineswon’t cut it anymore. The China Road to success is a lot narrower. Only the companies that drive it smarter will survive.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.