Five reasons why Chinese auto industry is shifting gears when others aren't
China is the world's largest automotive market and has the biggest automotive industry. Every major global player in the world has a major stake in the country as local manufacturers also mount serious challenges. Being the largest and biggest does not guarantee immunity from falling demand and the years 2018 and 2019 weren't as solid as the preceding years.
And then came Covid-19.
Yet, at a time when the pandemic has wrecked havoc on the automotive industries around the world, the Chinese market is not only recovering but is reportedly at the cusp of performing even better than what it had in 2018 and 2019.
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Consider this - auto sales in China in May of 2020 rose 14.5% from the same month in 2019. It was the second consecutive month of increase after sales rose by 4.4% in April. According to China Association of Automobile Manufacturers (CAAM), 2.19 million vehicles were sold in the country in May. In the same month, Federation of Automobile Dealers Associations (FADA) reported that 30,749 units of passenger vehicles were sold in India, 20,247 new passenger vehicles were registered in the UK and sales in the US picked up but were nowhere close to figures from May of 2019.
There are multiple factors why China is possibly looking at a much stronger recovery in the automotive sector when compared to other markets. Here are five:
5) Decline in Covid-19 numbers
China was the first country to report a Covid-19 case and the virus is largely suspected to have originated in Wuhan. Since December, China has reportedly managed to use an iron hand to reign in positive cases and check the spread of the virus even as other countries have and continue to deal with the pandemic. Lockdowns in many cities were eased even as other cities in the world were either in shutdown mode or were entering it.
4) Restarting production facilities
With number of positive cases reportedly coming down, Chinese auto factories began gradually resuming operations. Even in the Hubei district, where Wuhan is located, factories and assembly plants began brushing off dust. And while all of this was happening in China, other parts of the world were entering lockdown phase. For instance, Honda Motor Co said on March 11 that it had resumed limited operations at its production site in Wuhan. At the same point in time, India and several other European countries had not even contemplated lockdowns that would eventually bring life to a standstill.
3) Simplified finance process
China's state-run media outlet CGTN has attributed some of the returning demand in the auto sector to easier finance options. "Consumers are much more interested in financial services now. Our packages spread the cost over a longer period, and the monthly payment is less," a sales manager at Shanghai Yongda Lujie Auto Sales and Services was quoted as saying. "The five-year package is very popular. Customers need to pay only around 4,000 or 5,000 yuan a month."
It is only towards the end of May that automakers in India began announcing schemes and offers galore to lure back customers. Same is true in the US where SUVs stranded at sea because dealers were refusing to accept these, have started getting price cuts.
Some Chinese cities have also rolled out cash incentives for people who exchange their old vehicles for newer ones.
2) Focus on personal transportation
Positive Covid-19 cases may have declined in China but it may still have left a fear psychosis that pushes more and more people to take up personal mobility. Use of public buses and metro systems in cities like Beijing and Shanghai remain significantly lower when compared to pre-Covid-19 times. Several analysts point out that in a market as big as China, this could mean a solid push towards getting inside individual vehicles.
1) Government incentives
The Chinese government is reportedly attaching a lot of importance to the recovery of the automotive sector. Take for instance the incentives on offer for electric vehicles. It had been announced in 2015 that the scheme of rebates for these vehicles - called new energy vehicles in China - would end in 2020 but the government opted to continue with for EVs that cost less than 300,000 yuan. Government rebates have been a key factor in helping keep prices of EVs in check - a win-win for both manufacturers as well as buyers. Obviously then, Tesla was quick to announce a price reduction in its popular Model 3 to bring it down from 323,800 yuan to 271,550 yuan for the base variant.
Governments around the world are also considering more and more incentives for less polluting and/or electric vehicles, especially in current times. France and Germany have underlined push for clean mobility while the UK may offer 6,000 pounds under a car scrappage scheme. India too is considering bringing in a vehicle scrappage policy that, according to Nitin Gadkari, minister of MSME and Road Transport and Highways, will help automakers by supplying recycled parts and make it an attractive option for people to bring in their old vehicles for new cars.
As such, while a recovery in the auto sector is expected in countries outside of China as well, the pace may vary and is likely to be far more gradual. In China, the turnaround could be quicker. "We don't see a fundamental change in terms of the basic infrastructures of the market. So we do see that the market after the pretty bad first quarter, will see a pretty nice bounce back in the next three quarters," Ron Zheng, a senior partner of Roland Berger, was quoted as saying by CGTN.
