China: Continued Boom or Overcapacity?

Transcription

1 China: Continued Boom or Overcapacity? Implications for Global OEMs and Suppliers Ashvin Chotai Director, Asian Automotive Industry Research 6 October, 24 Schillersaal, Liederhalle Kultur und Kongresszentrum, Stuttgart Copyright 24 Global Insight, Inc. The Investment Challenge: To Add or Not to Add Capacity? Booming Sales in 22 and 23 Lifting of Restrictions on Investment Limited Growth Prospects in Other Regions Will Boom Continue? Implications of Current Slowdown? Investment Decisions in China? Investment Boom: Capacity expanding faster than expected growth in demand Too much caution may mean lost opportunity Risk of being in China are less than the risks of not being there Speculative investments by local companies Exports from China? Will investment in China help cut global costs? Margins? More Intense Price Competition Margins Capacity is Rising in Stages Most OEMs adopting a flexible approach Plans may be postponed if demand growth slows Will Exports be Stepped up? More Pressure of RoW? 2 Page 1

2 The Boom in 22 and 23..Main Factors Price Cuts Pent-up Demand Products Finance Significant price cuts in all segments No controls, new models and new capacity Pent-up demand Consumers had been waiting for lower prices post WTO entry New models coming on stream faster than expected Especially passenger cars at the low end Fewer restrictions on new model launch after WTO Entry Better access to vehicle financing Foreign OEMs launching new-vehicle financing initiatives But lack of credit screening infrastructure is an obstacle Significant improvements in infrastructure and traffic management will continue Infrastructure Road and Expressway construction programme continues But most cities still suffer from shortage of road space and chronic congestion 3 China Car Sales (Including Imports). Will be Difficult to Match the Sales Surge of 4th Q 23 Total 24 Sales: 2.47 million units (2.38 million domestic built) Car Sales (Thousand units) Forecast Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. 4 Page 2

3 China Sales: All Vehicles. Total Sales (Including Imports) of 5.1 m units in 24 6 Vehicle Sales (Thousand Units) Forecast 23 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 5 Slowdown Since April 24: Main Reasons After two very strong years, market due for a slowdown Less support from pent-up demand Year-over year comparison still indicate growth albeit much lower than industry expectation Overheating concerns by government in April the main trigger Curbs on lending Hitting consumer as well as dealer level finance Rapid change in consumer and business psychology More cautious attitude towards spending on big-ticket items Purchases by government and state-owned enterprises cut since May Price cuts are now regarded as a destabilising factor Potential Shanghai buyers delaying car purchases Possibility of elimination a 2,-yuan surcharge on car purchase after new auto policy 6 Page 3

4 Major Shift in Market and Industry Dynamics Slowdown with market share adjustment VW losing market share rapidly Sales of newer models/newer brands holding up better Waiting list for popular models has shortened very rapidly. Inventory levels rising rapidly since June Production adjustment lagging sales slowdown Production cut backs in August and September Reduction in working days in October No Buick Regal production in October Now uncertain outlook for 25 Reassessment of expansion plans 7 VW and PSA the Main Losers in 24.. GM, Honda and Hyundai Posting Impressive Gains Jan-August Change JOINT VENTURE Unit Sales Per Cent Thousand Units SHANGHAI VW % FAW VW % SHANGHAI-GM % GUANGZHOU HONDA % BEIJING HYUNDAI % FAW % FAW TOYOTA % FAW TIANJIN % CHANGAN SUZUKI % SHANGHAI CHERY % DONGFENG PEUGEOT CITROEN % GEELY AUTOMOTIVE % DONGFENG YUEDA KIA % CHANGAN FORD % DONGFENG NISSAN % FIAT YUEJIN % SOUTHEAST AUTO % OTHERS % TOTAL 1, % 8 Page 4

5 Car Sales Outlook for 25.. Year-Year Declines Expected in the First Half of 25 Car Sales 25: +7% to 2.64 million units Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Car Sales (Thousand units) China Vehicle Demand: The Upside Institutional demand is significant Government, Corporate and Taxi Large population and skewed income distribution Middle income and rich minority is sizeable Emerging entrepreneurial and professional class New Rich Boom in FDI and exports creating private companies and wealth Beginning of consumerism Release of pent-up demand as prices drop and product choice improves Saving rate is very high The overall savings rate is an amazing 43% of GDP. Recent auto-loans policy will stimulate demand Considerable scope for credit fuelled growth But lack of credit screening infrastructure is a major obstacle 1 Page 5

6 China: Rising Incomes in Major Cities will Support Growth in Medium Term Per Capita Urban Income Index (Shanghai=1) 18% 16% 14% 12% 1% 8% 6% 4% 2% % 1.3 Shenzhen Top 15 Cities are all in Eastern and Central Areas: Population of nearly 94 million 7.2 Guangzhou 13.2 Shanghai Ningbo Beijing Hangzhou Xiamen Jinan 21 Population in Million Based on National Bureau of Statistics Survey: 1st Half 23 Changsha Fuzhou Nanjing Qingdao Tianjin Dalian Nanning 11 Medium Term: Downside Risks Soft or hard landing Investment and asset bubble At present we are assuming a deceleration of growth rather than a slump Structural Risks Social / Income inequality Unemployment level Banking and State Sector restructuring Can government achieve more balanced development? Very rare for emerging markets to sustain double digit rates of growth in medium and long term High percentage growth difficult to sustain from a higher base level Energy Consumption and Infrastructure Constraints What if China reaches motorisation rate of 1 cars per people? Global Insight forecasts attempt to factor in these and other unknown risks Scenario analysis for major decisions 12 Page 6

7 China Demand Evolution: Base Scenario.. Slower Growth in Steady Medium Term Growth 5.1 million in million in million in 214 6, Sales (Thousand Units) 5, 4, 3, 2, 1, Car LCV Trucks and Buses (>6 t gvw) China Car Demand Evolution: Scenarios for Demand Development 8 Optimistic Sales (Thousand Units) Semi-Hard Landing Hard Landing Base Scenario Page 7

8 Most Car Plants in China Enjoyed High Utilisation Levels in Capacity 23 Production Capacity Utilisation Capacity/Production ( Units) Shanghai VW FAW-VW Shanghai GM Geely Dongfeng-Citroen Tianjin Xiali Chery South East Guangzhou Honda Changan Suzuki Beijing Jeep Great Wall Dongfeng Nissan Hainan Mazda FAW Nanjing FIAT Brilliance Beijing Hyundai Dongfeng-Yueda KIA Tianjin-Toyota Changhe Suzuki Shanghai GM Yantai Harbin Hafei Biyadi Auto Changan Ford BMW 11% 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Capacity Utilisation Rate 15 Expansion Plans of New Local Entrants are Rather Ambitious Company Main Business Activity Location Product Type Capacity Plans Remarks Geely Motorcycles Hangzhou, Ningo, Linhai Budget Car Planning to make larger cars 5, Chery Automotive Anhui Budget Car 5, Chunlan Home Appliance Nanjing Trucks Joint venture with Hino Great Wall Pick-up and SUV assembler Baoding Pick-up and SUV assembler 15, IPO in Hong Kong late 23 to fund expansion Hebei Zhongxing Pick-up and SUV assembler Baoding and Jiangxi SUV and Pick-ups 1, Mobile Phone Budget Car with ambitions to make Bought Xian Qinchuan Biyadi (BYD) Batteries Xian, Shenzen larger cars 45 Bird Mobile Phones Wuxi Budget Car Planning to build model based on Premacy Lifan Motorcycles Chongqing Budget Car 1, Hongta Tobacco Qingdao 1, Tied up with FAW Etsong Tobacco Tied up with FAW Jilin Tongtian Zhejiang Jinhua Nanhai Fudi Revival following acquisiton by private company Budget Car 15, Midea Household Appliances Changsha Bus Revival following acquisiton Guizhou Aux Group Vehicle Body Builder Air-Conditioners Range of cars, buses and trucks Foshan, Guangdong SUV 5, Zhejiang, Shenyang, SUV and Pick-up. Shenzhen Larger cars in future 45, Previously Jilin Jiangbei, Restructuring and acquiring smaller players Acquired Hunan Sanxiang. Constructing bus manufaturing base Acquired Shenyang Shuangma 16 Page 8

9 Will All the Announced Capacity Really Come on Stream? 12 1 Capacity Addition Plans to Capacity Shanghai VW FAW-VW Beijing Hyundai Geely Chery Dongfeng-Yueda KIA Dongfeng Nissan Guangzhou Honda South East Dongfeng-Citroen Shanghai GM Changan Ford Tianjin-Toyota Changhe Suzuki Changan Suzuki Harbin Hafei Biyadi Auto Tianjin Xiali Dongfeng Honda Wulin Shanghai GM Yantai Nanjing FIAT Hainan Mazda FAW Great Wall Beijing Jeep Guangzhou Toyota Brilliance BMW 17 China Car Demand Vs Capacity Evolution Production/Capacity (Thousand units) Local Players (New) Local Players (Current) Foreign JV Optimistic Hard Landing Semi-Hard Landing Base Page 9

10 Exports from China: Potential and Obstacles Restrictions on foreign ownership of assembly ventures Does not encourage global OEMs to hike exports Complicated to integrate China operations into regional and global networks China allowing majority ownership for export dedicated ventures Not viable or attractive for most ventures to replicate investment Cost structure still not competitive Improving scale economies and component supply industry will improve this China s image as producer of quality passenger vehicle is untested Consumer reaction? Impact on production and unemployment Union reaction? Greater support for exports if domestic demand slows significantly Likely to be greater government incentive / flexibility 19 OEM Profitability Under Pressure Downward Pressure on Prices Price War Continues Greater Consumer Choice and Intense Competition Looming Over-capacity in the medium and long term Upward Pressure on Costs Faster Pace of New Model launch Higher tooling and product costs Higher Sales and Marketing Costs Greater competition More emphasis on private demand Cost Reductions due to improving supply structure and greater scale economies Shake-Out?? Strong growth will support profits of most OEMs Shake-Out unlikely unless market takes a significant tumble OEMs could accelerate exports if there is a prolonged slump 2 Page 1

11 Shake-Out? More Sustainable Development Extent of downturn will determine the fate of local entrants How will companies such as Chery, Geely, Great Wall emerge from sluggish market? Investor attitude towards China IPOs e.g. Shanghai Auto? New Auto Policy restricting new entries Cancellation of some of the speculative projects very likely Domestic players consolidation through M&A activity Major restructuring will not occur until 5% cap on foreign equity stake in assembly venture is removed 21 Implication for Global OEMs For global players Risk of NOT being in China are greater than the risks of being there. But more cautious stance towards new investment and more realistic goals Competition will intensify further Rising costs of new model launch, sales and marketing The days of high profits are gone The current slowdown highlights the benefits of geographically diversified presence More attention on India and ASEAN Flexibility in investment planning Take advantage of upside Limit downside 22 Page 11

12 Implications on Suppliers OE competitive dynamics changing rapidly Many suppliers very vulnerable to VW and GM Challenge is to have diversified customer base Unique mix of OE customer base in China US, European, Japanese, Korean and Chinese platform in production No other region has such a diversified customer mix Opportunity to make inroads into new customers and leverage regionally and globally Intense price competition means more pressure on cost reductions Investment by Japanese suppliers has accelerated significantly in last two years 23 Thank you! Ashvin Chotai Director, Asian Automotive Industry Research ashvin.chotai@globalinsight.com Tel: Copyright 24 Global Insight, Inc. Page 12