China shifts from buying cars to sharing them
Fewer people want to buy automobiles because ride-sharing services are widely available
According to the lunar calendar, this is the year of the pig but, clearly, the greed that it symbolises does not extend to the desire to buy a new car in China.
In December, Chinese car sales were down a fifth from the previous year, while for the whole of 2018 they were lower than the previous year for the first time in about two decades. The US dream of car ownership, which 20 years ago was the definition of everything good that America represented, seems to be dying across the Pacific.
Most analysts think there is worse to come. “Inventory is at a multiyear high and volumes have deteriorated continuously,” said Goldman Sachs analysts, predicting that Chinse car sales will be lower in 2021 than they were in 2017.
At that time, 70 per cent of growth in car sales worldwide came from China. That means the subsequent drop in mainland sales has global implications given how many international car companies have operations there.
Any pessimism is solidly based. The slowdown in car sales is part of a general, broader slowdown in retail sales in China. Among the factors accounting for the drop is bearish consumer sentiment in the wake of friction with the US, tighter credit conditions especially for households, lower stock and property prices, and the end of tax breaks that brought a lot of demand forward after their introduction three years ago.
Goldman entitled its recent report “Not Yet”, in a reference to a possible recovery in demand. But should the brokerage have instead entitled it “Maybe Never”? Most of the reasons cited for the slowdown in sales are cyclical factors. But what if there is more to it than that? In fact, there are secular factors at work as well that suggest lower sales are not simply a passing cyclical phenomenon.
Cars are at the forefront of a larger transformation that is part of the sharing economy, and the sharing economy is fundamentally deflationary. Cars are going from being a manufactured good that households aspire to own to being a service. China is at the forefront of this transformation.
That is why many hedge fund managers are short many carmakers in China, including the stronger domestic ones such as Geely Automobile, Guangzhou Automobile, Dongfeng Motor, and those with joint ventures including American carmakers such as General Motors, the Germans, and the Japanese such as Toyota and Honda.
The transformation is gathering momentum. Looking at the data on retail sales, China seems to be on the verge of a much more drastic slowdown than the 6.2 per cent growth that analysts at JPMorgan are predicting for this year.
But retail sales data only capture part of the picture, noted Chris Wood, an analyst with the CLSA unit of Beijing-based Citic Securities. “The quarterly household survey shows a better growth rate since it includes services” and not just physical goods (unlike the retail sales data), and services accounts for 40 per cent of all household spending, he said.
For example, ride-sharing and car-sharing services are a big part of the reason why fewer people wish to buy cars in urban areas, even though incomes are much higher than in the countryside, meaning affordability is less of an issue.
But there are generational shifts as well. “Everything happens earlier in China,” said one mainland hedge fund manager. “We are a nation of early adaptors.”
Young people who have a penchant for spending rather than saving as their parents’ generation has done, express little desire to own a car, not least because they cannot text while they are at the wheel.
Meanwhile government policy, which is a big influence on demand, aims to encourage a shift from traditional polluting, fuel-guzzling vehicles to cleaner electric ones. Moreover, virtually every local government in the country wishes to champion local electric vehicles and battery producers.
Some hedge funds are strong believers in BYD as an alternative to both traditional carmakers in China and international competitors in the new world of electric vehicles, notably Tesla.
In 2018, “BYD sales grew 118 per cent and it is profitable, and yet it only has a market cap of $20bn, compared to Tesla, which makes losses and has a market cap of $58bn”, said Zhang Wei, founder of Yuanhao Capital Management in Shanghai.
While new economy plays such as BYD may well turn out to be the future of China’s car industry, even they will not be exempt from the more sobering maths facing the country’s consumers these days.