October 25, 2019 / 7:11 AM / a month ago

Column: China’s car sales slump as top urban markets saturate

LONDON (Reuters) - China’s car sales have slumped over the last year, reflecting tougher economic conditions and tax changes, as well as the saturation of some segments of the domestic market.

Cars for export wait to be loaded onto cargo vessels at a port in Lianyungang, Jiangsu province, China October 14, 2019. REUTERS/Stringer

Car sales slowed to 21.7 million in the 12 months to September 2019, down from a peak of 25.3 million in the 12 months to June 2018, according to the China Association of Automobile Manufacturers.

Slowing sales have coincided with a loss of momentum across the economy, with the purchasing managers’ index for manufacturing trending lower since May 2018, data from the National Bureau of Statistics shows.

Slowing sales have been both a symptom and a contributory factor to the wider economic slowdown as consumers become more cautious about buying expensive items and automakers respond by cutting output.

Sales have also been distorted by changes in tax policy. Value-added tax on vehicles with smaller engines was cut by up to 50% in 2016/17 to stimulate purchases.

The impending rise in tax rates at the start of 2018 drove vehicle sales to a near-record 2.7 million in December 2017 as consumers rushed to beat the deadline.

By pulling so many sales forward, however, tax changes probably contributed to the slump in sales in 2018/19 when rates returned to normal.

(Chartbook: tmsnrt.rs/2NfuxJ0)

The government has implemented another round of tax cuts, but much smaller this time, to boost sales again in 2019 (“New policy to boost car sales in short term”, China Daily, March 7).

MARKET SATURATION

The distorting effects of tax changes may be masking the saturation of at least some sections of the domestic market for passenger cars.

China’s vehicle ownership rate is still low by international standards at 37.5 vehicles per 100 urban households at the end of 2017, the latest data available.

But ownership had grown phenomenally over the previous decade from just 6.1 vehicles per 100 urban households in 2007, according to the National Bureau of Statistics.

Ownership rates in rural areas were lower at 19.3 vehicles per 100 households in 2017, but even there ownership had almost doubled from 9.9 vehicles in 2013.

Most urban middle-class households have bought a car in recent years, limiting the potential for further sales to this population segment.

Lower-income urban households and the majority of households in poorer rural areas may not yet be able to afford their first vehicle.

URBAN MIDDLE CLASS

At provincial level, there is a clear correlation between per capita disposable income and automobile ownership.

Households have tended to buy motorcycles as their per capita incomes have risen, and then switch to passenger cars as their incomes increase even further.

Provinces and cities with higher incomes have higher rates of car ownership (and lower rates of motorcycle ownership).

The principal exceptions are the provincial-level megacities of Beijing and Shanghai, where motorcycle ownership has fallen but car ownership is far below what would be predicted based on income alone.

Both cities have introduced tough restrictions on car ownership and invested heavily in mass transit to cope with severe road congestion.

In the rest of the country, car ownership rates correlate fairly closely with rising incomes and falling rates of motorcycle ownership.

But much of the urban middle class has already purchased a vehicle. Household ownership rates were nearing 50% in the provincial-level cities of Beijing and Tianjin and the wealthy province of Zhejiang by the end of 2017.

Pushing ownership further down the income scale in urban areas as well as out into the poorer countryside is harder without generous tax incentives, plentiful credit and fast growth in incomes.

ECONOMIC SLOWDOWN

China’s slowdown is compounding market saturation: as the economy grows more slowly, so does the number of households reaching the income threshold needed to buy their first vehicle.

Expensive consumer durables such as washing machines or passenger cars tend to diffuse through a population following an S-curve – slowly at first, then more rapidly, before tapering off as market saturation nears.

Initially, expensive durables are restricted to a small group of high-income households, before spreading to the mass middle class and finally penetrating lower-income groups.

New products diffuse more quickly or more slowly depending on whether average incomes rise rapidly or more moderately.

Even in a diffusion process, some groups may be excluded from new products for decades after the items have become commonplace for the middle class.

Poorer households, often in rural areas where productivity and incomes are lower, may not make their first purchases until decades later, slowing diffusion in its later stages.

In 2018/19, the economic slowdown and adverse tax changes have worsened market saturation effects in the short term and contributed to the slump in sales.

Tax cuts and more generous loans will be needed to help reverse the slump, and the government is taking steps in this direction.

But the most critical factor will have to be a return to faster economic growth and increasing incomes, especially in second- and third-tier cities and the countryside, where many households are still waiting to afford their first car.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related columns:

- U.S. auto sector outlook is softening (Reuters, Aug. 16)

- India’s stuttering economy hits global oil demand (Reuters, Sept. 25)

- Global motor manufacturing slump hits oil demand (Reuters, Aug. 13)

Editing by Dale Hudson

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