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Saturday 20 June 2020

A cautious rebound in China's auto industry


By Iram Khan. 

As COVID-19 continues to subside in China, good news from one industry after another is making headlines. The latest being an unexpected jump in car sales. China Passenger Car Association (CPCA) has announced that premium and luxury car sales grew 28 percent year on year in May. 

Apart from its social effects, the pandemic caused massive economic disruption. Small and medium-sized enterprises, that form the backbone of the Chinese economy, were the most hurt. The high-end production sector and its moneyed investors, too, felt the heat but wielded much greater capacity to absorb the shock. 

The same has been true for luxury car customers. Their consumption has constantly been upgrading ever since China became the largest luxury goods market in 2012. They were able to sustain the financial impact of COVID-19 as their buying power generally remained unaffected. 

At the same time, attracting business during this challenging time has been one of the topmost concerns for all sections of society. As luxury cars portray the pocket and the credibility of executives to potential clients, this could be one factor behind the surge in demand. 

With strict lockdowns pushing consumption – and consequently the first quarter GDP – downward, negative sentiment prevailed in almost all industrial forecasts. But May’s performance has beaten many expectations and can spill into other exquisite niches where pessimism might be overplayed. 

During the peak period of the pandemic, luxury manufacturers threw in a slew of supportive policies for dealers. They started off early, as far back as early February, with incentivized offers, promotional funds and provision of vehicles in advance. Fortunately, these measures worked and the premium segment is on track to full recovery. 

Luxury buying is guiding the growth of the whole automobile industry which, due to its extensive supply chains, is a key contributor to the real economy. The entire ecosystem that spans around car manufacturing is gearing into action and augmenting the revival of businesses.

The overall passenger car vending rose 1.9 percent in May as compared to last year, indicating how social distancing and avoidance of public transport has compelled people to purchase private vehicles. As a blessing in disguise, the changed health related priorities loosened the pressure on the car industry that had been struggling with sales since June 2019

China, the world’s largest auto market, is currently steering the resumption in global demand. Carmakers are thus cashing in all opportunities. Volkswagen AG disclosed last month that it is investing 2.1 billion euros (nearly U.S. $2.3 billion) in China’s electric vehicle landscape. The move comes in competition with General Motors, Toyota and Tesla who are all pushing for New Energy Vehicles (NEVs) – the latest predilection of upscale buyers. 

Leading among these companies is Tesla that has been touching new heights despite the pandemic. Support from the Chinese government and the continued hype around its Shanghai Gigafactory contributed to a record climb in its stocks this week as car trade rebounded in China. 

Jaguar Land Rover (JLR) is another brand that considers China the strategic core of its global development. It expects sales of China’s luxury segment to slightly increase from last year and probably for this reason it reached out to Chinese lenders for its capability enhancement, introduction of new products and technology innovation.  

Five Chinese banks have agreed to provide a revolving loan of 5 billion yuan (nearly U.S. $705 million) to JLR that will span over the next three years. The involvement of state owned banks in the deal depicts the government’s confidence in the company and the broader high-end car sector. 

An encouraging trend was visible in March and April as well when the decrease in retails at luxury car dealers remained at a mere 3.1 percent year on year. But CPCA is not too optimistic about June, for reasons unrelated to the ongoing economic crunch. Last year’s June had seen a sizable boost in sales because dealers were slashing prices as much as 50 percent to clear their inventories of cars that did not meet the new emission rules. So for June 2020, the year on year figure might not be a true depiction of the rebound. 

Moreover, as the Chinese economy is consolidating its comeback, carmakers might pull their incentives for dealers in the coming months. Plus, people’s confidence in public transport is returning with the diminishing infection rates and commuters, whose mobility was affected by COVID-19, can possibly delay their purchases. In most likelihood, therefore, we might see an adjustment in sales next month.

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