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Posted on : Friday 3rd April 2020 03:58 PM

Worst Yet to Come for China’s Slumping Car Market, As Coronavirus Pandemic Takes Its Toll

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The world’s largest automotive market is poised for a third year of declining sales in 2020, as the Chinese government’s incentives and tax breaks fail to convince buyers to make large financial commitments during a global economic slump and the coronavirus pandemic.

The State Council, China’s cabinet, announced on Tuesday it will extend subsidies and tax breaks for new-energy vehicle purchases by two years to boost the sluggish market. Current subsidies of up to 25,000 yuan (US$3,531) per vehicle and exemption from a 10 per cent purchase tax for buyers will be extended until 2022. Both policies were expected to be axed this year.

“Consumers were expecting an increase in subsidies … this [extension] will have a limited impact on the market,” said Tian Maowei, sales manager at Yiyou Auto Service in Shanghai.

China’s economy in 2020 is poised for its slowest growth rate in four decades, after the coronavirus, which has sickened 83,059 people and claimed 3,305 lives, forced production and services to shut across the country for two months. Even as the country’s manufacturing and overall economy creaks back into action, jobs and business prospects remain bleak as the worsening pandemic takes its toll on China’s export markets, leading to what is known as a second wave of demand slump.

Tesla’s locally made Model 3 electric car could be the only bright spot, after it topped other home-grown rivals in February in terms of sales. The American carmaker began producing the Model 3 at its US$2 billion Gigafactory 3 in Lingang, Shanghai – its only production facility outside the US – towards the end of last year.

A car made in Shanghai cost 299,050 yuan after subsidies in January, whereas a fully imported Model 3 would have cost 370,000 yuan just three months earlier. Tesla sold 3,900 Model 3 cars in China in March, more than double Guangzhou Automobile Group’s Alon S, which came in second place with 1,433 units sold, according to the China Passenger Car Association (CPCA).

“It is not easy to predict how big the fall in the mainland car market will look like in 2020,” said Gao Shen, an independent manufacturing industries analyst. “Covid-19 has become a pandemic and it is inevitable that the downward spiral will continue throughout the whole year.”

Chinese consumers had already put big-ticket purchases on hold during the 18-month US-China trade war that preceded the pandemic, because of uncertainties around jobs and business prospects. And Covid-19 and the resulting government response, including the lockdown of cities and travel restrictions, has dealt yet another body blow to Chinese carmakers.

Moreover, the recent easing of restrictions over travel and business activity in mainland China is not likely to boost production and sales, analysts said, because the pandemic is now spreading in the rest of the world. According to global market and consumer data provider Statista, China accounts for about a third of the world’s passenger vehicle production.

China’s automobile industry had already posted a second consecutive year of decline in 2019. Passenger car sales slumped by 8.2 per cent last year to 25.8 million units, while production shrank 7.5 per cent to 25.7 million units, according to the CPCA. “The virus is spreading fast and is souring efforts by carmakers to halt a slide in the industry,” said Peter Chen, an engineer with car components maker TRW. “The coronavirus outbreak will further knock the market down, as it disrupts supply chain and dents consumers’ buying interest.”

On Monday, Geely Automobile Holdings, one of mainland China’s top carmakers, said that 2020 would be one of the toughest years it has faced. “The recent outbreak of the novel coronavirus has caused serious disruption to our supply chain and thus our production levels, meaning additional pressure on our business volume and profitability in 2020,” the company said in a filing to the Hong Kong stock exchange.

Its bearish forecast followed the announcement of lower-than-expected profit for 2019. Geely said its earnings fell 35 per cent from a year earlier to 8.19 billion yuan, while revenue dropped 9 per cent to 97.4 billion yuan. US investment bank Jefferies Group said in a research note on Tuesday that higher discounts offered to consumers and increased administration costs had led Geely to miss an analysts’ forecast.

BYD, China’s largest new-energy vehicle maker, said its net profit for 2019 plummeted 42 per cent to 1.6 billion yuan, as sales dropped 7.4 per cent to 229,500 units. The company said a weak market and increased spending on research resulted in the profit decline.

Great Wall Motors, China’s largest sport-utility vehicle maker, on Tuesday posted a profit drop of 13.6 per cent in full-year earnings for 2019. It made 4.5 billion yuan last year. Also on Tuesday, Guangzhou Automobile Group said its earnings in 2019 plummeted 39.3 per cent to 6.6 billion yuan.

According to the CPCA, vehicle sales plummeted 92 per cent in the first two weeks of February, with just 4,909 units sold, as the coronavirus lockdown kept buyers away from showrooms. And industry officials said that capacity had yet to be fully used now because of disruption to global supply chains.

Last week, Moody's Investors Service placed the ratings of five carmakers in Korea and China under review for a downgrade. These include Hyundai Motor, Kia Motors, Dongfeng Motor Group, Beijing Automotive Group and Geely.

“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets,” Moody’s said in a report published on March 27. “The combined credit effects of these developments are unprecedented. The automotive sector has been one of the sectors most significantly affected by the shock, given its sensitivity to consumer demand and sentiment.”


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