China’s First Auto Recession

Market update and downgrade of forecast

May 2019

6 June 2019

Confidential. © 2019 IHS MarkitTM. All Rights Reserved.

 China’s First Automotive Recession Webinar | June 2019

Copyright notice and disclaimer

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for any errors or omissions or any loss, damage, or expense incurred by you or your organization.

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 China’s First Automotive Recession Webinar | June 2019

Next Global Sales and Production Webcast

Tuesday, 25 June 2019

• The 2019 and historical audio webcast can be downloaded at: connect.ihs.com under the IHS
Markit Events section.

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 China’s First Automotive Recession Webinar | June 2019

Questions and answers

• To ask a question, please type your question in the “Ask a Question” box within the webcast
system and click “Submit.”

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 China’s First Automotive Recession Webinar | June 2019

Today’s speakers

Nigel Griffiths Colin Couchman

Chief Automotive Economist Director - Global Automotive Sales Forecasting,
IHS Markit IHS Markit

Mr. Griffiths has more than 25 years of direct Colin Couchman is Director of Global Automotive Sales
experience in analyzing and forecasting demand trends Forecasting at IHS Markit. His global analyst team
and car sales in the global automotive industry. His specializes in light vehicle forecasting, manufacturer
work on deep-dive methodologies for China and its model program strategies, and vehicle segmentation
provinces helps steer the core global and country-level analysis. Couchman also oversees international bespoke
light vehicle forecasts for Automotive. Mr. Griffiths has forecasting projects for major clients. Couchman has more
received numerous awards for study and analysis, than 20 years of direct experience in forecasting trends in
including the Alexander Duckhams Prize of the Institute the automotive industry. He holds a MBA in International
of the Motor Industry, the Adam Smith Medal, and the Management and a BA (Hons) in Economic History and
Sir Julian Hodge Prize of the University of Wales. Politics, both from the University of London.

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 China’s First Automotive Recession Webinar | June 2019

Anatomy of China’s auto recession so far

China • First indication (after three consecutive months of
January–April YTD 2019 sales decline) :
Passenger vehicles (PV) - Sales (wholesale) -14.2%
- July 2018 by the final registrations measure*
Light commercial – Sales (wholesale) -1.2%

Total LV – Sales (wholesale) -12.4% - September 2018 by wholesale sales data measure
Total PV New registrations* -4.9%
• Sales decline intensified notably in Q4 2018
Source: IHS Markit © 2019 IHS Markit

Latest
12.0% China GDP forecasts (After May 2019 US tariff round) • Through April 2019 market has seen 10 months of
consecutive sales slide
10.0%

• We estimate sales in May 2019 will show another

8.0% high-teen percentage decline

6.0%
• All vehicle segments have been hit (premium brands
held out longest)
4.0%
• All body styles have been hit
2.0%
• Virtually all of China’s 31 provinces have registered
sales declines, and at about the same time
0.0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Source: IHS Markit © 2019 IHS Markit

• Bottom line: This is an unprecedented (and not
forecast) development in China’s auto market
*New vehicle registrations proxied by insurance originations

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 China’s First Automotive Recession Webinar | June 2019

Disconnected cars – its an auto recession but not an economic recession

The general economic slowdown has been in line with expectations, but the slump in
passenger vehicle sales is far worse and a clear outlier.
Car slump but no other major consumer
Available consumer confidence indicators show little to no correlation to recent car slump
category is showing decline
130 Consumer goods
China Consumer Confidence Index

January–April 2019
120 % change

Total retail sales 8%

110
Food & drink 10%

100 Household durables 6.6%

Building decoration 6.8%

90
Clothing 2.2%
Source: NBS (National Bureau of Statistics of China), IHS Markit © 2019 IHS Markit
80

Car market metrics

70
January–April 2019
01/2014
03/2014
05/2014
07/2014
09/2014
11/2014
01/2015
03/2015
05/2015
07/2015
09/2015
11/2015
01/2016
03/2016
05/2016
07/2016
09/2016
11/2016
01/2017
03/2017
05/2017
07/2017
09/2017
11/2017
01/2018
03/2018
05/2018
07/2018
09/2018
11/2018
01/2019
03/2019
% change

Source: NBS (National Bureau of Statistics of China), IHS Markit © 2019 IHS Markit
PV sales units (Wholesale) -14.2%

PV sales units (Final vehicle registrations*) -4.9%

PV retail sales (Value) -3.1%

Source: NBS (National Bureau of Statistics of China), IHS Markit © 2019 IHS Markit

*New vehicle registrations proxied by insurance originations

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 China’s First Automotive Recession Webinar | June 2019

China’s seasonally adjusted sales rate (SAAR*)

China’s seasonally adjusted selling rate (SAAR*)

35

30

25

Tax breaks AND

“unconventional
Millions

20

financing” pushed
market above trend
15
and “faked” a
sustainable run rate
10
Last date point is
“estimated” for May 2019
5

0
Sep-09
Nov-09

Sep-10
Nov-10

Sep-11
Nov-11

Sep-12
Nov-12

Sep-13
Nov-13

Sep-14
Nov-14

Sep-15
Nov-15

Sep-16
Nov-16

Sep-17
Nov-17

Sep-18
Nov-18
Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
May-09

May-10

May-11

May-12

May-13

May-14

May-15

May-16

May-17

May-18

May-19
Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
* Raw SAAR (this series does not adjust for explanatory drivers, and is typically distorted by China new year effects in January–February period)

Source: IHS Markit

Monthly SAAR Trend SAAR Poly. (Trend SAAR) © 2019 IHS Markit

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 China’s First Automotive Recession Webinar | June 2019

Structurally, China’s car market is transitioning from

growth to pre-maturity phase Implications:

Structural
40 components of China's light vehicle market • New demand driver has peaked
• Support from rapidly growing “new
35
demand” component—in part driven by
geo-demographic trends—is now largely
30
removed
Light vehicles (m)

25 • Sales momentum likely to be more

sensitive to market specific events (pricing,
20
taxes, sentiment, and policy) and how
Pre-maturity transition Mature vehicle replacement trends develop
15
Growth
• Car sales will exhibit lower elasticities to
10
GDP or average per capita income growth
than seen in the past
5

• However, this transition is a known entity

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 (previously forecast), is at different stages
Note: Historic anomalies smoothed
across provinces and generally a more
Light vehicle sales Replacement demand New demand
Source: IHS Markit © 2019 IHS Markit gradual process

• Other factors are needed to explain sharp

nationwide correction in vehicle sales

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 China’s First Automotive Recession Webinar | June 2019

Unconventional financing now appears to have boosted auto sales above

trend in 2016–17. The government clampdown on third-party lending burst that
bubble. We do not assume a loan replacement vehicle.
• Third-party financing, including “peer-to-peer” lending, is part
of China's shadow banking system

Approximate estimates of vehicle sales inflated by “third-party lending” schemes • Likely that this will have supported an element of vehicle
purchases if not fully financed using this method (secondary
1,400,000
finance), including help with cash deposits for car loans that
may have stretched conventional rules on overall debt
Estimates of vehicle sales supported by shadow finance*

1,200,000 financing (effectively bring forward future demand)

-490K
-1.8% • Government crackdown in spring 2018 has intensified into
1,000,000
2019
-900K
800,000 -3.2% • By April 2019, P2P total lending has fallen around 65%
compared with 2017
600,000
• Conventional banks unlikely to fill the void

400,000 • By its nature the lack of transparency makes anything other

than broad range estimates difficult*
200,000
• Including impacts from investment losses by private lenders
and from loss of one avenue for finance we model a trend
0 reset of sales down by approximately 500,000 in 2018 and
2014 2015 2016 2017 2018 2019
900,000 (vs. high point in 2017)

• This reset is held across the forecast horizon given

Source: IHS Markit © 2019 IHS Markit
government policy on deleveraging and financial stability

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 China’s First Automotive Recession Webinar | June 2019

Light vehicle sales trend lowered while the new

trade tariffs lower income prospects.
Why was the extent of the sales
Light vehicle sales
downturn not forecast earlier?
40 • Role of “unconventional finance” is not well
understood and not included in models
35

30
• Base case was for a “trade truce” with the
US; promising trade talks unravelled
25
quickly and new tariffs were imposed only
Millions

20
in May 2019

15 • Initial value-added tax (VAT) cut on cars

not yet fully passed on to consumers via
10
list price reductions
5
• Extra market distortion and destocking
0 from China 6 has unexpectedly
accelerated in many provinces and only
Source: IHS Markit © 2019 IHS Markit
became clear since April 2019

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 China’s First Automotive Recession Webinar | June 2019

Market complexity has significantly reduced confidence levels for forecasting

auto sales. Intense downward correction in play in the first half, but this should
ease off in coming months.
Indicative heat bars of impacting events on Chinese passenger vehicle sales
2017 2018 2019
Special impact events Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Fiscal
Small car tax break
Fiscal *Import tariff reduced
VAT cut
Fiscal
Income tax cut
Cyclical
Dealer inventory swing
Temporary
China 6 emissions advance
Economic
US trade war & tariff
Structural
Unconventional financing (P2P)

Net impact on
PV sales*

Positive for sales Negative for sales

* Impact on market as measured by passenger vehicle wholesales data. This includes dealer orders and so is influenced by dealer inventory

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 China’s First Automotive Recession Webinar | June 2019

Latest PV sales data for China is also being dragged down by a new rush of provinces
planning to implement China 6 by July 2019—a year ahead of the national schedule.

China 6 implementation schedule by region • China 6 emissions rules are to be implemented nationally in
Province City Scheduled time July 2020 for PV

Beijing Beijing 1 January 2020 for China 6B • A few provinces (circa 15% of China sales) announced they
Tianjin Tianjin 1 July 2019 for China 6 would advance implementation to July 2019

Hebei All cities 1 July 2019 for China 6 • Since late March, this list has grown dramatically and now
Henan All cities 1 July 2019 for China 6 covers provinces responsible for half of all passenger car
sales
Shaanxi All cities 1 July 2019 for China 6

Shanxi All cities 1 July 2019 for China 6 • Dealers forced to clear old stock fast ahead of newly
imposed deadline; dealer protests, with calls for more time
Shandong All cities 1 July 2019 for China 6

Zhejiang All Cities 1 July 2019 for China 6 • Intense destocking alone could be responsible for lower
wholesale orders by as much as 10% each month over April,
Guangdong Guangzhou, 1 July 2019 for China 6B May, and June
Shenzhen 1 July 2019 for China 6B

Chongqing Chongqing 1 July 2019 for China 6 • This additional blow to wholesale orders is temporary but
clearly alarming and clouds true level of demand; weak
Guangdong All Cities 1 July 2019 for China 6
dealer profitability may also limit any inventory rebound
Hainan All cities 1 July, 2019 for China 6
• Retail “registrations” are a better indicator of this than
Jiangsu All cities 1 July, 2019 for China 6
wholesale data
Shanghai Shanghai 1 July 2019 for China 6B
Source: IHS Markit © 2019 IHS Markit

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 China’s First Automotive Recession Webinar | June 2019

Forecast downgrade summary

Forecast downgrade and impact timing:

China forecast downgrade since March 2019 • Structural lowering of trend due to effective
40 removal of an additional avenue of auto
Millions

finance (for part of purchase price)

35

 This impacts all years, not just current downturn

30

• Latest escalation of US China tariff wars has

25
downgraded China economic growth
20 prospects, especially for private sector
15  Extra 250,000–300,000 loss of sales in 2019 but
largest impact will be on 2020; (note long-term
10
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
impacts would get worse the longer these tariffs
remain as product sourcing slowly switches to
March Forecast New Base Case Forecast
Notes: Sales using the standard wholesale data definition
other countries)
Source: IHS Markit © 2019 IHS Markit

• Intense dealer destocking combined with

China 2019 vs 2020 China 6 emissions turmoil
2019 2020
 Impact likely to be at least -700,000 units
Light vehicle sales units 25.9m 26.6m
concentrated in 2019; this will normalize in 2020
Passenger vehicle % change -4.8% +2.9% as wholesale data and final consumer purchase
Light vehicle volume adjustment -1.1m -1.6m rates recouple
LV % downgrade vs March forecast -4% -5.5%
Source: IHS Markit © 2019 IHS Markit

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 China’s First Automotive Recession Webinar | June 2019

Scenario overviews:
Light vehicle sales and possible trade scenarios
• Base case forecasts includes the latest (May
2019) increase in US import tariffs from 10%
China forecast downgrade and contingency scenario ranges
to 25% on USD200 billion of goods
31
• Optimistic case: General trade deal is
29
agreed with US, revoking tariffs on all goods
(under section 301) that have been
27 implemented since 2018

25
• Pessimistic case:
Millions

• US escalates to a 3rd round of tariffs &

23 The balance of 2019:
effectively imposes 25% tariffs on all
Base case of -4.8% for PV sales for 2019 requires end of destocking in H2 manufactured products sourced from China
21
with the selling rate gradually increasing generating +4% sales in H2.
Another downside scenario is that dealer confidence and financial • Knock-on effects on exports, manufacturing,
19
profitability/ stability are hurt so much that H2 prospects are affected. If and unemployment would push China GDP
resulting H2 selling rates (factory order) do not start to improve then annual below government “red-lines” and offsetting
17 2019 sales would fall by -6.5% to -7.5%
policies implemented
15
2014 2015 2016 2017 2018 2019 2020 2021 2022 • However, the private export sector and
Optimistic Case Pessimistic Case New Base Case SME’s will be hurt, disproportionally hitting
Source: IHS Markit Contingency Planning Forecast Service Q2 2019 rebased © 2019 IHS Markit
passenger vehicle sales with sales falling to
just 25 million units during 2020 (-5.2% below
base)

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 China’s First Automotive Recession Webinar | June 2019

Why should sales begin to show even a mild recovery in 2020?

• Final consumer demand (registrations/insurance) fell the fastest in 2018 but has been far more stable so far in 2019 and
has not slumped like the YTD sales data. This suggests that the sales running rate will start to improve as numerous dealer
stock distortions fade and eventually recouple.
• Destocking and the China 6 impact will have worked through and no longer drag on the market (comparative base will be
easy in spring 2020).
• Most of the downward trend level adjustment required from the financing issue will also have taken place by end-2019.
• Higher disposable income from income tax cuts will build over time—notably for key middle-class households.
• VAT cuts since 2018 now amount to 5% of the purchase price.
• In summary, although overshadowed by the current sales slump, overall affordability has improved significantly (this has
always led to higher sales in China).
• However, it is clear that the US trade war will have a larger negative impact on the economy and consumers in 2020 than
during the balance of 2019; this will drag sales downward and will leave only a mild 2.5% recovery in sales (rather than a
China-like rebound).
But uncertainty remains high:
• The two most significant risks to this base forecast include a full blown trade war with the US and/or the potential for
reaching uncharted territory of a darker consumer mood in face of prolonged deceleration in the domestic economy. This
clearly represents a significant interpretation and modelling risk given the current uncertainties and of predicting Chinese
consumer reaction in a phase without modern precedent.

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 China’s First Automotive Recession Webinar | June 2019

Questions and answers

• To ask a question, please type your question in the “Ask a Question” box within the webcast
system and click “Submit.”

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 Presentation Name / Month 2019

Thank you for your participation

Colin Couchman
Director, Global Light Vehicle Sales
[email protected]
Next Global Sales and
Nigel Griffiths Production Webinar
Chief Automotive Economist Tuesday, 25 June 2019
[email protected]

IHS Markit Customer Care

[email protected]
Americas: +1 800 IHS CARE (+1 800 447 2273)
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