China Sales Decline Puts Automakers in a Tight Spot
Passenger car sales in China declined in 2018 for the first time in nearly three decades. Per China’s Association of Automobile Association (CAAM), vehicle sales in China dropped 13% in December 2018, marking the sixth consecutive month of decline. In 2018, total automobile sales declined 2.8% to 28.1 million units.
The slump in China doused hopes of robust growth in auto sales in the months ahead. Foreign automakers were banking heavily on the world’s largest car market, China but the recent collapse played spoilsport. Importantly, this has happened at a time when global automakers are spending heavily on their transition to electric and autonomous vehicles.
Per Bloomberg, adding to automakers’ woes, economists predict economic growth in China to slow down to 6.2% in 2019 from 6.6% in 2018. The unsettled trade spat between the United States and China is likely to affect consumer confidence in 2019. Goldman Sachs Group Inc. does not predict bright prospect for the auto sector in China in 2019 and it expects sales volume to drop 7% in the year. China-based automaker Geely Automobile Holdings Ltd. GELYY forecasts flat sales for 2019.
Likely Losers
Along with consumers’ waning appetite for passenger cars in China, lack of demand in other parts of the world such as the United States, the U.K. and Germany, is making the journey tougher for global automakers. As escalating vehicle prices, uncertainty related to Britain’s pending exit from the European Union and the launch of services such as car sharing are keeping a lid on auto demand, automakers are reorienting business models.
The second largest U.S. automaker Ford Motor Company F and Britain’s Jaguar Land Rover recently announced heavy job cuts in Europe. Stricter emission standards, a sharp decline in the demand for diesel vehicles and a slump in global economies led by China might have prompted these automakers to make such a move. (Read more: Ford, Jaguar Announce Job Cuts in Europe as Demand Wanes)
Among others, German auto giant Volkswagen AG and the largest auto manufacturer in the United States, General Motors Company GM, are likely to be hurt as these companies sell more vehicles in China than anywhere else, per Wall Street Journal. Further, auto companies such as Ford, Hyundai Motor Co and Peugeot SA are likely to face the problem of overcapacity.
Policy Stimulus
The auto sector witnessed some positive developments. Per CAAM, in 2018, new energy vehicles (NEVs) in China surged 61.7% to 1.3 million units. Further, NEV sales are anticipated to reach 1.6 million in 2019.
Drop in passenger vehicle sales in China is likely to lead to some strong policy incentives. In fact, authorities in China have already introduced some changes to the income tax limit to give a boost to personal disposable income and purchasing power. More such policy measures are likely to follow. This could be beneficial to the auto industry in China, which is facing the problem of unsold inventory.
While General Motors and Ford currently carry a Zacks Rank #3 (Hold), Geely has a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Currently, Ford, Geely and General Motors expect long-term growth rates of 5.3%, 7% and 8.5%, respectively.
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