China on Course to Replace Japan as World's Second - Largest Auto Market

Sales and production climb by more than a fifth over last year

China produced 5,881,434 vehicles in the first 10 months of 2006, up 26.29 per cent over the same period in 2005. This 10-month output is greater than the total output achieved in 2005.

Total sales Jan-Oct 2006 were 5,706,672 units, up 22.30 per cent, an all-time record. Sales for each individual month also set new records.

As with the last few years, March remained the top-selling month, with sales exceeding 710,000 units. March is usually the first month after the Chinese lunar New Year, when businesses and individuals start purchasing new vehicles for the coming year.

The sales pattern in the first five months of the year was very similar to last year, and June and July sales sank to the lowest levels of the year before rebounding in August. Traditionally, the market surges in September and October. Launches of new models, price cuts and intense promotional activities are commonplace during this period, when dealers make every effort to clear out their inventories. At the same time, businesses buying cars to use up their remaining budgets help boost sales during the last two months of the year.

 
According to available figures for November, China's cumulative vehicle sales through to November 2006 had already reached almost 6.5 million units. Sales were forecast to reach 7.4 million units for the year and China is well positioned to surpass Japan as the world's second largest auto market.

Passenger vehicle segment

Overall, passenger vehicles experienced strong market demand in 2006, accounting for 71 per cent of the total vehicle market. The passenger vehicle market has seen steady growth, with sales in each month exceeding its 2005 level by a substantial amount. The biggest increase appeared in January, up by more than 60 per cent, and the October 2006 saw a 25 per cent increase over the same month in 2005. Total passenger vehicle sales (including cars, MPVs, SUVs and minivans) exceeded four million units in the first 10 months. Passenger cars dominated the segment, with sales of almost three million units, accounting for nearly three-quarters of the passenger vehicle market. Many buyers rushed to purchase large-engined (bigger than two litres) vehicles, particularly SUVs, before the new consumption tax (the tax is added as a percentage of the new car price, ranging from 6 to 15 per cent, depending on engine size) became effective on April 1, 2006. This was the chief reason for strong sales increases in the SUV and MPV segments, with sales growth of 73 and 54 per cent, respectively, in the first quarter. In the second quarter, the YTD sales of SUVs and MPVs returned to normal growth, at 7 and 21 per cent year-on-year, respectively. Sales of minivans amounted to 730,000 units, up only 10 per cent.

With growth in China's GDP reaching 10.5 per cent in 2006, the Chinese clearly have more money to spend. The Chinese year of the dog is also viewed as a lucky year to get married and have babies: as a result, Chinese families bought more cars in 2006.

Commercial and heavy-duty vehicle segments

Sales of light commercial vehicles (including light trucks, light buses and mini trucks) during January-October 2006 totaled 1.03 million units, up 13.5 per cent year-an-year. Mini truck sales enjoyed the biggest growth - almost 19 per cent over the same period in 2005. Sales increases for light trucks and light buses stood at 13 and 8 per cent respectively. Sales in the heavy-duty vehicle sector (including heavy and medium-duty trucks, as well as large and medium buses) gradually recovered from negative growth, ending in nearly the same volume (188,816 units) as for the same period in 2005; while sales of semi-tractor trailers were up by 50 percent, to exceed 73,000 units for the period.

Stagnant heavy-duty vehicle sector bolstered by strong bus sales

Sales of large and medium-sized buses were up 11 and 25 per cent respectively thanks to the rapid development of expressways and highways around the country. The upgrading of city buses has also contributed to sales increases. Although large and medium-sized buses couldn't quite offset the 19 per cent drop in sales of heavy-duty trucks, the heavy-duty vehicle sector experienced a turnaround from the beginning of 2006. Medium-duty trucks recovered from negative sales growth to positive, with Jan-Oct sales up by 5 per cent year-on-year, and a huge 53-per cent increase in the month of October. Combined sales of the heavy-duty segment (including finished vehicles, semi-trailers and chassis) reached 248,000 units, up 23 per cent year-on-year. Owing to the country's continuing rapid infrastructure development, the segment has emerged from a period of adjustment to see growth again.

Big five auto groups - SAIC leads the pack

Combined sales of the top five automobile groups reached 3.76 million units, taking up about two thirds of the market. Shanghai-based SAIC is China's largest automobile group, with sales exceeding one million units in the first 10 months. The company's GM and VW passenger vehicle JVs accounted for 95 per cent of total group sales. The company, with 33 per cent y-o-y growth, ranked highest among the top five automobile groups.

 
Import and export

China's total import and export of automotive products reached $26 billion in value in the first 10 months of 2006.

Recovering from negative growth in 2005, total import (vehicles, engines and components) value was up by 42 per cent, to reach $15 billion. The import of whole vehicles reached 180,000 units (excluding chassis), worth almost $6 billion, up 40 and 49 per cent respectively. Introduction of the consumption tax on cars has affected the imported auto market, too; customers rushed to buy imported large-engined cars before the introduction of the tax on April 1, 2006. A total of 173,612 passenger vehicles worth $5.5 billion were imported in the first 10 months, up 40 per cent. Of the large-engined cars, sales of those with an engine displacement of 3.0L showed a strong 88 per cent growth to reach 25,076 units. They accounted for 50 per cent of all imports in value. Surprisingly, small-engined (1.0L-1.5L) cars showed a dramatic growth of 965 per cent, reaching 2,120 units.

 
SUV imports continue to grow

Imported SUVs continued their strong growth, up 33 per cent to reach 69,884 units. They made up 40 per cent of all auto imports. The import of SUVs with engines larger than 3L was up 62 per cent to reach 34,869 units, valued at $1.27 billion. MPV imports totaled 15,508 units, up 68 per cent. Imported parts and components were valued at $7.50 billion, up 40 per cent.

Export value increases by 47 per cent

The export of automotive products, including finished vehicles, increased in value by 47 per cent over the same period in 2005, amounting to $10.91 billion. Car exports in the first three quarters of 2006 exceeded the entire 2005 figure. Exports reached 67,342 units, up 254 per cent year-on-year. The average price of an exported car was about $6,800. Chery was the largest exporter, selling 36,144 units overseas in the first 10 months. Trucks were the main automotive exports, with volume reaching 123,500 units, valued at $986 million. Syria was China's largest export destination in volume, which stood at 37,072 units, while Russia was the largest export destination in value, which stood at $195 million.

Continued healthy outlook for 2007

As a forecast, China's GDP growth will remain at around 10 per cent in 2007. The launch of new models and price reductions will continue to be the major driving force behind auto sales. The export of Chinese-made vehicles will continue to grow. A rapid warm-up of the used vehicle market in big and medium-sized cities, and the emergence of young buyers, will ensure that the growth rate remains high. Rising fuel prices and traffic jams make up the dark side of the equation, which is expected to have a negative effect on the market. If the government does not exercise macro controls over the economy, national automobile sales are expected to exceed 8.9 million units in 2007, up around 20 per cent over 2006. And sales of the passenger vehicle segment are expected to exceed 6.2 million units, up 25 percent.

Passenger Vehicle Output Exceeds Five Million in 2006

China's production of passenger vehicles (cars, SUVs, MPVs and minivans) reached 4,219,909 units in the first 10 months of 2006, up 32.32 percent over the same period in 2005, and sales were 4,054,286 units, up 26.78 percent year-on-year, according to CBU-Autostats.

Cars were the main driving force of the segment, experiencing robust demand. Car sales hit 3.41 million units in the first eleven months, up almost 40 percent over the same period in 2005.

Production of passenger vehicles was expected to exceed 5.25 million units for the entire year, up 30 per cent over 2005.

Performance of cars by segment

The mid-sized segment led car sales in the first 10 months; with a market share of 25.67 per cent. The compact car segment, with a market share of 22.07 per cent, followed closely behind.

Despite the adoption of policies such as the imposition of a consumption tax on large-displacement cars and the easing of restrictions on small-displacement cars to encourage fuel conservation and environmental protection, China's mini-car segment performed rather poorly. The segment had the lowest year-on-year growth among cars of any size. Sales were down 0.57 per cent in the first 10 months, a sharp contrast against the 33 per cent growth for the car segment as a whole. In the third quarter in particular, sales of mini-cars slipped into negative growth.

Prospects for the mini-car sector are uncertain. Rising fuel prices worry many customers, particularly those at the entry level, who are more likely to be concerned about the cost of car ownership. Slender profit margins are also weakening manufacturer interest in launching new models in this segment.

The tendency to use relatively fuel-efficient but spacious designs has attracted buyers to compact cars with engine displacements of 1.5L-1.8L. The most popular cars seem to have an engine size of 1 .6L. Significantly, the compact car segment's market share was up by almost 3.5 percentage points over 2005 after the consumption tax became effective in the second quarter.

Market shares of the other segments have remained more or less the same, with the exception of the mini-car segment, which suffered a drop of 5 percentage points.

Mid-size and mid-luxury segments are the most competitive and influential in China. The two segments have a combined 47 percent share of the car market. The arrival of Brilliance-Jinbei's Splendor and Guangzhou-Toyota's Camry has had a big impact on the market by igniting a price war of sorts.

It is worth mentioning that, year-on-year, the luxury segment saw a 64-per cent sales increase and 23-per cent market share increase. All models in the segment reported at least double-digit growth, which illustrates the increasingly strong spending power of wealthy people, along with robust government procurement of official cars. As Mercedes-Benz, Volvo and Chrysler brands are all starting to produce their products in China, the competition in the segment is expected to intensify.

Performance of leading carmakers

Shanghai-GM sold more than 325,000 cars, MPVs and SUVs in the first three quarters, up 30 per cent over the same previous period. The company reclaimed its first place position from Shanghai-VW in the first quarter though its market share slipped slightly by 0.45 per cent. Stable sales of the Buick Excelle and GL8 MPV, as well as strong demand for new models Lova and LaCrosse, have ensured its leading spot on the passenger vehicle market.

Chery, FAW-Toyota, Geely and Dongfeng-Peugeot-Citroen increased their market shares among the top 10 carmakers. VW's two JVs, FAW-VW and Shanghai-VW, took a slight loss of just over 1 percentage point towards the end of the third quarter.

Remarkably, Tianjin-FAW- Toyota, a latecomer to the market, is catching up rapidly. Its sales reached 171,000 units, up 75 per cent over the same period in 2005. But for the oil leak incident on its Crown and Reiz models (which led to a recall) earlier this year, the company would have performed better. Toyota's joint venture in Tianjin gained 1.4 percentage points in market share.

Chery and Geely, the two domestic independent carmakers, both gained market share in the top 10. Chery's total passenger vehicle sales reached 189,000 units and Geely's sales came to more than 160,000 units. The launch of new models and strong demand for Chery's QQ and Geely's Freedom Cruiser are boosting their sales.

Dongfeng-Peugeot-Citroen was the last of the top 10. Thanks to the launch of its competitive C-Triomphe and Peugeot 206 models, sales were up 37.86 per cent and the company's market share has increased slightly.

Remarkably, SAIC-GM-Wuling, a major minivan producer in Liuzhou, Guangxi ZhuangAutonomous Region, sold 306,000 units, in January-October 2006 - up an impressive 45 per cent over the same period in 2005. The company is expected to realise total sales of 450,000 units in 2006. Sales growth is attributed to its mini vehicle production focus, R&D backing from GM and effective sales promotion in rural areas.

Sales performance of top-selling models

The Jetta, produced by FAW-VW, replaced Tianjin-FAW-Xiali's Xiali economy car as the best-selling car in the first 10 months. Jetta sales totaled 149,000 units in the period. Reliability, a reasonable price and regular technology updates have enabled the car, dubbed one of the "Old Three" (the other two are the Shanghai-VW Santana and Dongfeng-Citroen Fookang), to outperform the others in the marketplace, with average monthly sales of 15,000 units.

Beijing-Hyundai's Tucson replaced Dongfeng-Honda's CR-V as the top-selling model on the SUV market, with sales hitting 22,000 units. The top five SUVs commanded a 50-per cent share of the SUV market.

Higher-end SUVs, with their fashionable appearance and focus on city road agility to target white-collar workers, dominate the SUV market. Lower-end SUV (truck-based, or SUV body on a utility vehicle chassis) manufacturers generally suffer from sluggish sales. These manufacturers try to increase their profit margins by model upgrades and even by switching to producing vehicles of a different segment: pickups or MPVs, for instance.

Fleet sales 9f MPVs have increased rapidly thanks to increasing government purchases (thanks to greater fiscal income) and the growing profit margins of businesses that use such vehicles. Demand for Shanghai-GM's GL8 was extremely strong in the first 10 months and sales surpassed 30,000 units, up 55 per cent year-on-year. Guangzhou-Honda's Odyssey was nipping closely at the heels of the GL8, with sales of 29,000 units. More than half of its new owners are individuals, whereas Jianghuai's Refine, the top seller in 2005, remained a favourite for the big fleet buyers but still followed the GL8 and Odyssey closely in sales. The Refine had a market share of 17 per cent for the period.

 
Prospects for passenger vehicles in 2007

Passenger vehicle sales are expected to exceed 6.2 million units in 2007, up 25 per cent over the 2006 figure. As the driving force in the marketplace, cars are expected to show sales growth of some 30 per cent in 2007.

New products unveiled or launched by domestic and international automakers during Auto China 2006 will help expand sales in 2007. Price reductions, continuing export growth, a stronger desire to own a car on the part of an increasing number of the Chinese people, and warming markets in provincial capitals and rural towns will all contribute to stronger passenger vehicle sales in China.

High fuel prices are still a key factor that will negatively affect the sales of SUVs and MPVs. As assemblers start focusing on improved fuel efficiency with better performance, the SUV segment is expected to maintain a 5 to 10 per cent growth rate, while MPV growth is expected to remain steady, for around a 20-per cent hike in 2007.

The minivan, based on the traditional Chinese-type minivan (small six-seater, breadvan body style), is beginning to grow in size and engine power, crossing over more into small MPV territory. More large and luxury minivans are gradually coming off assembly lines. Growth of the minivan segment is expected to remain at around 5 to 10 per cent y-o-y.