U.S. and EU Automakers Skid on China Slowdown

China was supposed to be the next big boom market for the world's automakers. For most of the past two decades, car conglomerates from across the world poured tens of billions of dollars into the Chinese market. And it seemed to be paying off: last year, they sold 28 million new cars and trucks to Chinese consumers — 11 million more than the world's second-largest market: the car-crazy United States.
Nearing the end of 2019, though, the explosive growth that characterized much of the 21st century is starting to fizzle. China is in the midst of a painful 18-month slump in car sales. When sales began to fall by 3 percent last year, it marked the first time that the world's biggest country had seen a downturn in car sales in more than two decades. And the slide has only continued, with sales through November down 9 percent from last year.
"China experienced a sensational rush for investments into its auto industry between 2000 and 2015, the likes of which this planet has never seen," said Michael Dunne, CEO of the automotive consulting firm ZoZoGo, which specializes in the Chinese market. "Annual production capacity soared from 2 million to nearly 24 million. For automakers, the game was simple: chase sizzling demand. That trajectory has shifted dramatically, especially since 2018."
The country's ongoing trade war with the United States is partly to blame; the tit-for-tat tariffs between Washington and Beinjing have hit consumers on both sides of the Pacific in their wallets and pocketbooks. But China has also been muddling through an economic slowdown for the better part of a decade, which in turn has hurt consumer spending. And, this year, it instituted tougher emissions standards for certain vehicles, injecting fresh uncertainty for consumers considering a new car or truck.
"The economic slowdown as well as ongoing U.S.-China trade tensions have greatly dampened consumer confidence by signaling prolonged uncertainty," said Marco Hecker, Deloitte China Automotive leader. "Experience shows that consumers, especially price-sensitive consumers, are more likely to cut down expenditures on big-ticket items when the economy is under the weather. Another casualty of economic slowdown is car-owners holding onto their vehicles for much longer and lacking stimulus to trade-in for new ones."
That's become a major headache for U.S. and European automakers like Ford, GM, Volkswagen, and Tesla, which have been pouring billions of dollars into manufacturing and brand partnerships in China to grab a bigger slice of the market there.
"The performance of foreign automakers keeps diverging: The winners are dominating or winning market share, and the losers are retreating," said Bill He, who leads FTI Consulting's Business Transformation practice in Asia. "The winners are maintaining healthy investment in China, while the losers are reducing their capacity."
Ford's Chinese partner, for example, lost nearly $400 million through just the first half of 2019, and it was forced to slash its workforce by 2,000 people, according to a report earlier this year from ZoZoGo. And Ford was not alone: each of the Big Three U.S. automakers – Ford, GM,and Fiat Chrysler – saw sales in China this fall tumble by double digits.
Even Volkswagen, which holds the biggest slice of market share in China at about 13 percent, has seen its sales this year drop by close to 5 percent, according to data compiled by Focus2Move.
"Automakers are sitting on massive overcapacity, margins are shrinking fast and new investment in (still loss-making) electric vehicle production enhances the pain," Dunne, of ZoZoGo, said.
By contrast, Japanese automakers, having followed a more cautious investment strategy, are not facing such challenges of oversupply, which has made them far less exposed to the downturn, experts say. Honda and Toyota, based in Japan, each saw their sales in China grow by about 10 percent and 7 percent, respectively, this year. Nissan's ticked up by about 1 percent.
Luxury automakers like Audi, BMW, and Mercedes-Benz, propped up by China's wealthiest consumers, have also fared well despite the downturn.
"The rich, it seems, we will always have them," Dunne said.
The slump in China, though, is threatening to short-circuit one important growth area: electric vehicles. China is a pivotal market for electric vehicles, a result of its size and the government's robust support for electric vehicles. But Beijing this year reduced generous subsidies it had been offering for battery-electric and plug-in hybrid vehicles.
The move came in response to criticism that the government's vigorous backing of electric vehicles was dampening competition among automakers and allowing them to artificially inflate their prices. That may have been the case, but the cutback prompted a sharp downturn in EV and hybrid sales: Even as EV sales around the world were up 13 percent through October, they plummeted 43 percent in China in November, compared to last year.
That could spell trouble for Tesla, which has invested in factories in China to qualify for the subsidies that are still in place there. The outlook, though, may not be quite as bleak as the numbers suggest.
Chinese buyers, aware that the subsidies for electric vehicles and hybrids were being cut, rushed to purchase cars while they could still get a discount. Sales reportedly soared by 85 percent the month before the cutback took effect – making the drop-off that followed seem even steeper.
Crucially, key EV subsidies remain in place, as do regulations that essentially require automakers to meet certain electric vehicles quotas that remain in place. Moreover, a new, strict emissions standards – while injecting fresh uncertainty into markets now – is eventually expected to stoke fresh interest in electric vehicles. And even though the subsidy cutback is currently painful, experts say that it might ultimately level the playing field, leading to greater competition among EV makers.
"The demand for electric vehicles is still highly driven by government subsidies, which are reducing," He, of FTI Consulting, said. "The investment into EV will become more rational and the market will become healthier. Traditional automakers will play a more important role in this market."
Beijing has also continued to heavily invest in charging stations and other infrastructure to support electric vehicles. While companies in the U.S. this year trumpeted that they have installed more than 20,000 charging stations, China has installed more than 1 million.
"Despite of the overall pessimistic views on market growth, foreign carmakers have shown more resolutions on China's new energy vehicle market," Hecker said. "Not only have they announced new investment to build production capacity, but they are also pushing forward localization of the entire EV value chain."
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