China Auto Sales Data From LMC Automotive: Double Destocking Takes Hold in January 2015

Beijing March 6, 2015; In theory, China’s Light Vehicle market should have experienced a particularly strong start to the year, in contrast to the same month of last year, given the industry’s full exposure to the rapid selling season that invariably precedes the Spring Festival, which, this year, fell in the middle of February. However, the sales results of locally‐produced Light Vehicles for the month of January 2015 amounted to only 2.26 mn units, a meager 9% gain on the same period of last year.

The Light Commercial Vehicle sector followed the same pattern as that seen in preceding months, with a decrease in January of 12% in year‐on‐year (YoY) terms to 0.32 mn units. The Minibus segment, which continues to be squeezed by the rapidly emerging MPV segment within the PV sector, led the downward trend with sales in the month falling by 24% YoY to 0.10 mn units. Sales of Light Trucks and Pickups totaled 0.13 mn units in January, a drop of 12% on the same period of last year, prompted by the higher vehicle costs triggered by the stricter regulations imposed by the China IV emissions standards.

At first glance, the Passenger Vehicle sector appeared to be more dynamic, with sales of locallyproduced models in the month climbing by 13% on last year to 1.94 mn units. However, we believe that this growth is far less substantial than it may first appear once the positive market influences are taken into account; notably, the impact of a late Spring Festival and the upward shift in demand from the Minibus to the MPV segment. More significantly, the SAAR of Passenger Vehicle sales in January was 21.1 mn units, nearly a million units fewer than in December 2014, while normal market conditions would usually produce a higher SAAR in January than in the preceding December.

In our assessment, the overriding factor behind the anomaly in the January result was the destocking at dealer level. According to CADA, the dealer‐level inventory index stood at 1.20 months at the end of January, or 0.23 months higher than in January 2014. At the end of December 2014, this index reached 1.53 months, or 0.53 months higher in YoY terms. This suggests that the dealer‐level inventory was reduced by around 0.2 mn units in January 2015.

Digging a little deeper, it becomes apparent that Japanese OEMs have been at the forefront of the ongoing destocking process as a way of compensating for the spike in wholesales last December. The net result is a drop in the Japanese brands’ share of the overall Passenger Vehicle market to 12% in January versus 19% in December of last year and 17% in the final quarter of 2014. As well as the Japanese OEMs, Hyundai‐Kia and GM demonstrated similar falls in market share, albeit to a lesser extent.

In contrast, other OEMs followed a reverse pattern, helping, in part, to offset the inventory hikes seen last December, while smoothing out the sales trend over the last few months. European OEMs – the frontrunners in the Chinese market in recent years – saw their share of the Passenger Vehicle sector rebound to 26% in January from 18% in December 2014 and 21% in Q4 of last year. Destocking has by no means been limited to dealers, however; OEMs have followed suit, with a resulting negative impact on production growth. In 2014 as a whole, Passenger Vehicle production exceeded wholesales by 270,000 units, or 1.4% of total yearly production, a peak not seen since 2007, the knock‐on effect of which saw Passenger Vehicle wholesales in January overtake production by nearly 70,000 units and marked the second consecutive month of OEM‐level destocking.

Our projection going forward is that destocking at both OEM and dealer level will continue throughout the coming months. Indeed, it has been our view since last year that inventory will be a key factor in adversely affecting market growth in 2015 and the evidence points towards it having already undermined the positive impact that would ordinarily have resulted from the late Spring Festival.

(Please note a change to LMC Automotive’s classification structure. In line with the CAAM classification, the Wuling Hongguang and the Changan Honor are now defined as MPVs (PVs); Minibuses remain in the LCV category.)