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The Market in China

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Even if we put the trade war with China to the side, it seems as though when people in the industry talk about China they point out, with what seems to be a bit of schadenfreude, that the vehicle market there is being set back on its heels. Are vehicle sales in China down? Sure. But that may be a temporary glitch in what otherwise seemed to be a relentless increase over the past several years.

According to the recently released McKinsey China Auto Consumer Insights 2019 (mckinsey.com), “This era is characterized by falling overall sales. . .”—don’t start with the “I told you so”—"but we believe this is more a pause for breath than the end of the road, as the potential for growth remains strong, and the future of China’s automotive industry is bright.”

“A pause for breath.”

“After all,” the McKinsey researchers continue, “China remains the world’s largest automotive market, and exhibits strong demand from prospective and existing car owners, both for new cars and, increasingly, used vehicles as well.”

Once you get a taste for automobility, it is hard to go back.

The research was conducted among 2,500 people in 20 major Chinese cities. And one of the things that they conclude: “Our survey finds that robust demand for private cars is set to drive the market forward, and that there are strong indications that the downturn will be short-lived.”

Obviously, there are a lot of people in China (an observation that seems absurdly understated). According to the CIA World Factbook (which is seriously better than Wikipedia), as of July 2018 there were an estimated 1,384,688,986 people in China. And the number for the U.S. at the same period: 329,256,465.

Despite ever-growing vehicle sales in the China market during the past several years (according to McKinsey: 13 million in 2011; 14 million in 2012; 16 million in 2013; 18 million in 2014; 20 million in 2015; 23 million in 2016; 24 million in 2017; and a mere 23 million in 2018), the number of vehicles per person is rather low: the car parc in China is such that 173 people out of 1,000 own a car. In the U.S. that number is 837. Which means that even in a poor year (e.g., McKinsey is anticipating that 2019 will come in at 22 million units) there are plenty of vehicles sold, and if, as the researchers found, there is a “sustained consumer appetite for private cars,” things are going to improve.

But what is somewhat notable in the McKinsey study of the China vehicle market is that even in 2019 there was traction in a couple of important categories. According to the firm, there was a 7% growth in premium car sales in China—which can be contrasted with a −1% reduction in the U.S. market for premium products. And the “new energy vehicle” (NEV) sales in China—battery electric and plug-in hybrids—are estimated to finish the year at about 560,000; in the U.S. the number was 150,000. Arguably that U.S. number is actually not bad given the massive population differences, but OEMs are looking at total numbers of sales and that 410,000 delta is important.

But think only of the two categories in question: premium vehicles and NEVs. The first is one where OEMs can command some good margins. Even the U.S. domestic premium brands—Cadillac and Lincoln—have a considerable interest in the China market and are increasingly tailoring their offerings to meet the demands of the people there. Just as is the case in the home market there is significant competition there; according to the McKinsey study, “more than 70 percent of respondents favored German brands.”

Related in a more-than tangential way is this example: Audi held the third MQ! Innovation Summit in Beijing December 4 and 5. Said Bram Schot, Chairman of the Board of Management of Audi AG, “China is the ideal place to discuss impulses for the mobility of tomorrow. Here, we are in a phase of transformation in which the digital environment, in particular, is rapidly changing, It is the unconventional thought leaders who shape our future with their ideas.”

That last sentence should be considered in the context that is another truism out there vis-à-vis China, that all they do is copy. Seems like there are some “unconventional thought leaders” there, as well.

Speaking of which, and going back to the NEVs, there is Elon Musk who decided that the demand in China would be such for his NEVs that he built an entire factory there—in record time, it seems—to serve the China market with Model 3s. If we go back to the number of NEVs sold in China compared with those in the U.S., realize that the lion’s share of the U.S. sales were Tesla products. Now that there is greater availability of Teslas in China, one can only expect that the sales numbers will increase significantly, especially as the McKinsey study found that 55% of the respondents are considering an NEV for their next vehicle.

It can’t be stressed too often that this is a global industry. And due to the transformations being wrought by electrification and automation, it is the innovators—some of whom are undoubtedly “unconventional thought leaders”—who will lead.

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