China’s Automakers Accelerating Output

International | Jun 17 2022

China’s Automakers Accelerating Output

China’s covid lockdowns have hit automakers and their raw materials producers hard over the past six months, but ratings agencies believe the worst has passed.

-China’s automakers ramping up production
-Government stimulus should lend support for raw materials 
-China’s EV production charging ahead
-Outlook for the sector

By Sarah Mills

China’s auto manufacturers are ramping up production after the cessation of covid lockdowns, and ratings agencies expects output will largely normalise by July.

Shanghai lockdowns triggered a -40% dive in auto sales year on year, according to S&P Global’s Corporates: China Auto And Battery Sector Update, and hogtied manufacturing output.

Shanghai is the powerhouse of China’s automotive manufacturing so China’s lockdowns have also affected global commodities prices.

The iron ore price roughly halved in the final months of 2021, and has since recovered less than half of its losses.

Domestic Auto Sales Remain Fragile

S&P Global warns that while production is strong and rising, the domestic auto sales recovery may stall in 2022 for a range of domestic and macro reasons.

In the total auto market, light vehicle sales have been flat or declined up to -3% over the lockdown period, compared with a forecast 2%-3% growth for all of 2022.

The agency notes that domestic consumer demand is lagging production but expects government stimulus to the sector will fill that gap and that consumer demand should normalise, ex-stimulus, by 2023.

In May and June, auto sales rose sharply but remain -10% lower year on year, and the government stimulus is expected to add another 5% to 10% in the second half.

The government has cut the vehicle purchase tax to 5% from 10% for the period between June 1 and December 30, 2022. 

Capacity Utilisation On The Rise

Production is the immediate driver of raw materials demand and S&P Global notes production has recovered materially in the past month with capacity utilisation rising.

The agency reports Tesla has reached 100% utilisation at its Shanghai gigafactory, and SAIC Motor, China’s largest automaker, has resumed normal two-shift production and is continuing to ramp up.

Passenger vehicle production jumped 70% month on month in May, and was up 5% year on year. The agency believes production will be tracking normally by July. In contrast, sales were down -17% year on year.

Fitch Rating expects Chinese auto manufacturers will accelerate production and deliveries from June 2022 in anticipation of a demand recovery, driven by a stronger than expected stimulus packages.

However, it believes these policies could dampen sales beyond 2022 by generating a front-loading of sales.

EVs continue to charge ahead

S&P Global notes the battery sector was less affected by covid lockdowns, thanks to strong inventories, and production continues apace at normal levels.

Fitch Ratings expects EV growth will moderate to 45%-50% in 2022 from 117% in the first half as structural and macro factors take their toll.

But in the medium-term to long-term the outlook is strong. 

S&P global expects China’s light electric vehicle sales will rise 50% year on year and that market penetration will reach 30% by 2025.

This compares with the government’s official target of 20%.

S&P Global says the green transition will continue to support battery demand. 

The agency expects battery producers will pass through cost hikes, and that they are in a position to strengthen their bargaining power and secure supply – both good and bad for Australian green commodity exports, suggestive of relatively stable prices.

Despite the lockdowns and the macro uncertainty, S&P global says the outlook for the battery sector is stable, and that while surging inflation and rates may weigh on profitability and cash flow, most producers are in a strong position having built strong inventories and should maintain low leverage and net cash positions.

Fitch Rating expects the EV market will continue to enjoy favourable government treatment in 2023 as broader industry incentives wind down. These include subsidies and full redemption of the vehicle purchase tax; short-term local fiscal subsidies; and possible subsidies in rural markets. 

The government views the EV market as an opportunity to establish dominance in the global auto industry and it is likely to continue to lend it strong support.

Autoblog notes that EV sales have been rising sharply in China as internal combustion vehicles share of the auto pie has fallen.

Several Chinese auto brands are expected to launch in Australia this year, off the beachhead formed by those such as Great Wall Motors, Chery and MG. Nio, Ora and Tank are just a few of the names heading down under.

Outlook For Lockdowns

Fitch also believes risks remain from potentially more frequent but shorter, production disruptions and supply-chain issues as China’s zero-covid policy continues.

S&P Global expects the zero-covid policy will not end until after the 20th National Congress of the Chinese Communist Party, which it expects will be held sometime in the December quarter.

So while the outlook for raw materials is improving, they aren’t out of the woods yet. 

China Taking Leaf Out Of Japan’s Playbook

China’s support for domestic auto consumption is likely to remain a feature in the foreseeable future.

China has every reason in the world to continue to support its auto sector through a range of subsidies and incentives.

China’s rising strong focus on its domestic market is reminiscent of Japan’s motor-vehicle market during its ascendancy. 

For decades, Japan’s motor-vehicle industry benefited from its ability to test its new vehicles (and many other products) on a large domestic population, which enjoyed less consumer protection than their western counterparts, allowing them to hone their products before presenting them to the global market.

It appears China is taking a page out of the playbook, broadly boosting passenger car sales domestically and is particularly focused on EVs. 

In 2021, China domestic passenger-car sales totaled 21.5m units – the equivalent of US, European and Japanese sales combined.

And EV prices in China are tumbling. The Jidu electric car is expected to launch in 2023 with a price tag of US$30,000, compared with the Tesla’s Model Y, which retails for about US$50,000 in China, according to CNBC.

EVs also offer China a strong opportunity to gain brand recognition in the domestic market.

Chinese consumers have long admired western ICE brands over local brands.

But that may all be about to change.

Autoblog notes that General Motors and Volkswagon are lagging China automakers in the Chinese EV market 

Autoblog suggests that Tesla is the only western EV producer with real brand recognition and acceptance in China.

This all suggests green commodities will continue to be keenly sought over the next few years by the world’s car manufacturers as China seeks to dominate not just the local market but the global EV market.

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