January 25, 2017 11:00 am JST
FT Confidential Research

Lower-tier Chinese cities to drive auto demand in 2017

FT Confidential Research data predict rising sales, though tax increase will drag

New cars are seen at a parking lot in Shenyang, Liaoning Province, China. © Reuters

  • Our monthly and quarterly surveys point to robust demand for vehicle purchases among Chinese consumers, with notable strength among third-tier city residents.
  • We nonetheless expect sales growth to slow this year. Strong 2016 sales partly reflected front-loaded purchases by consumers in expectation that tax breaks would be removed.
  • Volkswagen remained the most popular brand in our latest quarterly Consumer Brands Survey, though subsidiary brand Audi has eroded its lead over the past year.

Monthly and quarterly consumer survey data from FT Confidential Research point to another year of robust car sales in China. A reduction in a government tax break may slow sales growth from the double-digit increase recorded in 2016, but our data indicate continued strong demand, particularly in second- and third-tier cities.

Our measure of car buying sentiment among Chinese consumers hit an eight-month high in December, on a three-month moving average basis. In 2016, car buying sentiment was as strong as it has ever been, averaging 56 (where any reading above 50 indicates positive sentiment).

Sentiment has usually been strongest in first-tier cities (see chart), reflecting higher incomes that support demand for vehicle upgrades, bolstered by expectations that city governments will tighten restrictions on non-local vehicles to control congestion in the country's biggest urban centres.

But demand in lower-tier cities has also strengthened. Our December survey found an improvement in third-tier cities, with the tier's sub-index overtaking that for second-tier cities for the first time in 33 months.

Furthermore, there was a striking fall in the percentage of second- and third-tier city residents saying they did not plan to buy a car in the coming 12 months in our quarterly Consumer Brands Survey (see chart).

Building on a bumper year

Will this mean another strong year for car sales? Much hinges on government policy. Passenger vehicle unit sales rose 13.7 per cent last year to a record 24.4m, according to the China Association of Automobile Manufacturers (CAAM), including a 44.6 per cent increase in Sport utility vehicle (SUV) sales (see chart). We expect industry sales growth to slow but remain in the high single-digits in 2017.

Sales of vehicles with engines of 1.6 litre and under rose 21.4 per cent last year, accounting for 72.2 per cent of total passenger vehicle sales, up from 66.5 per cent in 2013. Sales of vehicles with smaller engines were boosted by a cut in purchase tax from 10 per cent to 5 per cent in October 2015 - we believe our Auto Purchase Sentiment index rose in the final months of 2016 on expectations that this cut would be reversed entirely. This was particularly true in third-tier cities and below, where smaller vehicles are more popular.

In fact, the government only raised the tax rate to 7.5 per cent. This increase, plus the likelihood that some purchases that might have been planned for this year were brought forward into 2016, will weigh on auto sales growth this year.

Yet, by following the same logic, the slowdown may not be as sharp as some expect. The Ministry of Finance has signalled plans to restore the purchase tax to 10 per cent in 2018, which should mean further front-loaded purchases this year.

Volkswagen leads brand pack

Shrugging off the emissions scandal, Volkswagen remained the most popular brand among Chinese consumers in 2016, although its lead was eroded by its own Audi marque (see chart).

We believe this reflects increased demand to upgrade to luxury vehicles. Other German brands also gained in our survey. Mercedes-Benz may have delivered more cars globally in 2016 than rival BMW, but the latter was the more popular brand in our survey, up 1.7 percentage points year on year.

This article was first published on Jan. 16 by FT Confidential Research.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.

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