Over the past decade, China has been the global auto industry's big growth engine. However, that growth ground to a halt over the course of 2015 as the Chinese economy cooled off. That was unwelcome news for automakers such as General Motors and Ford Motor , for whom China is a very important market.
However, the Chinese government recently enacted a stimulus measure, temporarily cutting the purchase tax for vehicles with engines up to 1.6 liters from 10% to 5% beginning in October. So far, this move has had the desired impact, driving strong auto-sales growth last month.
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A sales slump takes holdForecasters have slashed their expectations for 2015 Chinese auto sales as the year has progressed. Through September, passenger vehicle sales increased just 5.8% year over year, the slowest rate of growth since 2012. That included consecutive year-over-year declines in June and July.
This result is a sharp change from the strong growth in 2013 and 2014. It also throws into doubt the major investments that many companies -- including top U.S. automakers GM and Ford -- have planned for China.
Ford and GM have been investing heavily to drive growth in China. Photo: Ford Motor Company.
Earlier this year, Ford opened a new assembly plant in Hangzhou, bringing the production capacity of its Changan Ford joint venture to 1.4 million vehicles per year. As recently as February, it looked as if Ford would need all of this capacity within a year or two.
However, the recent Chinese auto-sales slump has caused Ford's capacity utilization to drop precipitously. Through the first nine months of 2015, Ford's sales in China declined 1% year over year.
Meanwhile, GM is in the midst of a multiyear plan to boost annual production capacity in China from 3.5 million to 5 million by 2018. It now seems very unlikely that GM will need that much capacity so soon. GM's sales in China declined on a year-over-year basis in each month from May through September. For the first nine months of the year, unit sales rose a paltry 1.6%.
Sales snap backIn this context, GM and Ford executives must have breathed a big sigh of relief when China announced its auto stimulus measure in late September. Sure enough, on a marketwide basis, passenger-vehicle sales rose 11.3% year over year in October, the fastest growth rate since March.
Ford's sales in China rose 7% year over year. It was dragged down by continued contraction in the market for commercial vehicles, which weren't covered by the auto stimulus. But while commercial-vehicle sales dropped 11% compared with October 2014, passenger-vehicle sales from the Changan Ford joint venture rose 15%.
GM is getting strong growth from its Baojun brand in China. Photo: General Motors.
The story was even better at GM, where sales rose 15% in China during October. The General was also affected by the slowdown in commercial-vehicle sales, with a 7% sales decline in that market. However, it is benefiting from a recent focus on bringing SUVs and crossovers to China. Buick sales soared 42% year over year, while Baojun (an entry-level brand in China) more than doubled its sales.
Is it sustainable?The quick return to sales growth in China at Ford and GM -- especially the latter -- was certainly encouraging. However, both automakers need steady growth to fully utilize all of the production capacity they've recently added.
The auto tax cut runs through the end of 2016, so it should provide some continuing benefit. But the first and last months of any stimulus program tend to see the biggest sales increases. In the first month, a tax cut can encourage consumers who have been on the fence about buying a new vehicle to pull the trigger. Then, in the last month of the stimulus, consumers rush out to take advantage of the tax incentive before it disappears.
The main thing for investors to keep an eye on is what happens in between. If sales remain consistently strong over the next year, that's a good indication that the market may be able to sustain a higher sales rate even after the stimulus expires.
By contrast, a return to slower sales growth in the coming months followed by another surge in late 2016 would indicate that Chinese consumers are just chasing discounts. If that's the case, then it's more likely that sales will slump in 2017, when the purchase tax is scheduled to return to the previous 10% level.
The article China Auto Sales Bounce Back in October originally appeared on Fool.com.
Adam Levine-Weinberg owns shares of General Motors. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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