China's bright light is now flickering

SHANGHAI — Just two years ago, the Chinese auto market was still a place where consumers seemed to have insatiable demand, where companies were rewarded with continuous sales growth and where investments were perceived as virtually a sure bet.

Back then, at industry events around the world, the big topic auto company executives loved to discuss was how soon China's annual new-vehicle sales might top 30 million.

Things have changed.

These days, what many industry executives, planners and forecasters are anxious to know is how many players can survive in China now, especially in the wake of the coronavirus outbreak that ravaged the country earlier this year.

The darling of industry optimism just two years ago, China is now viewed as warily as markets everywhere else, with falling sales, oversized capacity and uncertain consumer outlooks.

Dealer Jimmy Tsung expresses the pessimism of China's bruised dealers these days. Tsung is COO of Lio Ho Vehicle Group China, a Taiwan-based company that runs 18 stores in mainland China.

"As long as the Chinese economy remains weak," Tsung said, "consumers would be cautious about spending money on big-ticket items such as cars."

After growing nonstop for 28 years, China's new-vehicle market contracted 2.8 percent in 2018 — before the world had ever learned the word COVID.

The next year, still in advance of the global health panic, the sales market shrank 8.2 percent.

What happened?

The main reasons behind the seemingly abrupt downturn were economic. Business and trade in China rippled in reaction to the trade feud with its critical partner, the United States — especially given the impact of U.S. punitive tariffs on Chinese goods imposed by the Trump administration.

At the same time, the Chinese government cut back its massive spending on domestic infrastructure projects, such as new roads and railway lines, which threw many related jobs into question.But there were other factors.

Detailed industrywide data is not available, but financial practices also played a part. In late 2017, national authorities in Beijing cracked down on "micro-lending," the practice of issuing unauthorized, unregulated consumer loans via mobile phone apps or person-to-person agreements.

It was a seemingly innocuous measure to introduce more regulation into China's buoyant economy. At the time, micro-lending was estimated to represent about $150 billion a year in transactions. But the lending practice had been allowing many high-risk consumers — especially young people — to buy new cars based mostly on their personal optimism about being able to repay. After the new regulation, auto sales began to decline almost immediately.

Another factor contributing to China's change of fortune: the loss of tax incentives for small vehicles, according to John Zeng, Asia director at LMC Automotive, a market consultancy.

In an effort to goose sales of domestic autos, which tend to be smaller and less powerful, Beijing had implemented a tax break on purchases of vehicles with engines of 1.6 liters or less. In October 2015, Beijing halved the tax break to 5 percent. The incentive was phased out at the end of 2017.

"Our calculation shows the tax cut had boosted vehicle sales by 4 million to 5 million in the 2015-2017 period," Zeng said.

Forecasters correctly predicted that industry volume would take a hit in 2018 and 2019. They believed that in 2020, vehicle demand in China would recover from the tax incentive phaseout.

Instead of a rebound 2020 brought the coronavirus pandemic and the lockdown of China's manufacturers, retailers and shoppers.

The virus outbreak started in China and was brought under control in mid-March, just as other countries such as the United States began to experience it. Because the lockdown was managed in a relatively short period, China's new-vehicle sales increased for the following three months.

The China Association of Automobile Manufacturers reported that June sales of new light vehicles (sedans, crossovers, SUVs, multipurpose vehicles and minibuses) gained 1.8 percent compared with a year ago.

Ford Motor Co. reported that its sales results in China showed a 3 percent gain in June, Ford's first year-over-year improvement in three years.

Sales for the first six months of 2020 fell 22 percent from a year earlier, to roughly 7,873,000, according to the association. Since April, the rebound in new-vehicle sales has been mainly driven by demand for commercial vehicles.

Despite the encouraging sign, the Chinese economy has not recovered from the outbreak, and overseas demand for China-made vehicles remains low. As a result, the manufacturers' association forecasts that sales for this year will fall by 10 to 20 percent.

Tsung's dealership group wants to play it safe. It has stopped making new investments in mainland China and frozen hiring for its stores there, most of which are Ford franchises, Tsung said.

Global automakers started to exit China or streamline local operations in 2018 when the market slid into contraction.

That year, Suzuki became the first foreign automaker to exit China as hope to rescue sales decreased. The same year, FCA Group stopped production for the Fiat brand in China.

In December 2019, PSA Group closed one of its two joint ventures, which assembled the Citroen DS lineup.

The consolidation accelerated this year after the coronavirus spread across China from late January to early March.

In April, Renault SA announced its decision to exit the passenger-vehicle market in China to focus on producing light commercial vehicles and full electric vehicles for the market.

The coronavirus outbreak has also deepened financial woes at two small Chinese light-vehicle makers — Zotye Automobile, which in 2019 lost 11.2 billion yuan ($1.6 billion), and Lifan Industry Group, which lost 4.7 billion yuan ($671.2 million) in 2019. The two companies have suspended production this year.

China's electric vehicle industry — the bright spot of the world's EV outlook — also is reeling.

Dozens of EV startups unveiled their first products at the Shanghai auto show in April 2019. Impact from the epidemic has forced a slew of them to shut down this year. Last month alone, Bordrin and Byton, which were considered strong contenders among the startups, wound down their operations.

Complicating the burgeoning market, which Beijing identified more than a decade ago as a target industry to create jobs and exports, are new signals of a changing reality.

Beijing originally planned in 2015 to phase out purchase incentives for so-called new-energy vehicles in 2020. In April, the government said it is extending subsidies through 2022.

Last year, automakers sold 1.2 million NEVs, which include EVs and plug-in hybrids. For the first half of this year, EV sales were down 37 percent from the year before.

Mei Songlin, chief digital officer for Shanghai- based EV startup WM Motor, said the segment is feeling pressure. He predicted that only WM Motor and four other EV startups that have achieved monthly sales of more than 1,000 can survive by the end of this year.

As competition becomes more strenuous, the industry is consolidating.

Dealerships are seeing a sharp decline in numbers. Some 3,000 dealerships, or 10 percent of the industry's total, closed in 2019. Then 2,078 closed in the first five months of 2020, according to the China Automobile Dealers Association.

In 2019, Pang Da Automobile Trade Co., China's ninth-largest dealership group by revenue by 2018 results, filed for bankruptcy protection.

But not all brands have been equally affected.

Among automakers, while French and many small Chinese automakers have been hit hard in recent months, Japanese brands, led by Toyota, have held their positions during the decline. A steady rollout of new-generation gasoline and hybrid vehicles has enabled them to raise their collective market share to 23.7 percent in the first five months of 2020, up from 18.1 percent in 2017.

German marques also have gained market share since 2018 because of the Volkswagen brand's fast expanding crossover lineup and sustained strong demand for luxury brands Mercedes-Benz, BMW and Audi.

Industry watchers are now wondering who will survive and who might not.

Last month, at an automotive forum in the southwest China city of Chongqing, several speakers predicted that China will see an accelerating consolidation, which will favor a small group of global automakers and leading domestic Chinese players.

At the event, Wu Song, executive vice president of GAC Motor Co. and chairman of the state-owned automaker's joint venture with Toyota Motor Corp., said he previously expected six to seven global brands to be able to increase market share in China amid the consolidation.

Not now, he said.

It now appears, he said, that market share will increasingly concentrate in the hands of a smaller group of these brands. He did not identify which auto companies he had in mind.

Zhu Huarong, chairman of state-owned automaker Changan Automobile Co., made a similar comment on Chinese brands.

In the low end of the market, which remains largely the territory of domestic Chinese automakers, stronger brands are fast winning market share from weak competitors, he said.

"If we take a look at the highly intense competition," he said, "undoubtedly more companies will be closed or acquired."