Chinese new-vehicle sales on road to recovery in 2021

China’s total new-vehicle market rebounded sharply in the last eight months of 2020, after a difficult start, to end with a benign contraction of 1.9%. While sales of new cars fell by 6% over the year, sales of new commercial-vehicles (CVs) and new-energy vehicles (NEVs) recovered strongly, owing to renewed government support. The Economist Intelligence Unit forecasts that China’s total new-vehicle market will regain its 2019 levels this year, crossing 27m units in sales, fuelled by government support aimed at boosting private consumption. However, the ongoing semiconductor crunch at the global level could constrain the production and sales of new cars in 2021.

Twin pillars of growth

China—where Covid-19 first emerged in December 2019—recorded the best performance among the world’s major automotive markets last year, in line with broader economic-growth trends worldwide. With total sales of 25.3m units, the country comfortably retained its pole position ahead of the US, where the new-vehicle market shrank by 15% to 14.5m units.

Chinese CV sales, comprising trucks and buses, recorded the biggest jump in percentage terms (18.7%) to 5.1m units. The CV segment soared to an all-time record thanks to a higher infrastructure outlay, loose credit, and fiscal measures to stimulate consumption. We expect sales growth in new CVs to moderate in 2021, however, as the government rationalises its expenditure in order to meet deficit targets.

Going electric

The weakest part of the new-vehicle market in 2020 was the passenger-car segment, which contracted by 6% to 20.2m cars. However, within this segment, the NEV market expanded by 10.9% year-on-year to 1.4m units, according to data from the China Association of Automobile Manufacturers (CAAM). The surge in NEV sales in 2020—which included battery electric vehicles, plug-in petrol hybrids and hydrogen fuel-cell vehicles—was significant, because it made up 28% of all registered clean cars until the end of last year. In March 2020 the Chinese government extended purchase incentives and tax exemptions until 2022 in a bid to encourage an environment-friendly recovery from the pandemic. However, China later reigned in NEV benefits in keeping with its long-standing commitment to stamp out corruption.

A sales spike in November-December 2020 was the main driver for the full-year expansion; NEV sales from January-October contracted by 7.1% year on year owing to weak consumer sentiment and the 10% cut in 2020 fiscal incentives in April. NEV sales boomed towards the end of the year as motorists rushed to take advantage of relatively higher incentives, which were set to be cut by a further 20% in January 2021.

Nevertheless, we forecast a 10% expansion in China’s NEV market to 1.5m units this year because of a number of factors including multi-dimensional fiscal support and the desire for personal mobility (exacerbated by avoidance of public transport and carpooling). The Chinese government has been vocal about its support for clean vehicles; its five-year plan for 2021-25 unveiled in November 2020 mandated that NEVs must account for 20% of each manufacturer’s total new-car sales by 2025, compared with an average of 6.8% in 2020. The plan also laid out some long-term targets until 2035, one of which is to electrify all vehicles used for public transport.

The blueprint also aims to reduce costs (and therefore prices) through improved technology and stronger regulations regarding excess expansion in the sector. Encouraged by China’s market potential and support of green vehicles, a number of carmakers, non-automotive companies and start-ups have pledged investments to introduce EVs and raise their domestic manufacturing capacity. These include US-based Tesla, and China’s SAIC Motor, Alibaba, Geely, Baidu, Nio and Xpeng. One of the world’s largest EV-battery makers, Contemporary Amperex Technology (CATL), has also committed to spending US$4.5bn to expand capacity at plants in the Chinese provinces of Guangdong, Sichuan and Fujian.

Another lever China plans to pull is to provide broad-based support for household consumption, especially in rural areas. In mid-November, the State Council called for a strategy to boost car sales in the hinterland by raising the ceiling for licence-plate quotas. The cabinet has also proposed subsidies for the purchase of light trucks and passenger cars, along with a scrappage scheme to phase out vehicles that do not meet the national emission standard 4, which is equivalent to Euro 4. These proposals, if implemented, could lead to a surge in total new-vehicle sales as motorists make the shift to cleaner vehicles.

Outlook for China’s passenger-car market in 2021

Apart from the factors that will buoy NEV sales, support from an established online-sales infrastructure will also help the new-car market recover by an expected 8% in 2021, following their 6% decline in 2020. Since consumers are likely to remain wary of venturing outdoors until mass immunisation against the coronavirus is achieved, the ability to buy cars online will help keep sales steady. Evinced by recent outbreaks in Shijiazhuang, Beijing, Liaoning and Heilongjiang, Covid-19 still remains a risk. Community transmission may spike during the Chinese New Year holiday period as well.

However, we also expect the desire for personal mobility (exacerbated by avoidance of public transport and carpooling) to be a significant contributing factor to 2021 sales. We expect China’s total new-vehicle market to expand by 6.8% year on year to total more than 27m units in 2021, primarily on the back of a rapid recovery in new registrations of NEVs and passenger cars. Annual unit sales this year will comfortably regain their 2019 levels.

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