Coronavirus analysis

From cars to cosmetics

What have sales of luxury cars in China got to do with those of cosmetics (the key category for travel retailers serving Chinese consumers)? Plenty, argues The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung.

China’s car-buying market declined by -21.5% year-on-year to 1.7 million units in January – the worst rate of decline in the history of the sector since the China Passenger Car Association (CPCA) began recording data in 2005.

The figures are important to travel retail in that sales of automobiles, especially luxury cars, are a key indicator of consumer confidence. They also have a direct correlation to China’s cosmetics market.

The luxury vehicles and cosmetics sectors have shown a positive linear relationship. Both will be negatively impacted by COVID-19.

Year-on-year % growth of luxury vehicle sales and cosmetics sales

Source: China Association of Automobile Manufacturers; National Bureau of Statistics of China; Moodie Davitt Business Intelligence Unit

Putting the brakes on

January was anticipated to be a slow month in retail sales for cars because of the earlier Lunar New Year Holidays – 25 January 2020 as opposed to 5 February 2019. The timing difference decreased the number of effective sales days to 20. Sales during Chinese New Year are traditionally around -30% lower than normal trading periods but the sudden outbreak of COVID-19 essentially halted business in this year’s holiday period.

The impact of COVID-19 on the automotive industry in China is expected to worsen this month, especially with the Chinese New Year holidays extended by the government to help curb the outbreak. “Dealers are closed for vacation and those who have returned to work are faced with having no customers,” the CPCA sad.

Dealers have ramped up their marketing to promote online sales and on-site delivery but according to CPCA the approach is yielding “little results”.

The timing difference of the Chinese New Year holiday should have resulted in a February sales rebound. The COVID-19 will change all that and the CPCA forecasts retail sales to fall by more than -30% year-on-year in the month.

The January decline in sales marked the 19th consecutive monthly decline in auto sales year-on-year since July 2018. Sales decreased by -3.2% and -8.1% (factory sales) for 2018 and 2019. The 2018 fall was the first in China’s history and followed three decades of growth which had seen the country emerge as the world’s largest market.

The declining market has been driven by car ownership reaching saturation points in key cities; a growing second-hand car market; improvements in public transport; the rise of ride-sharing services; and the government’s crackdown on grey market financial lending.

Besides crippling sales of new cars, the COVID-19 crisis is likely to dissuade customers from trading in existing models.

China Association of Automobile Manufacturers (CAAM) stated that only 59 out of 183 factories in China that manufacture complete cars had resumed production as of 13 February. China’s importance in the global automotive supply chain is also expected to negatively impact the global automotive industry. The assembly plant at the larger players operate on a ‘just-in-time’ operations system that requires parts to arrive constantly in order for production to continue.

Annual motor vehicle sales in China – policy measures to boost auto consumption in 2019 ineffective, sales decline worsens compared to 2018

Source: China Association of Automobile Manufacturers

Drawing parallels – and differences – with SARS

CAAM announced that January factory sales of automobiles posted an -18% year-on-year decline. The association commented that COVID-19 will deliver a “huge shock” to the industry, one expected to be worse than the 2003 SARS epidemic.

During the height of the SARS crisis, new vehicle sales growth in China slowed to +13% and +8% in April and May, much lower than the +34% year-on-year growth in March and the +37.5% for 2018. Notably though, sales quickly returned to normal, with June 2003 showing a +30.8% year-on-year increase.

However, it is difficult to compare the negative impact of COVID-19 with that of SARS, particularly because China was at an early development stage in 2003. In terms of car density in 2001, car ownership was a mere 12 cars per 1,000 people. This paled in comparison to the mature US market (787 cars per 1,000 in 2001). By 2018, car ownership had increased to 155 vehicles for every 1,000 people in China and 867 for every 1,000 in the US.

The Chinese automobile industry was undergoing a rapid period of expansion pre-SARS. Impressive growth rates were recorded, driven by lower prices (China’s entry into the WTO at end-2001 resulted in price reductions throughout 2002 and 2003), improved availability of different models, and increased availability of auto financing.

In 2003 customers who wanted to buy the new Honda Accord had to wait six months or more to receive delivery. The situation is drastically different now as automobile companies scale down production in China and have had to work on lowering their unsold inventory through high promotions.

Year-on-year % growth of China total motor vehicle sales and luxury car sales

Source: China Association of Automobile Manufacturers

The maturity of the China automobile market and the growing number of cases in China will make it difficult for the recovery to be as quick as SARS. The Chinese authorities may choose to incentivise new car purchases after the outbreak to increase domestic consumption. However, measures need to be top down from the central government and much more encompassing than the ineffective policy measures witnessed throughout 2018 and 2019.

In January 2019, China’s National Development and Reform Commission published six measures to boost auto consumption (promoting trade-in of old vehicles, enhancing rural consumption, and relaxing restrictions on truck access to larger cities). The measures were largely ineffective and the decline in the market continued throughout 2019.

President Xi Jinping’s latest speech delivered on 3 February and reported to the media on 15 February outlines how forthcoming measures to enhance consumption may be impactful. Xi spoke of the need to promote consumption of items such as automobiles by lifting restrictions on automobile licence plate quotas. Difficulty in obtaining the coveted licence plate in China’s larger cities, awarded through a lottery system, dampened sales as Chinese authorities worked to reduce air pollution. Residents in Beijing and Shanghai say obtaining a licence to acquire a vehicle could take anywhere between two and eight years.

Lifting of the quota to allow for more automobile purchases may reverse the annual decline in automobile sales.

Should the quota be lifted, luxury car sales are expected to outperform the market. Like other consumer goods, sales of luxury automobiles have outperformed the total market, and growth rates have held up well, showing +8.3% year-on-year growth for the full year of 2019. The total market as shown in the chart above declined by -8.1% for the same period.

The luxury category has remained resilient over the years with improving appetite to purchase new models. How COVID-19 affects the sector will not only be monitored by the automobile industry.

The Moodie Davitt eZine

Issue 277 | 24 February 2020

The Moodie Davitt eZine is published 20 times per year by The Moodie Davitt Report (Moodie International Ltd).

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