China’s auto industry faces problems with falling sales and consumer uncertainty

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.

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