Talking Point

How they spend it

Conflicting indicators on whether the Chinese consumer is in retreat

Ford-w

Slowing sales: Ford is among the carmakers that has been hardest hit by waning consumer demand in China

The reshuffle in Hong Kong’s benchmark Hang Seng Index (HSI) often reflects more fundamental changes in the Chinese economy.

Take Tingyi. The biggest cup noodle producer in China was replaced by AAC Technologies, a key parts supplier to Apple, as a HSI blue chip member in 2016. The change, observers pointed out at the time, was a function of the rising spending power of Chinese consumers, as they traded up from cheap food to pricey iPhones.

A year later Li & Fung, traditionally a proxy for Chinese exports to the US, saw its 16-year stint in the HSI end. Taking the merchandiser’s spot was Chinese carmaker Geely Automotive. Again it spoke to a bigger trend. Since 2011, aka the beginning of the 12th Five-Year Plan, China has made it a policy priority to wean its economy off reliance on exports and boost domestic consumption instead.

Failing to identify these trends was costly for investors. The market value of Li & Fung, for example, has plunged nearly 90% from its peak in 2011 to less than $200 million as of this week. Geely’s, meanwhile, has nearly quadrupled during the same period to $17 billion.

More recently, however, things have not boded so well for the likes of AAC Technologies and Geely. The former’s market capitalisation has fallen 75% so far this year (versus a 15% correction in the HSI) as disappointing iPhone sales weakened investor confidence in Apple’s parts suppliers. The share price of Geely, the best selling domestic car brand in 2017, also suffered a 45% drop this year on concerns that the growth in the world’s biggest automotive market might have stagnated.

Both are worrying signs for the Chinese government. They reflect economists’ warnings that as the US-China trade row escalates, Chinese tuhao (nouveau riche) and dama (mom-and-pop consumers) might no longer be relied upon to bankroll China’s economic growth.

What are the readings from the Chinese car market?

For decades the Chinese car market has been a reliable engine of growth. When battling to avert an economic slowdown after the 2008 global financial crisis, Beijing turned to the automotive industry and dished out a slew of tax incentives and subsidies to spur demand.

The result was a 45% surge in sales, with 13.5 million vehicles sold in 2009. China dislodged the United States as the world’s largest automotive market.

The China Association of Automobile Manufacturers (CAAM), the country’s top industry association, had expected the market to report 3% growth this year, in line with the rise in 2017 (and versus 13.7% in 2016).

Yet that modest forecast now appears too ambitious. Data from CAAM revealed automobile sales fell 11.7% year-on-year in October, the fourth consecutive month of decline and the biggest drop since 2012. Overall vehicle sales from January to October still totalled 22.87 million, or only 0.1% worse off than the same period last year, but the reading has already prompted gloomy talks that the Chinese car market is moving into reverse gear for the first time in 30 years.

The October figure has been carefully watched given it is traditionally the best-selling month for car dealers as consumer spending is normally underpinned by the National Day vacation week. A number of senior executives at state-owned carmakers such as the FAW Group now expect sales figures in the remaining two months to register similar year-on-year declines, CBN newspaper reported.

At the annual Guangzhou Auto Show, which opened last week, the Beijing Daily also noted that very few flagship models were launched while local and international carmakers alike were less enthusiastic in talking up the industry’s prospect.

“The numbers of visitors are noticeably lower than last year. The singing and dancing shows are gone [Chinese authorities have also banned female fashion models from auto shows]. Many carmakers concluded their press conferences spiritlessly in less than 30 minutes,” the newspaper observed. “Everyone could feel the car market’s temperature is dropping.”

What’s happened to Chinese car buyers?

Passenger cars and auto parts are among the sectors hardest hit by higher tariffs.

“The trade frictions brought uncertainties, impacted sentiment and made Chinese customers more cautious,” Xu Haidong, assistant secretary general of CAAM said at a press conference in Beijing in September.

More recently Chinese media outlets have largely shunned the ongoing trade war and opted to focus more on fundamental factors. In the more mature American car market, CBN has observed, sales have largely been stuck between 16.5 million to 17.5 million for the past 20 years. Similarly the China market might have reached a “ceiling”.

“Industry insiders have generally come to a conclusion that the ceiling of China’s automotive market is around 30 million vehicles in annual sales. Sales figures will top out and be range-bound when approaching the peak,” the newspaper said.

“The car buying demands of Chinese consumers have slowed down. But calm down. The world’s biggest automobile market is not plunging off a cliff,” Sina Auto agrees. “We are just saying goodbye to the era where any car sold easily.”

According to the news portal, the market is now undergoing “structural changes”, and buying demand remains robust in niche segments such as new energy vehicles (NEV) and luxury brands.

While the China sales of Ford – which is dubbed by Chinese drivers as “the oil tiger” because of its cars’ “appetite” for guzzling fuel – last month dropped 45% year-on-year (and 43% in September), Sina Auto noted that top German luxury brands are still reporting healthy sales and profit margins in the country. Porsche, for instance, still reported a 4% growth in China for the first 10 months of 2018.

So Chinese consumers are spending less?

That said, the sales of luxury car brands could be hit if the era of the “consumption downgrade” has indeed arrived. The term was coined by a popular blogger in September (see WiC425). Given government officials and researchers have been talking for years about “consumption upgrades”, the opposite concept has been widely discussed across social media.

Proponents, obviously, have pointed to slowing car sales as one indicator to back up the claim. Supporting statistics could also be found in the recent financial reports of instant foodmakers such as Tingyi. Buoyed by the sales of its Master Kang cup noodle, the company reported an unexpected 8.5% increase in revenue.

Tingyi’s sales in China had been on a declining path in recent years as Chinese consumers switched their spending to healthier, more expensive foods. Reinforcing the concept of a “consumption downgrade”, the rebound in demand for Tingyi’s cheap cup noodle sales coincides with evidence that Apple’s business looks to be finding conditions tougher (see WiC432).

Earlier this month Apple reported a 16% increase in its China revenues for the quarter ended September. Company CEO Tim Cook insisted that iPhones sales had seen five consecutive quarters of double-digit growth during the period. However, the South China Morning Post reported this week that Apple has cut production orders from Chinese manufacturers after its newer models such as the iPhone XR failed to achieve expected sales.

China’s trade tension with the US may have deterred some of China’s increasingly patriotic consumers from buying Apple’s products, but the “consumption downgrade” trend might have also been a factor.

According to a report published this week by MobData, a Shanghai-based market research firm, the iPhone remains the most popularly used smartphone in China with a 21.6% market share at the end of September. Huawei came second with 18.7%, followed by Oppo on 17.1%.

However, MobData noted that people with higher income, or those making more than Rmb20,000 a month, now generally prefer domestic and cheaper brands such as Huawei and Oppo. Meanwhile, iPhone users are the least educated, with the least monthly income (averaging Rmb3,000 or below) and perceived to be part of a group dubbed as “the invisible poor”, or those who don’t look as poor as their financial circumstances are.

Consumption downgrade or upgrade?

The smartphone market demographic as outlined by MobData points to a more sophisticated change in China’s consumer market.

According to a report published by the research unit of retailer Suning, “consumption downgrade” doesn’t necessarily mean that the Chinese are spending less. Instead, it said, Chinese consumers, especially the middle class, are increasingly reluctant to pay excessive brand premiums if products of similar quality are available at cheaper prices.

“The new generation of Chinese consumers have more self confidence and they don’t need expensive brands to show off their spending power,” the Suning report observed. “They no longer feel that the moon in foreign lands is fuller either.”

In other words, younger Chinese consumers want good value for money. Indeed, younger and more educated Chinese consumers, CBN reckoned, are also keen to avoid appearing too tuhao – i.e. looking like brand-laden spendthrifts – especially when travelling abroad.

Increasingly they are looking for unique ‘experiences’. This explains the conflicting messages in the tourism industry concerning the spending power of Chinese tourists. Ctrip’s share price plunged nearly 19% in one session last week after it reported a disappointing set of quarterly results, with a headline Rmb1.4 billion loss adding to investors’ worry that Ctrip’s travel service business will be affected by a weak Chinese currency and lower Chinese tourist spending.

But at the higher end of the market there is no shortage of big spenders. The Rmb2 billion InterContinental Shanghai Wonderland Hotel, built in an abandoned quarry in Shanghai, officially opened Tuesday. With only two floors above the horizon, even a basic room at the five-star hotel is listed at Rmb3,888 per night, or half the average local monthly income. Yet according to Ctrip, all 336 rooms in this one-of-a-kind hotel were booked solid for the first two weeks.

How do Chinese economic planners see the situation?

The strongest counterargument against a “consumption downgrade” has been provided by Alibaba, the single most important retail firm in China.

During Singles’ Day this year, its shopping bonanza held on November 11, about 180,000 global and Chinese brands took part and sales climbed 27% to top Rmb213.5 billion. But despite setting another sales record, naysayers still noted that the event’s growth rate was lower than last year’s 39%, and suggested that the relatively weaker increase is more proof of softening (see WiC432).

The Chinese government has resisted the notion that a “consumption downgrade” is occurring (and told media to drop the term, see page 7). Retail sales, for instance, grew 9.3% over the first three quarters this year. Although this is below the 12% annual increase notched up since 2010, the National Development and Reform Commission said it is robust and means retail sales now account for 78% of the Chinese economy, a figure that expanded 6.7% during the same nine-month period.

The sector is now an integral part of China’s strategy in the ongoing trade spat with the US: witness Chinese President Xi Jinping’s pledge at the China International Import Expo (CIIE) this month to promote the import of $30 trillion more of goods from abroad in the next 15 years.

No wonder then, Chinese planners are reportedly considering tax incentives to revive the flagging automotive market. Similar to those introduced following the 2008 Global Credit Crisis, China may now dramatically cut the tax on purchases of cars with lower emission rates.

Whether Beijing switches back into such a ‘crisis mode’ will underscore Chinese planners’ true confidence in the spending power of Chinese consumers.


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