Auto Industry

Signs of a pickup

China’s carmakers hope the worst is over after an awful quarter


Great Wall Motor’s Pao pickup truck sells for as much as Rmb159,800

In the US they are known as ‘cowboy Cadillacs’. In China they’re called pikas. Owning a pickup is just about as American as apple pie, but in China pika has been a more derogatory term for someone who carts around supplies or basic equipment for a living.

But attitudes are changing. Last year the Chinese became the world’s second largest buyers of pickup trucks, surpassing the Canadians (Europeans have never really taken to them in the same way). Sales jumped 10% over the course of the year to 452,000 vehicles, equating to 3% of global demand. This is still some way behind the US, where the figure is 16%, or sales of three million units.

Research firm Automotive Foresights reckons that sales in China could jump to as many as two million vehicles over the next couple of years, thanks to two trends. Firstly, the government is relaxing restrictions on pickup trucks in cities. And secondly, some consumers in China are starting to look at pickups in the same way that Americans do.

One such enthusiast is Grey Liu. As Reuters reports, the Beijing-based businessman is now the proud owner of a pickup that he uses to transport his motorbike to grasslands outside the city for a spin at weekends.

The local firm that hopes to take advantage of this new kind of consumer is Great Wall Motor, a carmaker that’s been better known in recent years for selling SUVs. Last August it launched the Pao pickup brand, which means ‘cannon’ in Chinese. The line-up includes a more passenger-friendly version (compared to the more functional finish of commercially-focused models) with a price tag between Rmb126,000 and Rmb159,800 ($17,780 to $22,558).

The pricing is significant because China’s leading carmakers are trying to shift their product ranges to higher-margin vehicles that sell for more than Rmb100,000.

Great Wall is now planning to go a step further with another leisure-oriented pickup model scheduled for sale this year. It will have a retail price above Rmb200,000.

The company believes that it will find a willing audience for a truck with upgraded specs that are more in line with a SUV. It will also be hoping to eat into Ford’s market share, given that its Ranger pickup retails for a far higher Rmb305,800.

The focus on this new business line wasn’t enough to prevent Great Wall from reporting a first quarter loss at the end of April. Net profits fell 184% year-on-year to a loss of Rmb650 million. Shenzhen-based rival BYD also saw net profits fall 85% to Rmb113 million and it would have reported an Rmb412 million loss if it had not been able to book a one-time gain over the period.

Even Geely wasn’t immune to the virus-related slowdown, reporting first quarter sales that had dropped 44% year-on-year.

All three of China’s biggest independent auto firms (i.e. without state-backed shareholders and not in joint ventures with multinationals) had been hoping for a better 2020 after a fairly miserable 2019.

In a lengthy feature, Economic Observer examined how they had suffered their first collective decline in 2019. This disappointing outcome followed four years of solid growth as each company topped Rmb1 billion in revenues. Local consumers had been won over by lower prices (compared to foreign brands) and were showing more faith in domestic models’ reliability and performance. But all this changed in 2019 when domestic brands lost three percentage points of their market share, dropping to 39% of total sales.

Of the three, Great Wall had the best 2019, thanks to 11 new model launches. But it still saw net profits fall nearly 14% over the financial year, while Geely’s was down 35% and BYD down 42%.

The Sino-US trade war was another contributor to the downturn in performance, hitting Great Wall hardest through a drop in demand for new cars in tier-three towns, Economic Observer said, which are more dependent on manufacturing jobs that feed from global supply chains.

Secondary factors included the government’s decision to cut electric vehicle (EV) subsidies and the prospect of more exacting emission standards for combustion engine cars.

More recently the government has turned tail, announcing new support measures. It will no longer scrap the remainder of EV subsidies, as it had planned this year, and it has extended the deadline for the sale of vehicles with older emission standards by six months from this July.

Some analysts think that the first quarter will prove the darkest point for the car firms, many of which were already discounting their prices to clear existing inventories. The figures back this up. In April, national car sales rose 4.4% year-on-year to two million, although when combined with the first three months, they were still down 31% on the same period in 2019.

Should a new wave of Covid-19 infections hit China, all three of the biggest independent manufacturers have built up large cash reserves to survive the storm. They also have a few new strategies to regain momentum.

In BYD’s case this includes venturing into a completely new industry: face masks (see WiC492). It is already predicting that second quarter profit will soar by more than 100% as it aims to become the world’s largest facemask manufacturer.

Geely, on the other hand, is pinning its hopes on a full merger with Volvo, which it purchased back in 2010. Since the acquisition there has been technology-sharing but a fuller combination will lead to greater synergies, it says. Most analysts agree and as we reported in WiC483, Geely executives are planning either to inject Volvo’s assets into its Hong Kong listed vehicle or try for a secondary listing in Stockholm. Either way, that should enable Geely to surpass SAIC as China’s largest car manufacturer by market value.

A brokerage taking a more negative view of the proposed merger is Sino-Malaysian CGS-CIMB (China Galaxy Securities is the Chinese partner). It thinks that foreign brands, especially luxury ones, will continue to outsell domestic ones as consumers upgrade to more expensive choices. It also points out that Geely’s work with Volvo to repurpose the Lynk brand hasn’t been a huge success to date.

Lynk’s product line has been manufactured on Volvo’s Compact Modular Architecture (CMA) platform, which is supposed to accommodate different models of car, based on a simplified approach to research and development. The Lynk joint venture did see a 6% uplift in sales during 2019, but net profit fell 29% despite the introduction of two new models. Some commentators argue that this is a signal that consumers prefer the more recognised appeal of the VW brand, which sells a similar SUV crossover model at a similar price.

Most car manufacturers are hoping that the central government will introduce more stimulus measures as the year progresses. So far, that kind of effort has largely been left to the provincial and city governments. Some have responded by easing licence plate restrictions – most recently Hangzhou and before that Guangzhou and Shenzhen.

There will be pressure on policymakers to do more to spruce sales, perhaps even on the basis that some of the newer models might counter the threat of another wave of Covid-19 cases. Some manufacturers have been fitting their newest cars with filtration systems that block particles smaller than 2.5 microns (see WiC491 for more on WM Motor’s new N95-equivalent air-con).

Over the medium term, people may also see it as better for their health prospects to travel by car rather than on crowded public transport. If the government does decide to help them in this direction, expect a new round of subsidies to flow towards the EV industry in particular.

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