China Autos: A Few Thoughts on 2018 Industry Demand and Initial Expectations for 2019

May China Auto Demand: Weak SAAR Leaves Lingering Headwinds for 2H

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Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

<p>One of the factors cited as a causes of this year's auto demand weakness in China is the transition from China V Emission Standards to China VI, in recent media reports.  For a number of provinces and municipalities, the new standards come into effect in July of this year rather than 2020, with Guangdong already having implemented the new standards in March.  According to observations made by the China Automobile Dealers Association (CADA), car buyers are on the sidelines waiting for China VI compliant models to come to market while OEMs are aggressively trying to push market China V compliant cars.  If this is the case then we should anticipate a strong 2H SAAR  from pent up demand, so if we were to take this as a given then the question becomes how strong must the average monthly SAAR be for the remainder of the year just to achieve flat YoY growth?</p><ol>
<li>Strictly based on historical observations, we have been unable to find any quantifiable evidence that new regulatory emissions standards implementation meaningfully impacts monthly industry selling rates.  If CADA, consensus media and sell side research views are correct, however, then we should anticipate a strong rebound in SAAR at some point, most likely in 2H19.</li>
<li>YTD average SAAR stands at 23.1m units.  In order to achieve flat YoY growth average monthly SAAR for the remainder of the year must come in at 30.3m units.  This is likely to be challenging in and of itself, with or without the China VI issue.</li>
</ol><p>If OEMs cannot bring China VI compliant vehicles to market in the near future, then we should anticipate pent up demand coming into play well beyond 2H19.  We suspect, however, that there are headwinds other than China VI at play which are largely behind the industry's SAAR weakness.  </p>

One of the factors cited as a causes of this year's auto demand weakness in China is the transition from China V Emission Standards to China VI, in recent media reports.  For a number of provinces and municipalities, the new standards come into effect in July of this year rather than 2020, with Guangdong already having implemented the new standards in March.  According to observations made by the China Automobile Dealers Association (CADA), car buyers are on the sidelines waiting for China VI compliant models to come to market while OEMs are aggressively trying to push market China V compliant cars.  If this is the case then we should anticipate a strong 2H SAAR  from pent up demand, so if we were to take this as a given then the question becomes how strong must the average monthly SAAR be for the remainder of the year just to achieve flat YoY growth?
Strictly based on historical observations, we have been unable to find any quantifiable evidence that new regulatory emissions standards implementation meaningfully impacts monthly industry selling rates.  If CADA, consensus media and sell side research views are correct, however, then we should anticipate a strong rebound in SAAR at some point, most likely in 2H19.
YTD average SAAR stands at 23.1m units.  In order to achieve flat YoY growth average monthly SAAR for the remainder of the year must come in at 30.3m units.  This is likely to be challenging in and of itself, with or without the China VI issue.
If OEMs cannot bring China VI compliant vehicles to market in the near future, then we should anticipate pent up demand coming into play well beyond 2H19.  We suspect, however, that there are headwinds other than China VI at play which are largely behind the industry's SAAR weakness.  

A Few Thoughts on China VI's Impact on Auto Demand