Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

China Automobiles / Thematic (Sector/Industry)

CAAM's reported December auto shipments in China amounted to 2,653,300 passenger vehicles and 407,000 commercial vehicles, to a total of 3,060,300 units.  Total annual demand in 2017 came to 28.9m units, representing a 3.6% YoY demand growth.  December 2017 had one less selling day than December 2016, which was the primary cause of December 2017 SAAR being stronger than December 2016.Here are some initial thoughts, looking back on 2017 and looking ahead to 2018:<div class="content-highlight"><ol><li><div class="content-highlight">December SAAR of 31.2m units was in line with our expectations for a strong 4Q ahead of the C-segment tax benefit expiration in January.  Long term trend demand places 2018 China demand at 29.5m units, which is consistent with current consensus outlook.  Without significant macro factor volatility we are likely to see overall demand growth in the 2.0% range in 2018, from a 2017 base of 28.9m units.</div></li><li><div class="content-highlight">Foreign brands gained market share at the expense of local brands in 2017. Major foreign brands' combined share of the passenger vehicle market amounted to 61.3% in FY17 based on retail data from CPCA, from 59.8% in 2016.</div></li><li><div class="content-highlight">The strongest gains came from the D3.  Data suggests that a major cause for D3's share gains stem from their relative strength in SUV and crossover product offerings compared with Asian Brands. The Baojun brand's strong performance also helped GM in 2017.  The global pattern of car buyer migration to SUVs and crossovers places D3 favorably relative to Asian brands in a market share context.</div></li><li><div class="content-highlight">While pockets of gains for local brands, especially in the NEV space, do exist, these are specific niches at this point in time.  With the recent extension of China's NEV tax subsidy to 2020, 2018 is likely to continue highlighting local brands exposed to the NEV space.  As we have argued in<a href="https://www.smartkarma.com/insights/some-thoughts-on-china-s-proposed-nev-credits-what-can-kandi-do-that-tesla-can-t" target="_blank" data-smartkarma-citation="insights:15017">Some Thoughts on China’s Proposed NEV Credits:  What Can Kandi Do that Tesla Can’t?</a> there is a limited extent to which high-end NEVs such as Tesla can do well in China at this point in time.  As with the U.S. market, we believe the key to increasing significant overall NEV penetration will be in capturing low end niche dominance at the basic urban transportation level, and this most strongly favors local Chinese brands.</div></li></ol></div>Market outlook looks benign from the current vantage point, albeit growth will likely slow in 2018.  The global migration to SUVs and cross-overs is likely to continue taking place in China in 2018, which places D3 in a favorable position from a market share perspective.  Hyundai-Kia, which has been showing strong signs of recovery from the THAAD Missile related consumer backlash, will likely gain share as part of normalization in 2018.  The NEV market will also likely show strong growth, but given it comprises only 2.7% of the retail passenger vehicle market currently, gains there by local brands will unlikely be sufficient to offset gains by foreign brands in the broader market.<table class="table table-striped"><tbody><tr><td colspan="12" style="text-align: center;"><h2>China December and Full Year 2017 Auto Demand</h2></td></tr><tr><td>(Mn Units)</td><td style="text-align: center;">Dec -17</td><td style="text-align: center;">Nov -17</td><td style="text-align: center;">MoM</td><td style="text-align: center;">Dec -16</td><td style="text-align: center;">YoY</td><td style="text-align: center;">FY17</td><td style="text-align: center;">FY16</td><td style="text-align: center;">YoY</td><td style="text-align: center;">Dec '17 SAAR</td><td style="text-align: center;">Dec '16 SAAR</td><td style="text-align: center;">YoY</td></tr><tr><td>PV</td><td style="text-align: center;">2.7</td><td style="text-align: center;">2.6</td><td style="text-align: center;">2.5%</td><td style="text-align: center;">2.7</td><td style="text-align: center;">-0.7%</td><td style="text-align: center;">24.7</td><td style="text-align: center;">24.3</td><td style="text-align: center;">1.9%</td><td style="text-align: center;">26.9</td><td style="text-align: center;">26.3</td><td style="text-align: center;">2.0%</td></tr><tr><td>CV</td><td style="text-align: center;">0.4</td><td style="text-align: center;">0.4</td><td style="text-align: center;">10.6%</td><td style="text-align: center;">0.4</td><td style="text-align: center;">5.7%</td><td style="text-align: center;">4.2</td><td style="text-align: center;">3.6</td><td style="text-align: center;">15.1%</td><td style="text-align: center;">4.3</td><td style="text-align: center;">4.0</td><td style="text-align: center;">7.8%</td></tr><tr><td>Total</td><td style="text-align: center;">3.1</td><td style="text-align: center;">3.0</td><td style="text-align: center;">3.5%</td><td style="text-align: center;">3.1</td><td style="text-align: center;">0.1%</td><td style="text-align: center;">28.9</td><td style="text-align: center;">27.9</td><td style="text-align: center;">3.6%</td><td style="text-align: center;">31.2</td><td style="text-align: center;">30.3</td><td style="text-align: center;">2.8%</td></tr></tbody></table><div class="content-caption">Sources: CAAM, Author's estimates</div>

CAAM's reported December auto shipments in China amounted to 2,653,300 passenger vehicles and 407,000 commercial vehicles, to a total of 3,060,300 units.  Total annual demand in 2017 came to 28.9m units, representing a 3.6% YoY demand growth.  December 2017 had one less selling day than December 2016, which was the primary cause of December 2017 SAAR being stronger than December 2016.Here are some initial thoughts, looking back on 2017 and looking ahead to 2018:December SAAR of 31.2m units was in line with our expectations for a strong 4Q ahead of the C-segment tax benefit expiration in January.  Long term trend demand places 2018 China demand at 29.5m units, which is consistent with current consensus outlook.  Without significant macro factor volatility we are likely to see overall demand growth in the 2.0% range in 2018, from a 2017 base of 28.9m units.Foreign brands gained market share at the expense of local brands in 2017. Major foreign brands' combined share of the passenger vehicle market amounted to 61.3% in FY17 based on retail data from CPCA, from 59.8% in 2016.The strongest gains came from the D3.  Data suggests that a major cause for D3's share gains stem from their relative strength in SUV and crossover product offerings compared with Asian Brands. The Baojun brand's strong performance also helped GM in 2017.  The global pattern of car buyer migration to SUVs and crossovers places D3 favorably relative to Asian brands in a market share context.While pockets of gains for local brands, especially in the NEV space, do exist, these are specific niches at this point in time.  With the recent extension of China's NEV tax subsidy to 2020, 2018 is likely to continue highlighting local brands exposed to the NEV space.  As we have argued inSome Thoughts on China’s Proposed NEV Credits:  What Can Kandi Do that Tesla Can’t? there is a limited extent to which high-end NEVs such as Tesla can do well in China at this point in time.  As with the U.S. market, we believe the key to increasing significant overall NEV penetration will be in capturing low end niche dominance at the basic urban transportation level, and this most strongly favors local Chinese brands.Market outlook looks benign from the current vantage point, albeit growth will likely slow in 2018.  The global migration to SUVs and cross-overs is likely to continue taking place in China in 2018, which places D3 in a favorable position from a market share perspective.  Hyundai-Kia, which has been showing strong signs of recovery from the THAAD Missile related consumer backlash, will likely gain share as part of normalization in 2018.  The NEV market will also likely show strong growth, but given it comprises only 2.7% of the retail passenger vehicle market currently, gains there by local brands will unlikely be sufficient to offset gains by foreign brands in the broader market.China December and Full Year 2017 Auto Demand(Mn Units)Dec -17Nov -17MoMDec -16YoYFY17FY16YoYDec '17 SAARDec '16 SAARYoYPV2.72.62.5%2.7-0.7%24.724.31.9%26.926.32.0%CV0.40.410.6%0.45.7%4.23.615.1%4.34.07.8%Total3.13.03.5%3.10.1%28.927.93.6%31.230.32.8%Sources: CAAM, Author's estimates

China Autos in December: Looking Back at 2017 and Looking Ahead to 2018