China’s Auto Market Crashes in First Quarter Amid Pandemic

Demand continues to slump even as most dealers have reopened
By Fan Yu
Fan Yu
Fan Yu
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.
April 12, 2020Updated: April 12, 2020

News Analysis

Automobile sales in China were completely blitzed during the first quarter of 2020.

Sales numbers from January to March were the worst ever, as the CCP virus pandemic shut car factories and dealerships across China, and consumers held tight to their pocketbooks.

China auto sales fell an annualized 43 percent in March, official data released by the government-backed China Association of Automobile Manufacturers showed on April 10. The world’s largest auto market has struggled to get back on track following an extended drop in demand—made worse by the ongoing pandemic of the CCP virus, commonly known as novel coronavirus.

Results in March were slightly better than February, when sales cratered 79 percent as most of the country was under lockdown. However, March data was still unsatisfactory, given that Beijing had looked to open the economy as quickly as possible.

China’s auto sector is currently mired in a deep slump that preceded the CCP virus-induced shutdown, as March marked the 21st consecutive month of nationwide sales declines.

Horrid Timing

The Chinese market isn’t only vital for local domestic automakers, but foreign brands such as General Motors Co. and Volkswagen AG in recent years have pinned their growth prospects on China.

The timing of the pandemic is particularly damaging for the Chinese auto market, which came into 2020 with big expectations following two years of declining sales due to lower demand and overproduction.

Beijing was hoping for a speedy V-shaped rebound, but on the ground, economic activity was reviving at a much slower pace than the government had anticipated. A V-shaped recovery is no longer in the cards. At best, Chinese economic recovery will be U-shaped, with the most likely scenario being an L-shaped recovery following a prolonged recession triggered by foreign demand shock.

Nearly 91 percent of franchised new-car dealerships in China have reopened as of mid-March, according to industry publication Auto News. But showroom traffic still lags; dealers are only seeing 53 percent of normal customer levels.

Other data suggest that store foot traffic has been decreasing since then. The March increase in visits to dealerships tailed off in April, IHS Markit analyst Lin Huaibin told the Wall Street Journal. The country’s lingering employment crisis could be a main factor. China’s official unemployment rate issued by the National Bureau of Statistics (NBS) jumped to an all-time-high of 6.2 percent in January and February combined, from 5.2 percent in December 2019—equating to roughly 5 million new people out of work.

Those figures are certainly understating the true jobless figures. Off the bat, migrant workers are not included. But it’s useful in this instance as the official NBS unemployment figures do count workers in China’s urban centers. And it’s likely that most of those 5 million unemployed people previously had economic means to purchase cars.

Local automakers also appear to be disproportionately affected by the CCP virus.

Domestic automakers Zhejiang Geely Holding Group, Great Wall Motor, and the Warren Buffett-backed BYD saw sales decreases of 43 percent, 47 percent, and 48 percent, respectively. As a group, they experienced the biggest sales drops, according to the WSJ report. Local car brands’ customers are generally less affluent and could be more susceptible to economic downturns.

Loosening Restrictions

Three months into 2020, it already looks to be a lost cause for the Chinese auto industry.

To combat sagging demand, Beijing is implementing measures to stimulate the economy and revive consumer spending.

At a macro level, China’s total social financing (TSF) rose to a record 5.2 trillion yuan ($730 billion) in March. TSF is the broadest measure of China’s total financing and includes both on-balance sheet (via commercial lenders) and off-balance-sheet financing (via shadow banks and trusts). This means that companies are being granted unprecedented liquidity funding to survive the current downturn.

A slew of industry-specific actions also took place. Beijing announced in March that it would extend electric vehicle (EV) purchase subsidies through 2022, which were supposed to end this year.

China is pushing to become a global leader in EV adoption. But EV sales during the January to March period dropped by 56 percent, according to the WSJ. And China’s EV industry is notoriously fragmented, with dozens of startups vying for attention. WM Motor, NIO, and Xpeng Motors are the three most prominent EV makers with major Chinese backing from Tencent, Alibaba Group Holding, and Baidu, respectively. But dozens of EV automakers had limited funding even before the pandemic hit.

Local authorities have also begun to offer consumer subsidies. Cities such as Changsha, Guangzhou, and Ningbo are offering incentives to potential buyers.

Changsha, for example, announced last month that it would offer rebates up to 3,000 yuan ($429) to buyers of new cars built locally from March 11 to June 30.

Taking a page from U.S. President Donald Trump’s playbook, Beijing policymakers are also considering delaying implementation of more stringent emissions rules by six months, to help the auto industry weather the storm.

The Trump administration recently rolled back vehicle emissions standards adopted under the Obama administration—requiring 1.5 percent annual increases in fuel efficiency, much more lenient than the 5 percent previously mandated.