Throughout much of the world, auto market prospects appear sluggish. In the US, auto sales are moving back to normalised replacement demand levels, implying slowing growth. In Europe, sales are being held back by a choppy economic recovery. China, in our view, presents a different story. Despite near-term concerns about the country’s slowing GDP growth and slipping consumer confidence, we are bullish on the long-term growth prospects of Chinese autos.
The Chinese auto market went through a rapid growth spurt from 2005-2010, growing nearly six-fold in six years, from 2.5m units in 2004 to 13.75m units in 2010. This unprecedented 35 per cent compounded annual growth rate has since slowed to roughly 9 per cent, but with nearly 18m cars sold in 2013, China has displaced both the U.S. and Western Europe as the world’s largest auto market (see chart below).
Household disposable incomes in China’s urban areas are growing 10-15 per cent annually, making automobiles increasingly affordable. In 2005, a modest entry level small sedan cost 3.7 times the average annual urban disposable household income, but this ratio has dropped sharply — to 1.4 last year — fuelled by expanding income. With falling vehicle prices, the ratio could reach 1.0 by 2015, approaching a possible tipping point in vehicle demand.