17 Jul 2019 16:39 IST

Auto pessimism could be over-revved in China

The country is likely to see sales drop again, undershooting earlier expectations for zero growth

China’s auto pessimism could be over-revved. A grim start to the year saw sales slump by more than 10 percent compared with the first half of 2018. Chaos reigned amidst new rules, while Beijing remained reluctant to offer stimulus. But policy pressure is uneven, and the worst could be past.

The latest numbers seem to imply a gloomy summer. Profit warnings from local champion Geely and suppliers like Johnson Electric and Sensiron blame weakness in the world’s largest auto market for their woes. The country is likely to see vehicle sales drop again this year, undershooting earlier expectations for zero growth, according to the China Association of Automobile Manufacturers.

Policymakers are partly responsible for the pain. Their decision to end tax incentives for low-end cars suppressed sales. Meanwhile, the haphazard application of new emissions standards saw dealers struggling to shift swollen inventory of older models, and a long wait for news on electric-vehicle subsidies has hurt the likes of Nio. To add insult to injury, a generous stimulus plan was leaked and shared widely in April, only to see hopes dashed when a pared-down package was finally published in June.

Yet there is a case for cautious optimism. Should regulators merely refrain from further drama, underlying demand could pick up despite the broader economic slowdown and a protracted trade war. The luxury segment, which was sheltered from the demise of tax incentives, has defied the downturn. Higher-end marques Audi and Mercedes-Benz reported record sales in the first quarter, while BMW claimed double-digit growth in China revenue.

Electric vehicles are another bright spot. Beijing has devised a credit system, which rewards makers of cleaner cars, and this month introduced even more ambitious sales targets for green autos. Chinese battery giant Contemporary Amperex Technology on Friday flagged that net profit had grown as much as 150 per cent in the first half of the year, more than expected.

Local bureaucrats can surprise on the upside, too. They may even help buck up non-green and non-luxury autos: in May, regional authorities eased limits on new licence plates of all marques in the cities of Shenzhen and Guangzhou. Add all these factors up, and the auto market’s doom and gloom can be overstated.