Route 312 – China’s Route 66
The world’s largest car market, China, with a population of 1.3 billion people and an emerging middle class, holds great potential for investors and consumers alike with annual growth rates in the auto sector expected to hold at around 23 percent to 2017, according to Alliance Bernstein Asset Managers.
Joint ventures (JV), the most popular structure for foreign firms investing in the automobile sector in the world’s largest car market, are set to capitalise on a growing consumer base in a country with 3.3 million kilometres of asphalt. Traversing the so-called ‘mother’ road 312 (China’s route 66) is becoming more of an attainable dream for the Chinese consumer.
VW has a JV with Changchun-based FAW, Dongfeng with Nissan, GAC with Toyota and Honda. There are many investment opportunities, though a constantly changing sectoral environment and risks of mechanical recalls can cause sharp fluctuations as in any market, according to Bernstein Research, a subsidiary of Alliance Bernstein holdings.
China now has some 21,100 dealers nationwide, more than the United States (17,500), Germany (12,900), and the UK (4,700) in absolute numbers. Domestic dealers are overshadowed by international brands in the larger cities. The next step is for the international JV-backed dealers to make regional expansion where domestic dealers are currently concentrated.
Tassos Stassopoulos at Alliance Bernstein said:
The place we currently expect companies to generate most value in China is in the SUV and luxury segment. Land Rover is in a sweet spot to cover both and for luxury BMW and Audi. This is all contingent on them not messing up their product cycle, which is hard to predict.
There are some warnings, however, according to the authors of the Bernstein Research report.
We believe Chinese car sales growth is set to run at a slower pace going forward and will collide with large increases in production capacity. Direct government financial assistance appears to be playing a role in China’s fast increasing capacity, which will ultimately lower returns. Our framework takes account of technology, R&D competence, growth and cash valuation. We rate Brilliance (HK$13 price target) and Dongfeng (HK$17) outperform. We rate Great Wall (HK$36) and GAC (HK$7) market-perform. We rate Geely (HK$3) underperform.
Elsewhere in the BRICs, Russia’s government announced a new subsidy programme in July for Russian citizens wanting to buy a car, helping to boost the likes of Avtovaz. Tata Motors in India has also found SUVs a bright spot, though sales to March were lower than expectations. In Brazil the world’s fourth largest car market, auto sales hit record levels in May as car makers took advantage of tax breaks for domestically manufactured vehicles.
If there is still doubt about the market in China, it is clear that it has more dealers in absolute terms and still sells more per dealer than major developed markets.