Competing in the China Truck Market - An Introduction

December 17, 2012

by Bill Russo

Driven by strong economic growth and infrastructure investment, the China auto industry has enjoyed explosive expansion in the past decade, at a compound annual growth rate of 25% over this period.  However, the year-over-year growth rate slowed down to 2.5% in 2011 due to a combination of policy and economic factors, such as the termination of the tax incentive policy, the credit crunch, purchase restrictions in China’s largest cities, supply-chain disruptions and the global debt crisis. 

This market slow-down has continued into the first seven months in 2012.  According to the China Association of Automobile Manufacturers (CAAM), year-to-date automobile sales are 10.98 million units in the first seven months, only 3.6% higher than last year.  Although CAAM maintains their optimistic forecast of full year growth as 8% higher than 2011, few analysts doubt that China’s automotive sector has arrived at an inflection point where future sales will expand at a more stable and moderate growth rate.

Commercial vehicles in China consist of trucks and buses, which have been negatively impacted by the economic slow-down.  While declining by 7% from 2010 to 2011, the commercial segment has seen a further decline of 9.4% in the first seven months of 2012 to 2.24 million units sold.

Over the past decade, the truck sector has grown to meet the demands from China’s expanding economy.  Historically, the sales of MDT and HDT accounts for 30% to 35% of the truck sector, which tripled in size from 409,000 units in 2001 to 1,287,000 units in 2010.  This growth momentum has not been linear.  Instead, several waves of fluctuations have occurred caused by macroeconomics and policy changes which directly impact the amount of capital available to businesses that typically invest in commercial trucks.  Government policies, which directly determine the levels of investment in infrastructure, along with measures to introduce stricter emission standards, have resulted in big fluctuations in the market.

In particular, the large stimulus package launched in 2009 sharply accelerated demand.  “Cash-for-clunkers” schemes introduced in 2010 helped drive replacement demand as well as improve the quality of the overall vehicle parc. When nearly all government stimulus measures expired in 2011, the truck segment entered a downward cycle and is expected to go down to 869,000 units sold in 2012.

Contrary to the US and Europe, where most sales are replacement sales, in China MDT & HDT are predominately new sales which increase the size of the fleet.  Though the parc of HDT and MDT has reached 3.9 million units by 2010, there is still a large gap relative to the developed markets in terms of per capita vehicle ownership.  Moreover, several fundamental drivers will prevail in next few years to push forward the demand for MDT & HDT.

First, industrialization and urbanization in China drives higher fixed-asset investment.  Fixed asset investment of China (adjusted by Purchase Power Parity) is 1.3-1.6 times higher than that of Western Europe and the U.S.  Such huge investment is mostly spent on the railway, highway and other infrastructure projects, which in turn drives demand for more commercial (mainly heavy duty) trucks.  Meanwhile, China’s current urbanization rate is about 50%, and this will increase to over 60% by 2020.  Clearly, these trends will continue to fuel higher demand for commercial vehicles for the foreseeable future.

Second, cargo transportation demand of China is larger than that of the U.S with a higher growth rate.  High cargo transportation demand is a result of inefficient logistics, urbanization and the size of country.  All of these factors will push higher demand for Long-Haul HDT.

Third, the replacement cycle of HDT/MDT in China is much shorter than that of the developed markets.   This will create significantly more replacement buying in China than international markets.  In China, line-haul HDT can typically only be used for 0.9 to 1.1 million Km while in the US, the number is as high as 1.5 to 1.7 million Km. As a result of such differences, the average age of MDT/HDT in China is only 6 years, much lower than 11.3 years in US.

Taking a broader look at the global context, several macroeconomic and sociopolitical developments are altering balance of power in the automotive industry.  These include the recent financial crises, which have effectively resulted in a redistribution of global economic power, altered the global trade balance, and have renewed concerns with energy security and environmental issues.   The growing size and influence of the Asian economies – especially China – are triggering a transformation of the automotive business model, with automotive enterprises seeking to leverage the momentum of the region.  The recent shift underscores the importance of the Asian economies to the future growth and profitability of the global auto industry.

Most of the recent growth in the world’s auto industry has been in the Asia-Pacific region, and more than half of that growth over the next decade is forecasted to come from China.  Similar regional demand migration also applies to the MDT/HDT sector. 

Driven by continuous industrialization, urbanization and cargo transportation demand, China’s MDT/HDT market is anticipated to come through the current down-cycle and experience a strong rebound thru 2015.  As illustrated in Figure 4, by 2020 the parc will increase by almost 7 million to 10.7 million units (up from 3.8 million) and sales forecast for 2020 is 1.7 million units (up from 1.3 million in 2010).

Going forward, several overarching market trends will shape the MDT & HDT demand structure: 

1. Line-haul HDT demand will be even larger than vocational trucks in China resulting from the comparably lower professional level and lower operational efficiency of the logistics infrastructure.   This creates opportunities for international entrants who have a strong on-road tractor line-up.
2. A push to meet stricter fuel economy and emissions standards will drive a need for advanced technology and accelerate the truck manufacturers’ emphasis on technology upgrades and alternative fuel application. 
3. The source of OEM’s profitability will increasingly shift from new truck sales to after-sales services, including vehicle logistics, value-added services, parts sales, and auto finance, etc.  

All of the trends noted here will raise the level of interest among China’s local truck manufacturers to form alliances international truck manufacturers.

The growing influence that China wields is not simply derived from the size and scale of its domestic market, which is an increasingly important focus in a growth-challenged industry.  Increasingly, financially weakened automotive companies and their suppliers must strive to deepen their participation in the China market if they hope to remain viable. It only stands to reason that companies that have weakened positions in their domestic market would benefit by redistributing some of their focus to the growth markets and in particular China.

In summary, China’s HDT/MDT market is expected to come through the short macroeconomic cycle into a sustainable growth track from now through 2020, and global truck makers should position themselves to participate in the market by forming alliances to leverage their unique capabilities in the areas of product, technology and after-sales services.

This is the first installment in a series on the China Commercial Vehicles market.  Click here to read the second installment.