Structure and Markets

2014: resilience to the end is encouraging for 2015 volumes…

There’s no mistaking the air of caution in the industry regarding 2015 heavy truck volumes in China. Today’s GDP report confirms a mildly slowing economy, while recent heavy truck monthly sales data (down by >20%, which may extend to January 2015 too) has also disappointed. It’s not all bad news, however on our analysis, recent statistics are actually mildly encouraging, and mix and content have started on an upgrade path. There is of course risk if China fails to manage the needed transition in its economy smoothly, but so far it has proved relatively sure-footed.

Steep year-on-year market contraction in 4Q14 masks underlying stability

There was plenty of excitable comment about the pace of contraction year-over-year in China’s 4Q14 truck sales data. From our perspective, however, what was remarkable about it is the stability it shows, at an underlying level. The headline was a 30% contraction in December (and 22% contraction in the final quarter) but that was versus a hyper-ventilated previous year (when truckmakers were filling dealer inventories with CN3 trucks ahead of a possible year-end guillotine). Our analysis suggests that 2014 ended at a near 780,000 running rate, slightly ahead of the average for the year (Figure 1) which recently confirmed data shows finishing at 744,000 units (-4% on 2013).

Soure: CAAM and TIR Analysis. SAAR = Seasonally Adjusted Annualized Rate, adjusting actual sales figures for typical seasonal variation and presenting at annual equivalent running rates.

Most forecasts are looking for contraction of the market into 2015

Reports coming out of year-end business planning meetings at some of the truckmakers, or picked up elsewhere by the trade press, suggest the heavy truck market is likely to contract in 2015 – up to 10% is a popular forecast. The two most often-cited negatives for the market are inventory overhang, and further slowdown in economic growth. Inventory concerns centre particularly on unassimilated CN3 vehicles (up to 40,000 by popular estimate, some of which may have influenced late 2014 factory sales levels). The whole industry appears to have rapidly aligned behind the concept of a ‘new normal’ for growth, as Chinese officials have described it, after the lacklustre 3Q14 GDP numbers. This redesigned economic model is more inclusive and based on more sustainable domestic demand – but may deliver slower aggregate expansion, growth at present seen as ‘only’ around 7% annually. The China Machinery Industry Federation expects a 10% decline for heavy truck sales in 2015, also citing risk in the real estate industry notably in 3rd and 4th tier cities. Truck manufacturers themselves have tended to be less specific – Shaanxi said the market may be ‘basically flat’ at 730K (versus a 743K outturn), Foton Daimler ‘continuing decline’, BeiBen said ‘slight downward trend’, CNHTC ‘slight decrease’. But they have traditionally been unwilling to commit publically to negative outlooks.

Policy Flexibility to help both stabilization and reform

What we have seen recently from China’s top policy makers is a loosening bias despite the neutral official policy stance. The fear of high profile easing amongst policy makers appears to have been overcome with stronger signalling to lower funding costs starting in November 2014, in combination with policy relaxation measures in the property sector. Unlike fiscal policy, which appears hampered by slowing revenue and elevated local government debt levels, more scope for monetary policy fine-tuning to maintain growth exists. Many more levers are in policy makers hands than in a market economy. Despite deepening structural reform, major changes in economic momentum may prove avoidable. This is not to minimize economic risk: China has enjoyed an unprecedented uninterrupted period of fast economic growth, now seen as too heavily biased to investment, and which created very high debt levels in the process. For a base case, however, we consider that the signs economic planners can manage the transition to a more consumption-led economy without a hard-landing for growth are positive.

The truck market took a very eventful year of regulatory change and economic challenge with remarkable resilience in 2014. Construction in general is still suffering from the last phase of a property market correction cycle, but the NRDC has given the go-ahead for a significant number of major infrastructure projects, while further accelerated retirement of older polluting vehicles is also still a support.

There’s even some hope in the progress of efforts to realise President Xi’s ‘Chinese Dream’ of recapturing the status the country enjoyed at powerful times in the past, exemplified in the Silk Road Fund and other efforts to recycle foreign reserves. Just as major Chinese construction companies have been heavily involved in fulfilling Chinese supported infrastructure projects, Chinese truck and construction equipment manufacturers have typically been major suppliers to the contracts. Given the unfolding impact of collapsed oil prices on key economies such as Russia and Venezuela, however, it is probably premature to expect much from export growth in the very short term.

2015: The Year of the Upgrade?

Truck makers look to qualitative upshift on mix and content While the industry appears to have given up on volume growth for 2015, there is plenty of aspiration for market share gain and ever more bullishness on upgraded product. CN4, of course, has been a major catalyst extending well beyond the engine management and emissions systems. But the industry also senses pull from new types of customers as well as regulatory push. ‘High-end logistics’ companies are the target of much of the industry’s recent product renewals, anticipating a new class of customers who may be ready for the new 13 litre engines, ‘European’ comfort cabs and RMB450,000 price tags which have peppered 2014s new releases.

Central and local government are also cheerleading a change in road transport and logistics in general. Last October’s Logistics Development and Long Term Planning policy from the State Council is yet another initiative targeting China’s famously high ratio of logistics costs to GDP from 18% as calculated by the China Federation of Logistics and Purchasing to ‘about 16%’. It is even more specific in seeking to promote a rational, efficient, technically advanced and green logistics service system; increase professionalism of the sector, encourage Third Party Logistics (3PL) firms. The State Council wants fast progress on new equipment and technology, IT integration, further multi-modal logistics parks and creation of globally competitive domestic logistics enterprises. All perfect for upgraded truck mix.

It’s not clear, of course, that customer make-up can change very quickly. So far professional transport companies have only really been notable in more prosperous eastern and southern cities, and many use numerous less well-organised trucking sub-contractors. Volumes on the new flagship products may remain in the few thousands. In which case a lot of development effort might have been spent to establish credentials for long-term market position, but find little real reward in the short term. But there is little doubt that a process has started, and that its speed is perhaps the most important open question for those trying to compete in the China truck sector today.