Structure and Markets

Gloom grips China's Truck Industry as Sales Falter

Heavy Truck factory sales were down 31% to 296,000 in 1H2015. In April, we forecast 2Q15 sales down by 23%: in fact they fell by 29%. It’s impossible to ignore a cacophony of noise suggesting a trend change in many industrial markets in China. The spectacle of the stockmarket’s 30% slide post June, and increasingly frantic (and only partially effective) official efforts to control the rout, has helped crystallize concerns. Nonetheless, the Shanghai Composite Stock Index remains 10% higher than at the start of the year at the time of writing. Concerns about a more severe slowdown for the economy were nurtured by July’s Caixin PMI and indications of slumping manufacturing profitability. Critically, too, for many foreign companies involved in the Chinese market, first half 2015 results have been the occasion when the difficulties of operating in a slowing economy have had to be clearly acknowledged. On the other hand, quarterly GDP numbers do indicate that the promised rebalancing of the economy is slowly being achieved, while the last few months data for industrial production and retail sales could suggest a bottom has been reached. We think it likely that an equivocal picture of economic activity will continue to be painted by datapoints over the next few months. However, an uncertain economy, much subdued construction sector, and weak confidence always spell poor news for heavy truck sales, which are notoriously sensitive to changes in growth rates. So is it time to get even gloomier about short-term volumes?

Source: China National Bureau of Statistics

Our 2015 forecast fast becoming an upper bound

The April 2015 forecasts we released to subscribers foresaw the market falling 24% in 2015, to 565,000 heavy trucks (we forecast factory sales, as is customary in China, which includes deliveries to domestic and export channels). Forecasters across many segments in China are scrambling to cut forecasts in many different markets, including the automotive and construction equipment sectors.

We believe 565,000 units is still an achievable number – just… Our seasonality analysis suggests the market was running close to that level in June at a 567,000 running rate. If the final 6 months of 2015 were similar to the final 6 months of 2012, that would imply a 2H15 running 15% below year ago, and that would be enough to just achieve the 565,000 forecast. Many commentators still suggest that 2H15 will see some improvement, based on recently approved infrastructure projects finally kicking in, the absence of CN3 standard inventory overhang issues, and even on the basis that by late 3Q or early 4Q there may already be some sort of government stimulus programme for the sector. At this stage, we would clearly see the 565,000 level as an upper bound. Should the market stagnate at its recent levels a fall to 520,000 is readily possible, on a 28% contraction in 2H15. Negatives to be considered include the gathering gloom on freight rates, the expiry of some of the most generous ‘yellow truck’ replacement incentives from July, and the sense that government management of the economic process has faltered.

Factory Sales, Heavy Trucks total over 14t GVW, China: Jan 2012 – Jun 2015. Seasonally Adjusted Annualized Rates, 000s

source: CAAM data, TIR seasonal adjustment (SAAR=seasonally adjusted annualized rate).

Low quality export ‘wins’ mask worsening picture for domestic sales

One additional issue to consider is that sales into export markets have been extraordinarily strong, and net of this growth in exports, domestic sales were down an even higher 34%. In 1H15 Chinese heavy truck exports grew+43% to near 46,000 units, and accounting for >15% of sales rather than just over 7% in 1H2014. This is far more than we dared hope, but the quality of these sales has collapsed. Vietnam, now 43% of total heavy truck exports, mathematically accounts for the entire positive change of 14,000 units, and Chinese sales so far this year exceed volumes achieved in the entire Vietnamese market in any full year prior to 2014. Venezuela also saw a huge lift to become >6% of sales from zero. In fact these two markets are currently full 50% of export volume, from 16% in the same period of 2014. While N Korea, Philippines, Iran and Ethiopia all saw a few hundred more trucks delivered, all other material markets contracted. China is increasingly dependent on a very small number of export markets where foreign aid and lower emission standards create a temporary opportunity, which we consider unlikely to be sustained for long. Withdrawal of the current strong support from exports would spell further pressure on factory sales and production, of course.

We will release our updated forecasts for Chinese heavy truck factory sales and domestic sales to subscribers in October of this year.

Chinese Heavy truck Exports by Major Destinations, 1H2014 and 1H2015. Units and Share of Total Export Volume

source: China Customs Data

Pure Road Transport Equipment appears to fare better

One positive feature of the current environment is that non-construction related segments of the market appear to be faring better. This is reflected in road transport activity remaining on a relatively steady growth path, up 6.2% according to MoT data in 1H2015 (measured in ton-kms). Anecdotally, port-related tractors, and even coal haulers have declined by significantly less than the average (by <20%), whereas tippers and construction related segments in general appear to have declined by 60-70%. This is in line with construction equipment markets in general so far in 2015. Dealers have suggested that infrastructure projects so far this year have simply not required new equipment purchases.

One consequence is that the road tractor or articulated truck segment has nearly caught up with the heavy rigid segment as a component of factory sales. Much of the higher-end product activity has been concentrated in this segment. Even so, the export support has been another contributory factor, as exports of road tractors shot up by 84% in 1H15, to 19,000 units – and thus now a very similar 41% of exports as its share in factory sales in total. Again, Vietnam and Venezuela play a highly disproportionate role.