U.S. markets closed
  • S&P 500

    +116.01 (+3.06%)
  • Dow 30

    +823.32 (+2.68%)
  • Nasdaq

    +375.43 (+3.34%)
  • Russell 2000

    +54.06 (+3.16%)
  • Crude Oil

    +2.79 (+2.68%)
  • Gold

    -1.70 (-0.09%)
  • Silver

    +0.09 (+0.42%)

    +0.0034 (+0.33%)
  • 10-Yr Bond

    +0.0570 (+1.86%)

    +0.0013 (+0.11%)

    +0.2270 (+0.17%)

    +194.16 (+0.93%)
  • CMC Crypto 200

    +8.22 (+1.81%)
  • FTSE 100

    +188.36 (+2.68%)
  • Nikkei 225

    +320.72 (+1.23%)

Coronavirus Crashes China Auto Market: Is There a Ray of Hope?

After decades of blistering growth, the auto sector of China has been battling a downturn for quite some time now amid tougher emission standards and waning consumer demand in the wake of tariff woes and economic slowdown. The COVID-19 outbreak — originated in Wuhan — further exacerbated the prolonged demand slump in the world’s largest car market.

According to China Association of Automobile Manufacturers (“CAAM”), auto sales dwindled 43% year over year to 1.43 million units in March. While March marked the 21st consecutive month of plunge, it was less dire than February, when sales volumes recorded the biggest ever monthly decline of 80% year over year. As coronavirus concerns crimped showroom traffic, automakers in China suffered their bleakest ever quarter in January through March, with sales tanking 42% year over year to 3.7 million vehicles.

China Auto Market in Free Fall, March Sales Offer Some Respite

China’s auto market has been faltering since July 2018 owing to tighter emission standards, trade tensions, increasing popularity of ride-sharing platforms and economic downturn. Moreover, EV subsidies cut in 2019 had cast a shadow on the ambitious goals of the nation, which targets green vehicles to account for 60% of China’s total auto sales by 2035. The massive lockdown in the country amid COVID-19 further jeopardized China’s economic activities and depressed demand for vehicles.

As the pandemic pummeled demand, March sales continued to go downhill, albeit at a slower pace. Sales of new energy vehicles (NEV) slid for the ninth straight month in March to 53,000 units (excluding deliveries from Tesla), per CAAM. However, the decline was less steeper than the last month, when EV sales in China tanked 77% year over year to 11,000 units, per China Passenger Car Association (“CPCA”). In fact, March sales numbers are indeed providing a glimmer of hope.

BYD Co. Ltd. BYDDY, which sold around 2,800 NEVs in February, witnessed a sharp uptick in sales to 11,700 units in March. However, the figure compares unfavorably with sales of 30,000 NEVs during March 2019. NIO Inc. NIO delivered 1,533 vehicles in March, which reflected more than 11% year-over-year gain. Encouragingly, the company’s sales skyrocketed around 120% from the last month.

Tesla TSLA sold 10,160 vehicles in March, which marked its highest ever monthly sales in the country, per CPCA. The revolutionary EV-maker, which intends to manufacture 150,000 Model 3 sedans from its Shanghai Gigafactory this year, managed to achieve robust sales and production despite significant setbacks. Per CPCA, Tesla sold 2,620 and 3,960 vehicles in January and February, respectively. It is to be noted that the first quarter of 2020 was the first full quarter wherein the Giga 3 factory was equipped to build vehicles. While the facility was shuttered in late January amid the pandemic, it resumed operations on Feb 10. Tesla currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Demand for vehicles started to rebound in March, with stabilizing of China’s situation. Weekly retail car sales have been picking up pace for more than a month now, after shrinking as much as 96% during the virus mayhem. According to CPCA, declines moderated to 50%, 44% and 40%, respectively, in the first three weeks of March. The group envisions weekly sales to rebound to last year’s levels by the end of this month.

Automakers Getting Into Gear as COVID-19 Slows Down in China

Of late, almost all the major manufacturing hubs have resumed operations in China. As showrooms are gradually witnessing higher footfall, vehicle sales have been picking up pace. While it has just been a couple of weeks that dealerships have got back in the business, daily sales of some of the dealerships have already rebounded to pre-shutdown levels. A recovery in the world’s second largest economy will provide a breather to global carmakers like Volkswagen VWAGY, General Motors GM, Ford, and Toyota, which are witnessing sales slump in other regions such as the United States, Europe, India and Latin America, as the deadly virus continues to wreak havoc.

BMW AG BAMXF has started witnessing early signs of market recovery, as is evident from strong orders. The company stated that it is saw a reversal in demand trends in March, pointing to a sustainable recovery in China. Tesla is doubling efforts in the China market, with production ramp up in Shanghai Gigafactory. Volkswagen’s operations in China have also started to gain traction. The German auto giant intends to build two new electric vehicle sites in China — with a combined capacity of 600,000 vehicles annually — in the second half of the year. It will also commence the local manufacturing of Audi e-tron this year. Almost all the production facilities and dealerships of major automakers including Honda, Toyota, Daimler, Fiat Chrysler, Ford, Nissan, PSA Group and Foxconn have resumed normalcy in operations in the country, with the companies focusing on ramping up output in China.

Has China Car Sales Bottomed Out?

With continued efforts to ramp up online sales and increasing in-store visits, car sales in the country are likely to gather steam. Further, due to hygiene and safety issues amid coronavirus, consumers are now more likely to prefer car ownership rather than ride-sharing services.

As the auto sector’s output is a key component of China’s GDP, the government has been revving up stimulus measures for boosting auto sales in order to kickstart the sputtering economy. While such moves may yield short-term benefits, it is still unclear if these will spur long-term demand and result in a sustainable rebound in China.

In a bid to provide respite to automakers amid the coronavirus fallout, China recently announced plans to extend tax breaks and subsidies on EV purchases for two years. The subsidies were originally due to expire at the end of this year.

Industry watchdogs believe that vehicle sales in China probably hit a bottom in February 2020 but are likely to gradually recover. This can be attributed to slowing down of the virus spread in the country and consumers’ return to shopping.

Per CAAM, vehicle sales in China will shrink more than 10% in the first half of 2020 and around 5% for the full year, if the pandemic is effectively contained before April. While it will be tough to make up for the battered first-quarter sales and losses incurred during the first half of the year, CAAM expects the China auto industry to rebound to at least last year’s levels in the second half of the year. CPCA anticipates overall passenger car sales volume in April to be much higher than March.

Just Released: Zacks’ 7 Best Stocks for Today

Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.5% per year.

These 7 were selected because of their superior potential for immediate breakout.

See these time-sensitive tickers now >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
General Motors Company (GM) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
Bayerische Motoren Werke AG (BAMXF) : Free Stock Analysis Report
NIO Inc. (NIO) : Free Stock Analysis Report
Byd Co., Ltd. (BYDDY) : Free Stock Analysis Report
Volkswagen AG (VWAGY) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research