Auto inventory hits new high amid sluggish demand

Weak sales may continue well through first half of the year, says leading association

About one third of the automotive brands in China suffered unhealthy inventory levels in February, and major industry associations are calling for carmakers to help cut the inventory at dealerships, despite a whiff of positive signs at the retail market.

Statistics from the China Automobile Dealers Association show that 18 of the 55 brands in the country had inventory more than double their monthly sales, ranging from volume brands including BYD and Buick to premium ones such as Volvo and Cadillac.

Their inventory was so high that the average level across the industry reached 2.1 months, up about one third from the same month last year and 50 percent more than the January level, according to the CADA, which said the stock is deemed unhealthy if it is more than 1.5 months of sales.

It said the spillover weaker demand from 2018, the week-long Spring Festival holiday, which led to a lull in car sales, and some brands forcing dealers to stock up all played a part in the increased inventory.

The CADA is urging manufacturers to help tide dealers over the difficult times. China's automotive market had seen eight months of decline in a row by February, and over the year, it saw the first annual fall in sales since 1990, according to the China Association of Automobile Manufacturers.

CAAM statistics show that February wholesale stood at 1.48 million, down 13.8 percent year-on-year.

Combined with January sales, a total of 3.85 million vehicles were sold, registering an even steeper fall of 14.9 percent from the same two months last year.

Chen Shihua, an assistant to the CAAM's secretary-general, said the steep slump was partially because of the fact that some major carmakers made intentional cuts in wholesale to help reduce inventory at their dealers.

SAIC Motor Corp, China's largest carmaker and partner of Volkswagen and GM, sold 974,000 vehicles in the first two months of the year, down 16.9 percent.

"Besides the impact of the Spring Festival holiday, the fall was mainly the result of the ongoing de-stocking effort," Caitong Securities said in a research note.

Chen calls on carmakers to continue the campaign. "The primary task for vehicle makers in the coming months would be to ensure reasonable stock levels," he said, though he warned the effort would aggravate carmakers' sales performance.

"We do not expect sales to look good in these months, not even in the first half of the year," Chen said.

But chances are likely that there will be a decent recovery in the second half of the year. The CAAM estimates that carmakers' total sales this year will be around 28 million units, the same as last year.

In fact, the retail market has already seen a whiff of growth. Citing car registration data, Jefferies Hong Kong, an investment bank, said January and February car retail volume increased about 1 percent from the same period last year.

"We believe it will further strengthen market confidence in the natural recovery of the car market. Going forward, we expect low single digit growth in March to May, and higher growth in June with a low base," said Patrick Yuan, an analyst, in a research note.

Some competitive companies have remained robust despite the overall chill in the market.

Among the companies, China's largest SUV maker Great Wall Motor achieved around 10 percent growth year-on-year in the two months, and Geely saw 1 percent growth, according to Jefferies Hong Kong.