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April 2018

China Light Vehicle Sales Update

Will the Marriage Last?

China’s Passenger Vehicle (PV) sales in March 2018 grew by 4.8% year‐on‐year (YoY) to 2.22 mn units. The (LCV) sector fell by 3.3% YoY, leaving the overall Light Vehicle (LV) market up by 3.6% YoY, on total sales of 2.59 mn units in the month. Although LV production grew by 0.3% in March, the year-to-date (YTD) result remained in negative territory, due to the poor performances in the opening two months of the year.

The seasonally adjusted annualized rate (SAAR) of LV sales in March is estimated at 28.9 mn units, 4% up from a relatively weak February. The YTD average SAAR in March was 28.4 mn units, compared to last year’s total LV sales of 28.6 mn units. As these figures highlight, the market was far from strong in Q1 2018.

Following President Xi’s speech at the Boao Forum on 10 April on deepening reforms and opening up the economy, the National Development and Reform Commission (NDRC) released further details of its plans to open up China’s . The ministry announced the removal of foreign equity restrictions on special-purpose vehicles and New Energy Vehicles (NEVs) this year, on CVs in 2020 and on PVs in 2022. The rule that currently prohibits foreign automakers from setting up more than two joint ventures in China will also be relaxed. In fact, within the next five years, all restrictions on the industry will have been completely eliminated.

In the PV sector, the NEV segment will be the first to benefit from the elimination of equity restrictions, in accordance with the government’s strategy to promote this market segment. Global Electric Vehicle (EV) brand Tesla will be a direct beneficiary as it already has a plan in place to produce vehicles in China, but has struggled to make progress in its negotiations with the government on ownership structure. Traditional brands’ EV production plans will also be impacted, not least BMW, which has already signed a memorandum of understanding with Chinese giant Great Wall, with a view to jointly producing EVs under the BMW nameplate. The new policy could alter the proposed partnership to some extent as the German OEM may wish to increase its equity ratio, or even set up a wholly owned NEV plant itself.

Our view is that this newly announced policy – the full effects of which will be felt five years from now – will impact the traditional sector very differently to the NEV sector. Indeed, the competitive environment will be unlike anything we see today, as EVs will become the industry’s key development focus.

In today’s EV market, Chinese brands have the upper hand, compared with their global counterparts, such that the gap between local and foreign companies is not as pronounced as it is in the traditional powertrain sector. In other words, Chinese brands will be well prepared to head off the competition from global automakers once the restrictions on the industry are lifted. This is already evidenced by companies such as VW Group and Ford proactively seeking to collaborate with local entities to ensure that they acquire sufficient NEV credits by 2020.

Obtaining a production license from a local partner is another major hurdle facing foreign OEMs seeking to set up independent operations in China, as the government has stopped issuing any new licenses for the joint production of traditional ICE vehicles. Any new manufacturing capacity will only be permitted for NEV production in the future, meaning that if a global brand wishes to obtain a production license to set up a new plant in China, it can only do so if it undertakes to build EVs only.

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China Light Vehicle Sales Update

As for the existing joint ventures, once the equity cap is lifted in 2022, any global brands wishing to part ways with their Chinese partners will be forced to negotiate to secure a production license from their former partners – an achievement that appears to have eluded them so far. Note that most of these joint ventures renewed their contracts two or three years ago, such that they are now locked in for another 20 to 30 years. For instance, FAW-’s renewal in 2014 means that the contract will remain active until 2040. As any ‘divorce’ within the contract period will be nigh on impossible, renegotiating equity share appears to be a more viable solution.

Nor would it be wise for foreign OEMs to overlook the influence of their local partners. For mass brands like Volkswagen and Ford, their joint-venture associates are powerful, state-owned enterprises like SAIC, FAW and Changan. The only way the foreign entities have been able to secure resources and government support in China is through these local partners, so any divorce would effectively leave them vulnerable. With that said, the picture may be somewhat different for some Premium brands as they have traditionally collaborated with smaller local companies, such as (Jaguar Land ) and Brilliance (BMW), and the lucrative Premium market is a compelling incentive for these foreign automakers to seek full control of their joint-venture partnerships in China.

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China Light Vehicle Sales Update

Market Top Lines Best Selling Models

Mar Δ YTD Δ 2018f Δ Mar Δ Share YTD Δ Share Sales 2,756,117 4% 7,486,723 3% PV PV 2,223,082 5% 6,295,572 4% 25,794,257 2% Wuling Hongguang 52,715 0% 2.4% 149,921 -3% 2.4% LCV 361,996 -3% 796,319 -8% 3,230,671 0% 510 41,158 128% 1.9% 139,225 433% 2.2% M&H CV 171,039 16% 394,832 10% 42,773 -21% 1.9% 118,433 -19% 1.9% Production 2,636,642 1% 7,041,665 -2% LCV PV 2,169,488 1% 5,894,498 -1% 24,779,437 2% Wuling Mini 40,227 -2% 11.1% 84,180 12% 10.6% LCV 306,510 -6% 757,249 -8% 3,176,906 -1% Foton 35,616 8% 9.8% 65,573 0% 8.2% M&H CV 160,644 13% 389,918 11% Changan Light Truck 32,239 116% 8.9% 56,527 44% 7.1%

Top Brands (Sales) Top Manufacturers (Production) YTD YTD # Brand Mar Δ YTD Δ # Manufacturer Mar Δ YTD Δ Share Share 1 Volkswagen 280,255 7% 814,391 4% 12.9% 1 SAIC Volkswagen 166,595 2% 525,621 2% 8.9% 2 112,457 29% 367,604 32% 5.8% 2 SAIC GM 164,522 10% 495,041 14% 8.4% 3 Honda 105,737 -12% 325,812 8% 5.2% 3 SAIC GM Wuling 156,045 5% 452,455 7% 7.7% 4 111,055 -2% 318,016 4% 5.1% 4 FAW Volkswagen 163,867 -8% 422,923 -13% 7.2% 5 Changan 110,427 -10% 294,171 -14% 4.7% 5 Geely Group 130,684 33% 357,860 27% 6.1% 6 Buick 90,538 -2% 270,239 -2% 4.3% 6 Dongfeng 117,035 13% 291,868 11% 5.0% 7 Baojun 97,669 24% 269,638 19% 4.3% 7 Gro 93,276 -8% 257,125 -7% 4.4% 8 Nissan 102,483 15% 256,578 14% 4.1% 8 Great Wall Motor 76,461 37% 220,349 6% 3.7% 9 59,895 -18% 180,523 -19% 2.9% 9 SAIC Motor 66,966 20% 184,196 33% 3.1% 10 Mercedes-Benz 56,127 9% 173,609 12% 2.8% 10 72,563 10% 182,669 12% 3.1% 11 57,467 27% 172,409 30% 2.7% 11 GAC Honda 67,515 -2% 174,937 4% 3.0% 12 Dongfeng 55,976 -9% 166,709 -15% 2.6% 12 FAW Toyota 66,493 1% 169,139 0% 2.9% 13 Hyundai 67,139 20% 162,783 -17% 2.6% 13 63,200 -21% 153,200 -34% 2.6% Passenger Vehicle Passenger Vehicle 14 Chevrolet 56,346 52% 158,264 40% 2.5% 14 52,698 -31% 150,548 -27% 2.6% 15 Wuling 52,715 -2% 149,923 -4% 2.4% 15 GAC Motor 58,837 35% 142,284 25% 2.4% 16 54,184 27% 149,320 23% 2.4% 16 43,185 13% 116,830 20% 2.0% 17 BMW 46,595 -1% 145,431 9% 2.3% 17 Chery 44,800 -10% 114,822 -18% 1.9% 18 Ford 48,548 -44% 138,645 -34% 2.2% 18 BYD 42,905 10% 112,449 24% 1.9% 19 Beijing 45,206 -18% 128,934 -5% 2.0% 19 Brilliance BMW 41,259 6% 107,651 9% 1.8% 20 41,714 23% 125,161 37% 2.0% 20 GAC Toyota 42,285 3% 105,117 0% 1.8% Passenger Vehicle Total 2,223,082 5% 6,295,572 4% 86.0% Passenger Vehicle Total 2,169,488 1% 5,894,498 -1% 87.6% 1 Wuling 69,677 -28% 155,575 -14% 19.5% 1 SAIC GM Wuling 56,366 -4% 138,508 -17% 18.3% 2 Changan 54,389 39% 97,379 -18% 12.2% 2 Beiqi Foton 38,800 -8% 88,338 -13% 11.7% 3 Foton 42,393 -11% 81,832 -22% 10.3% 3 Changan Automobile Gro 34,873 6% 76,538 -9% 10.1% 4 JAC 21,624 1% 66,183 3% 8.3% 4 Jianghuai Automotive 19,599 -8% 62,465 -2% 8.2% 5 Dongfeng 28,493 5% 64,173 2% 8.1% 5 28,735 -1% 62,027 -1% 8.2% 6 JMC 22,806 11% 40,922 -7% 5.1% 6 Dongfeng Automobile 21,873 -17% 58,052 -5% 7.7% 7 Great Wall 13,430 25% 31,737 7% 4.0% 7 Great Wall Motor 13,399 22% 33,973 15% 4.5% 8 10,632 3% 28,918 -6% 3.6% 8 CNHTC 11,898 19% 28,795 26% 3.8% Commercial Vehicle Commercial Vehicle 9 CNHTC 11,432 13% 26,748 18% 3.4% 9 Brilliance Auto 10,021 4% 28,374 -5% 3.7% 10 9,505 234% 23,300 259% 2.9% 10 SAIC Commercial 9,006 261% 22,682 304% 3.0% Commercial Vehicle Total 361,996 -3% 796,319 -8% 14.0% Commercial Vehicle Total 306,510 -6% 757,249 -8% 12.4%

2nd May 2018

For further information contact Ms. Angela Chen, Phone +86 21 5283 3568, [email protected] w ww.lm c-auto.c om Oxford ● Detroit ● Frankfurt ● Bangkok ● Shanghai ● São Paulo ● Tokyo 3

LMC Automotive

LMC Automotive is a market leader in the provision of automotive intelligence and forecasts to an extensive client base of car and truck makers, component manufacturers and suppliers, financial, logistics and government institutions around the world and is highly respected for its extremely responsive customer support. It offers forecasting services covering global sales and production for light vehicles and heavy , as well as forecasts of engine and transmission supply and demand. In addition, LMC Automotive publishes special studies on subjects of topical interest to the automotive industry.

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