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May 2018

China Light Vehicle Sales Update

Impact of Import Duty Cut on Chinese Vehicle Market

China’s Passenger Vehicle (PV) sales in April 2018 rose by 11.6% year‐on‐year (YoY) to 1.96 mn units. The Light Commercial Vehicle (LCV) sector grew by 2.5% YoY, pushing the overall Light Vehicle (LV) market up by 10.4% YoY, on total sales of 2.25 mn units in the month. While LV production increased by 12% in April, in year-to-date (YTD) terms, output grew by just 1.1% as the poor Q1 performance impacted the overall result.

The seasonally adjusted annualized rate (SAAR) of LV sales in April was 30.7 mn units, 6% up on March. Wholesales surged in April, but resulted from dealerships restocking their inventories, after a sluggish Q1.

The Chinese government announced on 22 May that the customs duty for CBUs will be reduced from 25% or 20% to 15% from 1 July this year, and that the duty for auto parts will be cut simultaneously to 6%.

This adjustment means that Passenger Vehicles (PVs) will be taxed at 15% from July, instead of the current 25%, leaving the industry wondering how the overall PV market be impacted. The key question is whether the tax cut will stimulate demand for imported vehicles, to the detriment of locally produced models.

If we turn our attention to the insurance data, it becomes obvious that imports are essentially a niche market in China. Around 1.13 mn imported vehicles were registered in 2017, accounting for just 4.7% of the overall PV market. If we compare this to the 23 mn domestic models registered last year, it is difficult to envisage any substantial impact from the import sector on the domestic vehicle market.

How will the new duty cut affect the retail price of imported ? To answer this question, we must consider the cost build-up of an imported model. Imports are subject to customs duty, VAT and consumption tax. Customs duty and VAT rates are fixed, with the latter set at 16%. Consumption tax rates are variable, however, and depend on engine size: the bigger the displacement, the higher the consumption tax. Note that last year, almost 50% of all imported vehicles had engines displacements of more than 2.0 liters.

As highlighted in the following table, the price gap, inclusive of duties and taxes, under the two schemes is around 8%, which is unlikely to impact the current price structure in the PV market to any great extent. It is worth pointing out, however, that battery electric vehicle makers like Tesla will benefit more from the duty cut as there is no consumption tax on electric models.

Comparison of Imported Costs Inclusive of Duties and Taxes:

Note: The consumption tax rates for 1.0-1.5L and below 1.0L are 3% and 1%, respectively.

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China Light Vehicle Sales Update

Another key factor to take into account is the parallel-import scheme. This has been in place in China for two years now and means that the retail price of parallel-import models is already 15% to 30% lower than the MSRP. Parallel-import car sales rose by nearly 30% to 172k units last year, accounting for more than 14% of the total import market. An 8% price adjustment on the MSRP will therefore have a fairly limited bearing on the market, given the competitive strength of parallel imports.

Most Premium brands have already localized a significant proportion of their main products in China, with more models set to follow suit. Not only do locally built vehicles have a significant price advantage compared to their imported counterparts, but localization can offset the risk of trade friction between countries. In previous years, this growth in localized production made a sizable volume impact on the import market.

All things considered, our view is that the customs duty cut will stimulate the import market, particularly for those brands that rely entirely on imports such as . It will not, however, alter the structure of China’s overall Passenger Car market as its impact on retail prices will be nominal.

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China Light Vehicle Sales Update

Market Top Lines Best Selling Models

Apr Δ YTD Δ 2018f Δ Apr Δ Share YTD Δ Share Sales 2,404,154 11% 9,890,277 5% PV PV 1,960,139 12% 8,255,101 6% 25,817,621 2% Wuling Hongguang 31,805 -12% 1.6% 181,726 -4% 2.2% LCV 292,345 2% 1,088,664 -5% 3,230,891 0% 510 33,007 50% 1.7% 172,232 258% 2.1% M&H CV 151,670 14% 546,512 11% Lavida 34,556 -5% 1.8% 152,989 -16% 1.9% Production 2,403,922 12% 9,446,176 2%  LCV PV 1,965,611 13% 7,860,470 2% 24,820,922 2% Wuling Mini Truck 25,558 4% 8.7% 109,738 10% 10.1% LCV 288,318 5% 1,045,567 -5% 3,174,525 -1% Foton Light Truck 28,976 13% 9.9% 94,549 4% 8.7% M&H CV 149,993 13% 540,139 12% Changan Light Truck 16,930 110% 5.8% 73,457 56% 6.7%

Top Brands (Sales) Top Manufacturers (Production) YTD YTD # Brand Apr Δ YTD Δ # Manufacturer Apr Δ YTD Δ Share Share 1 Volkswagen 239,096 9% 1,051,840 5% 12.7% 1 SAIC Volkswagen 176,672 31% 702,293 8% 8.9% 2 119,738 38% 487,342 33% 5.9% 2 SAIC GM 164,903 13% 659,944 14% 8.4% 3 Honda 107,633 -12% 433,446 2% 5.3% 3 FAW Volkswagen 174,828 22% 597,751 -5% 7.6% 4 Toyota 95,832 5% 415,172 4% 5.0% 4 SAIC GM Wuling 114,913 6% 567,368 7% 7.2% 5 Changan 69,633 56% 363,804 -6% 4.4% 5 Geely Group 136,080 51% 493,942 33% 6.3% 6 92,713 1% 362,989 -1% 4.4% 6 Dongfeng 107,514 2% 399,382 8% 5.1% 7 Nissan 95,470 16% 352,537 15% 4.3% 7 Group 71,397 7% 328,522 -5% 4.2% 8 Baojun 70,685 21% 340,323 20% 4.1% 8 Great Wall Motor 70,175 -1% 290,524 5% 3.7% 9 55,055 -11% 235,578 -17% 2.9% 9 SAIC Motor 72,760 41% 256,956 35% 3.3% 10 Hyundai 70,163 100% 232,822 1% 2.8% 10 54,153 -8% 236,822 7% 3.0% 11 Mercedes-Benz 54,228 14% 230,737 14% 2.8% 11 GAC Honda 59,249 10% 234,186 5% 3.0% 12 49,743 9% 222,302 25% 2.7% 12 Hyundai 69,000 90% 222,200 -17% 2.8%

13 60,470 54% 218,753 44% 2.6% 13 FAW Toyota 46,081 -10% 215,220 -3% 2.7%

Passenger Passenger Vehicle Passenger Vehicle 14 Dongfeng 35,304 -8% 202,013 -14% 2.4% 14 46,409 -31% 196,957 -28% 2.5% 15 BMW 46,293 -4% 193,065 6% 2.3% 15 GAC Motor 51,683 20% 193,967 23% 2.5% 16 43,481 4% 192,801 18% 2.3% 16 38,619 24% 155,449 21% 2.0% 17 Wuling 31,805 -17% 181,728 -6% 2.2% 17 39,369 -8% 154,191 -16% 2.0% 18 Ford 40,340 -21% 178,400 -32% 2.2% 18 GAC Toyota 43,324 23% 148,441 6% 1.9% 19 Beijing 39,605 -13% 168,539 -7% 2.0% 19 BYD 35,877 19% 148,326 22% 1.9%  20 39,397 42% 164,558 38% 2.0% 20 Brilliance BMW 35,186 16% 142,837 11% 1.8% Passenger Vehicle Total 1,960,139 12% 8,255,101 6% 87.0% Passenger Vehicle Total 1,965,611 13% 7,860,470 2% 87.2% 1 Wuling 50,203 -21% 205,778 -16% 18.9% 1 SAIC GM Wuling 53,206 4% 191,714 -12% 18.3% 2 Changan 29,755 28% 127,134 -10% 11.7% 2 Beiqi Foton 29,508 -21% 117,846 -15% 11.3% 3 Foton 34,566 -7% 116,398 -18% 10.7% 3 Changan Automobile Group 30,639 16% 107,177 -3% 10.3% 4 Dongfeng 27,060 18% 91,233 7% 8.4% 4 25,766 7% 87,793 1% 8.4% 5 JAC 20,265 2% 86,448 2% 7.9% 5 Jianghuai Automotive 18,648 37% 81,113 4% 7.8% 6 JMC 16,013 9% 56,935 -3% 5.2% 6 Dongfeng Automobile 20,261 -3% 78,313 -5% 7.5% 7 Great Wall 12,962 32% 44,699 13% 4.1% 7 Great Wall Motor 13,239 20% 47,212 16% 4.5%

8 11,749 5% 40,667 -3% 3.7% 8 Brilliance Auto 11,807 9% 40,181 -1% 3.8% Commercial Commercial Vehicle Commercial Commercial Vehicle 9 CNHTC 9,699 23% 36,447 19% 3.3% 9 CNHTC 9,761 17% 38,556 24% 3.7% 10 8,337 191% 31,637 238% 2.9% 10 SAIC Commercial 8,862 147% 31,544 243% 3.0% Commercial Vehicle Total 292,345 2% 1,088,664 -5% 13.0% Commercial Vehicle Total 288,318 5% 1,045,567 -5% 12.8%

31st 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 trucks, 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 .

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