China’s Booming Auto and Housing Markets
As a follow up to our previous blog post, Is China on Track to Reach Growth Targets?, we take a deeper look into the continued growth experienced in China’s auto and housing markets.
The growth from almost no private cars twenty years ago to the largest market in the world has transformed China. Sitting in traffic in a large city is evidence that the change hasn’t all been for the best. The resulting severe pollution problems have been addressed with restrictions on licensing new vehicles and limiting the days each vehicle can be driven, determined by license number. Still, the skies are not clear and the car ownership rate nationwide is barely into double digits.
As a result, China has announced three planks of its plan to address transportation and the environment:
- New Energy Vehicles: China is a leader in plug-in electric adoption, despite the challenge that so many cars are parked on the streets or unplanned lots in front of office and residential buildings. One driver is government policy, which allows easier licensing for electrics in major cities. Those who despair of ever winning a vehicle license in the Beijing lottery can much more easily buy an electric. Another driver has been the image created by Tesla—thanks to their heavy marketing efforts, electric cars are seen as modern and sophisticated. Electric vehicles have become a focus for most auto OEMs. An interesting question for global parts suppliers is whether the consumer preference for global brands of cars will extend to the much simpler and more basic electrics.
- Autonomous Driving: Self-driving cars are a focus because they allow more vehicles to travel safely and smoothly on the same number of roads, reducing spacing by eliminating driver reaction time and driver-caused stops and starts that clog roads. If China grows from 128 vehicles per 1,000 people toward the US number of 797, there is simply not enough room to build enough roads to accommodate private vehicles. Allowing more vehicles to occupy the same space helps, but it is also unrealistic that China can accommodate 6 times as many cars as are on the road today.
- New Business Concepts: The “Uber Model” has already taken the country by storm. China intends to promote not only the ride-hailing model, but also ride and vehicle sharing. It is believed that new business models can reduce the need for vehicle ownership, while still providing high levels of convenience and reliability of transportation.
Volkswagen, a long-time leader in China’s automotive industry through its two joint ventures with SAIC and FAW, has announced its plans to become a leader in implementing these three goals. Instead of fighting against change that might reduce future demand, Volkswagen suggests a vision in which it is the best partner with customers in managing personal mobility. Sometimes that might be selling a vehicle, but if not, Volkswagen still wants to provide the solution.
The decades-ahead future might be one of fewer automobiles, but the near-term outlook is for continued growth in the demand for the industry’s products, as a higher and higher share of the population reaches an income level that supports car ownership. As new sales continue to grow, the automotive aftermarket is also beginning to offer important opportunities. When vehicle ownership was increasing at 40-60% per year, most of the fleet was so new that the aftermarket was uninteresting. Now, with ownership levels much higher and new car growth slower, the aftermarket should be a target for the global industry.
The other consumer market that continues to boom is housing. The government has made repeated efforts to cool off the market, at least in terms of home prices. However, none of the taxes and restrictions have done much to even slow the rate of price increases.
Instead, the government’s increases in credit—designed to stimulate the economy—have flooded into housing. Housing is one of the few widely-available sources of consumer credit. Credit cards are becoming more common in China, but the limits are low due to the immaturity of the credit-rating industry. Without being able to verify credit-worthiness, banks see mortgages as one of the few low-risk ways to get credit into the hands of the public. Evidence of the government’s stimulatory policies can be found on smartphones every day—in text offers from banks to rewrite mortgages or otherwise extend loans to their best borrowers.
With a boom in housing demand, the focus on new construction has continued and now expanded into cities farther from the coast and higher-income regions. For major cities, the demand for middle class housing has been met by construction on a periphery that is continually moving farther from the center city. However, Chinese officials are concerned that China is “becoming Japan” with home ownership so expensive as to be only a dream for even middle income residents of major cities.