Cars: Chery, EVs Continue To Sputter

 |  Includes: TSLA
by: Doug Young

A couple of headlines are spotlighting the ongoing woes of 2 groups in China's auto sector, with domestic brands and new energy vehicle makers both showing signs of difficulty. In the former category, reports that former domestic high-flyer Chery is closing one of its biggest Beijing dealerships spotlight the broader woes of domestic car brands that are losing share to better-run foreign rivals. In the latter category, another media report is showing that new energy vehicle sales were largely insignificant in the first 4 months of the year, even though they did notch major gains over 2013.

Neither of these trends is particularly new, though the latest headlines show that the patterns are likely to continue for a while longer. The gradual decline of domestic brands dates back for at least the last 2 years, and follows an earlier rapid rise for names like Chery, BYD [(OTCPK:BYDDY) (HKEx: 1211; Shenzhen: 002594)] and Geely [(OTCPK:GELYY) (HKEx: 175)] on strong demand for their lower-cost cars from China's emerging middle class. But failure to crate exciting new models, and a slowing auto market have hurt the domestic brands that are rapidly losing market share to the big international names.

Chery has been one of the worst performing of the domestic brands, and this week media reported the company recently shuttered a Beijing outlet that was once its best performing dealership in China. (English article) The dealership in the Yayuncun auto market posted several major milestones in Chery's early rise, becoming the company's first outlet to post 100 units in monthly sales and later the first to reach the 1,000 vehicle mark.

But Chery and other domestic brands have suffered in big cities like Beijing in the last 2 years, as local governments limit the number of new vehicle sales and also enforce stricter emission standards to tackle pollution and road congestion. An official from the Yayuncun auto market said citywide car sales in Beijing were down 9 percent in May, even though they rose 8.5 percent nationally for the month.

At the same time, he said, domestic brands now account for just about 7-8 percent of sales at Yayuncun, or about half their levels from previous years. The downward trend for domestic brands is likely to continue for at least the next year or two, and I suspect that Chery may be one name that ultimately disappears or is greatly reduced in size by the time the trend finally reverses.

Meantime, local media were trying to accentuate the positive when they reported that China's new energy vehicle sales rose 10-fold in the first 4 months of this year. (Chinese article) That figure caught my attention, but then I read further into the reports and saw that even after the huge jump just 10,000 new energy vehicles were sold in China in January through April, averaging a meager 2,500 per month.

Adding further gloom to the picture, the vast majority of vehicles were purchased by fleet operators of taxis and buses. Within the larger figure, half of all sales were for buses, while another 40 percent were for taxis. Only 1,000 vehicles sold in the first 4 months were for consumer-use plug-in electric models. That doesn't bode well for the mass consumer market, which will need to improve significantly for China to meet its ambitious goals for new energy vehicle sales.

The electric vehicle (EV) market has received some good news in the last few months, mostly from US hotshot Tesla (Nasdaq: TSLA), which has energized the sector with several sharp publicity campaigns and other new initiatives to popularize its technology. (previous post) But Tesla's cars are squarely aimed at the very high end of the market, and its initiatives are unlikely to boost the broader market where mainstream consumers are still highly skeptical of the technology. These latest figures show the industry isn't going anywhere quickly in China, and it could still be years before the market finally starts to take off.

Bottom line: A new retreat by Chery in Beijing and new energy vehicle sales figures for the first four months of 2014 show domestic brands and electric cars continue to struggle to find an audience.

Disclosure: None.