Chinese Automotive Industry Has at Least 20 Years to Peak

After decades of growing car population, Chinese automotive industry saw its first decline in car sales in 2018, and the downturn trend likely continues this year. Does the market almost reach the ceiling?

In 2018, the number of licensed drivers in China reached about 369 million, increasing by 7.89% compared to 2017. However, the growth rate is actually the lowest over the past ten years. The number of cars in 2018 is around 240 million, rising by 10.51% on year-on-year basis. Higher growth rate of car holdings than that of licensed drivers in most years implies driving demand has been being constantly satisfied.

Japanese driving license holders account for 63% to 65% of the whole population between 2006 and 2017, whereas the ratio in China drastically surged to 26.44% in 2018 from 7.22% in 2006. The number of Chinese license holders is till 40% that of Japanese licenses. From a long-run perspective, with growing Chinese GDP, the ratio of China will trend to the Japanese level.

According to public data, each car in Japan matches 1.05 drivers and this number almost remains constant after 2006. In contrast, each car in China has 1.54 drivers, which means people’s driving demand is restrained compared with Japan.

Roughly speaking, the two ratios can help to estimate future total demand of cars in China that is between 600 million and 650 million vehicles.

According to Wealth Securities, combining with varied factors, future Chinese car holdings range from 520 million to 650 million. Assuming a 1.5% CAGR of car sales, it will take more than 20 years for the industry to reach its ceiling. China Association of Automobile Manufacturer estimated that the incremental demand of cars would fade away in 2044, and the demand would be driven by vehicle substitution.

Therefore, even though sales declined last year, and future growth rate of sales is expected to slow down, there is still much space (more than 20 years) for Chinese automotive industry to grow.