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Overcapacity sees China’s truck industry look overseas

Not a good move. Part of the problem with analysing the Chinese truck business is that the numbers are off the chart. It’s a case of one-two-many, against the Triad markets’ three-decimal-places-and-a-prayer. To put this into perspective, H1 2012 China HD sales came in at 371,605 units. That’s a 31.62% year-on-year reduction, but compares very favourably with the 112,762 HD units registered in Europe, and the net order rate (TKMINTOR) for NAFTA of 101,200 over the same period. China, in a market down 31%, still came in over 40% higher than the EU and NAFTA combined.

The long-term forecast that followed IAA showed low cloud just about everywhere; the advice to truck industry was to wrap up warm. Well-documented macro issues in the EU and NAFTA are now baked into the general pessimism, and so in our search for a sunnier outlook, we turn to China.

What does this say about the Chinese truck industry? At one level, it’s comparatively buoyant, but, beneath the surface, there are some clearly disquieting signs. China truck is bedevilled by overcapacity, matched by the inability of the product to last the course. Bluntly, in a price-driven market, capacity is necessary in order to replace the relatively youthful wrecks parked at the side of the road.

China truck is bedevilled by overcapacity, matched by the inability of the product to last the course

That’s the now. An interesting exercise is to consider the likely future replacement demand for Chinese trucks. We’ve already seen China’s HD market topping out in excess of one million units during the pump priming of 2010. This year, a market of 700,000 currently looks achievable.

So what happens next? Euro IV adoption in June 2013 is a clear challenge, not least as a result of issues with fuel infrastructure. This – quite reasonably – has been argued as good reason to assume the transition will not be smooth, making it difficult to see this as either a driver or a restraint.

But what is becoming clear is the cohort shift underway in vehicle type. The one-million-plus China truck market was predicated upon two things: money and breakdowns. Over the last few days, the Peoples Bank of China has been pouring cash (US$58bn) into the economy, albeit while maintaining a relatively stringent Reserve Ratio Requirement, suggesting that Beijing is addressing China’s slowing growth. Good news for the truck business, where the products are getting better. The adoption of a mid-point model between the high-end Actros-type CBU import and the more antediluvian local product alters things markedly. All of a sudden, longer-lasting trucks are prone to more sophisticated maintenance policies, meaning replacement demand will inevitably sink. To what number we know not, but 400,000 units is a figure currently doing the rounds.

By any measure, this degree of overcapacity is unsustainable, and the domestic market can only go in one direction: downwards

So what about the overcapacity? Simple analysis would argue that the peripheral domestic OEMs – over 30 claim to be in the business – would exit the market, mitigating the capacity excess. But industry data suggests almost all the overcapacity is vested with the big five OEMs, likely to still be in the game for years to come. This is a problem.

Clearly consolidation within the ranks of the Big Five is possible, but more likely is a renewed focus on overseas markets. With Iveco and Navistar clear targets for acquisition, along with a number of Tier One and tech-led Tier Twos, the scene looks set for a period of Chinese expansion overseas.

The world’s largest economy – the US – uses one third of the trucks that China does. By any measure, this degree of overcapacity is unsustainable, and the domestic market can only go in one direction: downwards. Which leads to the inevitable conclusion that the Chinese OEMs can go in only one direction too: outwards.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Oliver Dixon is Editor, World Truck Analysis

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