WE have a cautious view on the China's auto sector for the next 12 months, due to declining utilization rates, moderate industry growth, and weakening prices. Our main concern is deterioration of capacity utilization, as we expect 16.4 percent year-on-year growth in passenger vehicle capacity but only 8.1 percent year-on-year growth in sales.
We believe capacity growth will result in margin pressure for original equipment manufacturers (OEMs), which will gradually spread from the joint ventures that are leading this round of capacity expansion to domestic brand companies (in 6-12 months), as joint ventures will probably launch more low-end models to compete with domestic brand companies in the coming years.
Our industry analysis suggests passenger vehicle capacity growth of 16.4 percent year on year in 2013, on top of an estimated 16.3 percent year-on-year growth in 2012, most of which was completed in the second half of 2012 and should be fully operational in 2013.
Specifically, joint ventures are leading this round of capacity expansion, and we expect capacity to rise 22.0 percent and 18.7 percent year on year in 2012 and 2013, respectively.
All major joint ventures, including General Motors, Volkswagen, Nissan and Hyundai, will have sizable capacity increases in the next 12-18 months. We expect capacity growth to outstrip demand growth, resulting in industry-wide deterioration of utilization rates, which will first and foremost be felt by the joint ventures.
Although we forecast the compound annual growth rate (CAGR) of demand to be more than 15 percent over the next five years (2013-17) due to arising consumer power, we expect infrastructure bottlenecks to limit sales to a 5 percent CAGR over the next three years. For 2013, we expect shipments of domestic-made passenger vehicles to grow 8.1 percent year on year.
We expect the compact and small car segment to continue to gain market share and slower growth for the large sedan segment, with both having a negative impact on joint ventures. The continued outperformance by the SUV segment might help the joint ventures, but competition is also heating up with numerous product launches.
We believe Japanese brands will continue to lose market share to other joint ventures due to the structural loss of their competitive edge. We believe domestic brand companies will continue to lose market share, but we expect their fortunes to diverge - with some of the smaller ones running into difficulties, while some larger ones survive or even strengthen their market positions.
Hou Yankun and Xu Ming are analysts with UBS AG. The article was an excerpt from a UBS research note dated November 29. The opinions expressed are their own.
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