The world’s biggest car market is about to get a lot bigger.
In 2010, China eclipsed the U.S. as the world’s largest car market when it sold 13.5 million cars.
Last year, despite a 3.2 percent decline in sales, 28 million vehicles were sold in China – compared with just 17.2 million in the U.S.
I wrote about China’s rare annual decline in vehicle sales last month.
We’re seeing a normal correction in the market after nearly 20 years of nonstop growth. But we’re also seeing an abnormal market in China, where the government has been intentionally trying to limit growth in vehicle sales.
For instance, big Chinese cities are implementing restrictions on new car purchases to limit burning of fossil-fuels and control pollution.
In cities like Beijing, Shanghai and Shenzhen, only so many new cars are given license plates each year. So the market for new cars is being artificially held back by government policy.
But there are four reasons why I believe China’s car market will continue to grow many times its current size…
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1. China’s “motorisation rate” lags developed nations.
You can see how developed a country’s car market is by looking at its car ownership or “motorisation” rate. It’s the number of vehicles per 1,000 people.
Of the 10 largest nations in the world, the U.S. has the highest motorisation rate at 849 cars per 1,000 people.
There’s almost one car for every man, woman and child in the U.S.
Japan, which is home to several of the world’s largest car manufacturers, has a motorisation rate of 591 cars per 1,000 people. Germany has a motorisation rate of 589 cars per 1,000 people.
Meanwhile, China has a motorisation rate of just 148 cars per 1,000 people.
But I expect that to change over the coming years.
You see, countries have car ownership rates that are proportional to their GDP per capita (that’s the nation’s GDP divided by the population). You can see this in the chart below.
In short, the higher a country’s GDP per capita, the higher the rate of car ownership is. The more money people make, the more likely they are to buy cars. It’s that simple.
The International Monetary Fund (IMF) predicts China’s economy will hit US$30 trillion by 2030, and surpass the U.S. as the world’s largest economy. That would give it a GDP per capita of about US$20,700.
Based on the chart above, that puts China’s car ownership rate to grow to around 300 to 350 cars per 1,000 people. That’s almost double the current ownership rate.
China’s expanding middle-class backs up this theory. As people have more disposal income, they’ll spend it on things like vacations, luxury goods and cars.
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2. A road building boom is taking place.
Without adequate roads and highways, China’s car market cannot fully develop the way it has in the U.S., Canada, Germany and Japan.
China is addressing this with a road-building boom that involves 1.3 million kilometres of new roads and 26,000 kilometres of new expressways by 2020. That’s on top of the 130,000 kilometres of expressways that have already been built (mostly in just the last 10 years).
More roads and highways mean more cities, towns and municipalities in China are easier to get to and faster to get around in (i.e. lighter traffic). That encourages consumers to buy cars.
3. The availability of financing.
Hardly anyone buys a new car with cash in the U.S. or any other developed country. The U.S. auto mortgage market alone is worth US$1.1 trillion.
But in China, despite selling nearly 10 million more vehicles a year than the U.S., a large portion of buyers still pay in cash. According to the Chinese Automotive Finance Industry Report, the country’s auto finance market was worth just US$171 billion in 2017.
But Beijing is encouraging banks to increase lending to consumers. It sees that the availability of financing is vital in the development of a strong and sustainable auto industry.
By 2020, that amount is expected to hit US$300 billion, according to estimates from the China Automobile Dealers Association. That’s 20 percent annual growth over the next three years.
4. Electric vehicles.
As we’ve written before, China is a pioneer in electric vehicles.
Thanks to the low cost of production and strong government support, 1.1 million electric vehicles were sold in China last year – nearly three times the 361,307 units sold in the U.S. It was an 82 percent increase year-on-year for China.
And Beijing has set a goal for electric vehicles to account for 20 percent of overall vehicle sales in China by 2025 (to about 7 million). That implies a compound annual growth rate (CAGR) of 30 percent over the next seven years.
So this segment will drive growth for the overall car market in China.
In short, while China’s car market has taken a breather, it’s far from done growing. If this market isn’t on your radar, it should be.
Editor, Stansberry Pacific Research