China offers hope for German cars after stimulus snub

The German government on Wednesday surprised most market pundits by announcing a massive €130 billion ($145 billion) stimulus package to boost consumer spending and private investments, topping even the most optimistic expectations by a margin.  

But the size of the package was just one of the surprises, the other being the absence of any incentives for the purchase of conventional petrol and diesel cars, for which the German auto industry, the largest industrial sector in Germany by revenue, had lobbied hard. Chancellor Angela Merkel's coalition instead decided to double incentives for electric vehicles — which account for only a fraction of total car sales — with a "view on the future." 

German carmakers, including Volkswagen, Mercedes Benz-maker Daimler and BMW, have been battered by the coronavirus, which has deepened the troubles of an industry already reeling from Dieselgate emissions scandal, waning global demand, higher tariffs caused by US-China trade tensions and a costly transition to electric and self-driving cars.   

New car sales in Europe, the biggest market for flagship German cars besides China, plummeted 76% in April, with sales in Germany, among the largest single car markets, crashing more than 61%.  

While official sales figures for May for the entire European Union are still awaited, new car registrations in Germany, France, Spain and Italy showed tentative signs of recovery. New car sales regained some lost ground last month as customers slowly trickled into reopened showrooms, but remain well below last year's levels. In Germany, new car registrations slumped by 49.5% on year in May, the Federal Motor Transport Authority (KBA) said on Thursday.  

Silver lining 

Things are looking much brighter in China, the world's biggest car market and one of the key growth engines for German carmakers in recent years.  

China's vehicle sales are estimated to have risen 11.7% on year in May, the first back-to-back monthly sales increase in about two years, Reuters reported, citing figures from the China Association of Automobile Manufacturers (CAAM). 

New car sales have almost reached last year levels, registering a sharp recovery from a sales collapse seen during the peak of the pandemic. Car retail sales dropped by just 5.5% in April, following a 40% fall in March and 79% crash in February.       

The rise in sales have been attributed to customers who are believed to have postponed their car purchases amid lockdowns and an increasing demand from first-time buyers looking to shield themselves from the coronavirus, a trend also seen during the SARS outbreak in 2003. 

A survey by Swiss investment bank UBS showed that 27% respondents said the virus had increased their desire to buy a car, compared with 17% in February. 

"April and May sales so far were ahead of our expectations. If this trend continues in the coming months, there may be some chance that even our forecast looks too conservative," UBS analyst Paul Gong told DW. Gong and his team currently expect passenger car sales in China to fall by 8% in 2020, optimistic than the consensus view of a drop of between 10-15%. 

German automakers, unlike Chinese and US makers, have been increasing their market share in China even as the auto industry in the Asian country witnessed falling sales in the past two years. China accounts for four out of every 10 Volkswagen cars sold worldwide and almost three out of every 10 BMW or Mercedes cars delivered globally. BMW's and Daimler's shares of earnings coming from China are even higher. 

"The recovery of the Chinese automotive market since April will help German carmakers offset sustained adverse conditions in their home European base," Emmanuel Bulle, senior director at Fitch Ratings, told DW, adding that he expects new vehicle sales in Europe to remain subdued for some time, falling by more than 20% in 2020. 

"China has once boosted the sector's growth, in 2009-2010 when developed markets were reeling in the wake of the financial crisis," he said. "The exact same pattern is unlikely as the Chinese automotive market cannot report high double-digit growth rates anymore, because of its sheer size. However, we do expect higher growth in China than in Europe in the coming quarters." 

Premium cars gain market share 

German carmakers are benefiting from a growing demand for premium cars in China, a sector they dominate along with their Japanese rivals. BMW, Mercedes and VW's Audi saw sales jump 18%, 14% and 38% respectively on year in April, as their customers – with higher savings and better employment – showed more resilience to the economic shock caused by the pandemic than the working class. 

Premium cars, which account for about 14 percent of China's passenger vehicle sales and about 30% in terms of sales value, continued to gain market share in May, as a rise in demand for used car hurts sales of new mass-market or lower-end cars. Used car sales have risen almost 20% over the past two years. 

Volkswagen said its market share rose by 1.5 percentage points in April, which saw its sales grow by +1% year-over-year. It said preliminary May deliveries were looking "promising," adding that sales of Audi, Porsche and core Volkswagen brand’s Jetta were "particularly impressive."  

"We are back at pre-pandemic levels, and still gaining market share," Leslie Bothge, a spokeswoman for Volkswagen, told DW.

UBS' Gong does not rule out the premium segment witnessing a growth in sales volume this year. 

"I wouldn't be surprised if the year-over-year growth is 5-10% higher than the overall market," Gong said.