2025 sand table deduction, evolution path of passenger car industry

1. Historical review: Similarities and differences between passenger car popularization paths in China and Japan and South Korea

Economic development is the core driving force for the growth of passenger car ownership

We reviewed the historical data of the long cycle of passenger vehicles in the United States, Japan, South Korea, China and other countries. From a long cycle point of view, the popularity of automobiles shows a very obvious positive correlation with economic development: By horizontal comparison of countries' economic development level and car popularity data, we can see that countries with higher per capita GDP (the more developed the economy) tend to have higher car ownership per thousand people. The specific car penetration rate, popularization path and ownership ceiling are subject to the comprehensive constraints of different factors such as infrastructure, energy structure, economic structure and consumer culture in different countries.

Review and Contrast: Similarities and differences between China and South Korea and Japan

China is currently in the "third decade" of automobile popularity. From the point of view of the popularity stage, the popularity of automobiles in a country has obvious stages: Taking the annual sales growth rate of automobiles as the basis for division, observing the history of automobile popularity in the United States, Japan and South Korea, we can see that Japan and South Korea have the characteristics of "three decades", that is, the industry growth rate of >25% of the rapid popularity period, the growth rate of 7-10% of the steady growth period, and the growth rate of 2-3% of the low growth period. For Japan, it was the 1960s, 1970s, and 1980s, and for South Korea, it was the 1980s, 1990s, and 2000s. The United States, with its leading automobile industry in the world, experienced a steady growth period of 5% CAGR for 40 years from 1933 to 1973. The four decades since 1973 have been stagflation. After entering a period of stable growth, the concentration of domestic auto self-supply ratio in Japan, South Korea and the United States has always been high and the pattern is stable. Among them, the two giants of Hyundai and Kia in South Korea have steadily occupied 40% and 35% of the domestic share, and the three giants of Toyota, Nissan and Honda in Japan have maintained a total share of about 60% in nearly 40 years.

Looking back at the popularization path of passenger cars in various countries, it can be found that China's growth and popularization path in the past 30 years is highly similar to that of South Korea: When China reached the same per capita GDP as South Korea in the historical period, it also reached a similar number of thousand cars. In terms of car ownership, the current Chinese market is more similar to South Korea in 1995 and Japan in 1971. In contrast, the popularity of passenger cars in Japan happened earlier, but the shape of the popularity curve is comparable. In 2020, the number of cars per thousand people in China is 195, basically reaching the world average, and the number of cars per thousand people is basically equivalent to that of South Korea in 1995/1996 (188 and 210/1,000) or Japan in 1971 (197/1,000). We believe that among all the comparable countries of China, South Korea is the most similar comparable country to China, followed by Japan.

After 1995, the South Korean passenger car market resumed: sales growth was mainly driven by exports, and the number of thousand people increased steadily. South Korea reached China's current level of 1,000 cars in 1995 and 1996, when domestic car sales reached 1.56 million and 1.64 million, respectively, but domestic car sales soon halved after the 1998 Asian financial crisis (during which time GDP per capita fluctuated wildly). Due to the lack of timely and effective consumer stimulus policies, passenger car sales in South Korea did not recover to 1.62 million units until 2002, seven years later. However, in the six years from 1995 to 2001, the number of cars per thousand people in South Korea remained very stable at 273 vehicles per thousand people. At the same time, South Korea's export sales grew rapidly after 1990, and the proportion of export sales increased from about 30% in the early 1990s to more than 60%, and the development of export markets effectively hedged the decline of domestic automobile sales.

The Japanese passenger car market recovered after 1971: the first oil crisis (1973) led to rapid sales growth until the first demand peak in 1990. In contrast, Japan had 197 cars per thousand people in 1971, which is basically equal to China's car penetration rate in 2020. That year, Japan sold 5.8 million cars, of which 4.02 million were sold domestically and 1.78 million were sold overseas. In the following five years, car sales in Japan also experienced fluctuating growth (Japan's domestic sales had reached 4.95 million in 1973, but fell back to 4.1 million in 1976), but the number of cars per thousand people also gradually increased to 273 vehicles per thousand people. There are many reasons for the fluctuations in sales, including fluctuations caused by economic growth and changes in the landscape of the automobile industry caused by the 1973 oil crisis. After the oil crisis, demand for Japanese-made cars, known for their fuel economy, exploded.

The characteristics of the "third decade" of Chinese automobile popularization: the era of personalized consumption has come

The first decade and the second decade of China's automobile industry: from industrialization to privatization, cars began to be popular, consumers paid attention to cost-effective cars, and cars with balanced functions were better sold. In the industrialization of China after the founding of the People's Republic of China, automobile productivity continued to improve, the first car was produced in the mainland in 1958, and SAIC Volkswagen became the first joint venture car company in 1985, but it was not until 2000 (13 cars for 1,000 people) that China's passenger cars entered the stage of rapid popularity. At the same time, with the increase of national income, cars began to be privatized and gradually entered thousands of households. Since 2010, China's auto market has entered the "second decade" of popularity, independent brands began to challenge the share of joint venture brands with cost-effective SUVs, achieving the rise of the first round of independent brands, and the growth rate of the total industry has also experienced a substantial downward revision, and the industry growth mainly relies on the traction of SUV models. In the privatization stage, cars are mainly reflected in family travel needs, and car purchase decisions are often collective decisions of family members, so the best-selling models at this stage are often cost-effective, performance and space are more balanced, mature and stable appearance, and more homogeneous products.

Over the past 10 years, with the rapid adoption of passenger cars in the Chinese market, we have observed an intuitively conflicting phenomenon: Unlike the United States, the average sales volume of a single model in China's passenger car market has declined slowly after 2010, and has now fallen to 37,400 units per year, while the threshold sales volume to enter the top ten has continued to increase. This phenomenon precisely sums up the investment logic in the "second decade" of the automotive industry from an investment point of view: only by creating explosive models can excess returns be obtained. However, considering the unique personalized trend of the Chinese market in the future of the "third decade", we believe that car companies need to take into account the ability to "explode" and "personalized" in order to obtain an incremental market in the future.

The third decade: the "personalized" consumption stage has become a general trend, "one car for one family" to "one car for one person". According to the data of the National Bureau of Statistics, in 2020, the number of civilian cars in China reached 200/1,000, according to the average of 4 people for a family, the number of 200 people should be about 0.8 vehicles per family. Therefore, the improvement of the future ownership lies in the increase of the proportion of the second car in urban families, and the popularization of the first car in fourth and fifth tier cities and rural families. The decision-making of automobile consumption is changing from family group decision-making to individual decision-making. The "family" attribute of cars still exists, but the satisfaction of "personal" needs is becoming more and more important, especially considering that the users of the first car in the family are often dominated by the male owner, and the proportion of women and generation Z young people in the structure of users of the second car in the family increases. Changes in the consumer population and the rapid development of the science and technology industry have given China's automobile industry more changes, and the attributes of automobiles as "personalized consumer goods" and "science and technology tide play" are significantly enhanced. The ability of independent brands to position consumers and define products is significantly stronger than that of joint venture brands, and it is expected to occupy the lead on the track of "personalized consumer goods" and "science and technology tide play" in the future.

Generation Z will become the main force of car consumption, and the consumption concept is changing. Generation Z refers to the generation born between 1995 and 2009, also known as the connected generation. Affected by the rapid emergence of scientific and technological products, this group of people has formed a set of exclusive consumption concepts. In China, most of Generation Z are the only child, with strong self-awareness and desire for expression, and more distinctive personality characteristics. At present, in the Chinese automobile consumer market, the contribution of Generation Z can not be underestimated. Roland Berger predicts that by 2020, the proportion of people born in the 1990s who buy cars may have reached 45%; Most of the new drivers are under the age of 25. As the pan-Z generation grows into the main force of automobile consumption, the consumption concept of the traditional generation of people focusing on brand, cost performance and practicality will be replaced by the consumption concept of focusing on personality, self-satisfaction, experience and service.

We believe that from the historical data of Japan and South Korea, when the car ownership of 1,000 people increased to 200, the growth rate of domestic car sales has been low to single-digit growth, and is greatly affected by the marginal impact of economic growth, policy, international situation and other aspects. But there is no denying that the growth of thousands of car ownership is still continuing to occur. At present, China has entered the third "decade" of the passenger car popularization process, which belongs to the stage of slow growth in demand, if according to the past data of Japan and South Korea, the number of thousand cars in the Chinese car market in 2025 will be more similar to Japan in 1976 and South Korea in 2002. However, due to different economic development conditions and great changes in car buyers and consumption motives, it is expected that the growth law of passenger car market sales in China in the next 5 or 10 years may not copy the law of South Korea and Japan, and we will discuss our arguments in detail below.

2 Total volume: The replacement cycle is about to start, and the growth of passenger cars is expected to exceed expectations

Discussion of time dimension: Passenger car scrapping is also cyclical

Since 2016, the proportion of first purchase in China's auto market has continued to decrease, and the proportion of replacement purchase and increase purchase has gradually increased. Replacement and family purchase will become the main driving force for automobile consumption, and we expect that the replacement demand brought by the scrapping of old cars will strongly support the replacement demand in the next five years. Since demand in China's passenger car market has been dominated by first-time car purchases and additional household purchases over the past 20 years, the impact of replacement purchases on total demand has not been accurately measured. As can be seen from the data of the Passenger Association and McKinsey, the proportion of demand for exchange and additional purchase has gradually increased to about 50% since 2016, and the demand for exchange and additional purchase is mainly concentrated in first and second-tier cities and wealthy people. In fact, the impact of the demand for replacement on the total amount is divided into two categories: (1) Due to the renewal of vehicles brought by scrap, old vehicles directly exit the circulation link, and replacement does not affect the increase of the number of vehicles; (2) The old cars after replacement continue to circulate and be used in the market in the form of two-handed vehicles, and the replacement directly increases the total number of passenger cars. Due to the current market of concentrated scrap passenger cars are mainly concentrated in 2005-2008, when passenger car sales are not high, so scrap volume has no great impact on the sales of the last vehicle end. However, in the next five years, it is expected that the demand for the replacement of old cars will bring strong support to the sales of the passenger car industry.

The replacement cycle brought about by the scrapping of stock cars has gradually approached. As the cars in China's peak sales years in 2009-2010 are about to usher in mass elimination, the passenger car market will usher in the renewal and replacement peak of stock cars in the next five years. According to the global probability distribution of passenger car scrapping, the peak of car scrapping is from the 13th to the 15th year, and about 50% of vehicles are scrapped in these three years. In 2020, the theoretical scrap volume of passenger cars in China is 4.09 million (registered scrap volume is only 2.07 million). By 2025/2026, we expect there will be about 11.7 million / 13.5 million scrapped vehicles, there will be a huge replacement demand.

2025 Sales Outlook: The passenger car industry selling more than 30 million units is not a dream, and the market may have systematically underestimated the growth potential of the passenger car industry. Looking back at Japan's performance in 1971-1977, and South Korea's performance in 1995-2002, we predict that China is expected to reach 265 and 278 cars per thousand people in 2025 and 2026, respectively, and the total industry ownership will rise to about 380 million. The replacement of ownership due to scrapping will become a new driving force that cannot be ignored in China's passenger car market. At the same time, the consumption upgrade brought by replacement will be another manifestation of the passenger car industry, and it is expected that the supply of high-quality production capacity in the industry is expected to further fill the broad demand space of the market. According to the calculation of ownership demand and scrap model, we estimate that the sales volume of China's passenger car industry is expected to exceed 30 million units in 2025, and the CAGR of the industry is expected to reach more than 7% in the next four years. At the same time, we estimate that China's new energy vehicle sales are expected to reach 9 million in 2025, with a market share of 30%.

Discussion on spatial dimension: Total space in high-line city or low-line city?

After the epidemic is alleviated in 2020, the year-on-year growth rate of sales in fourth-tier and below cities far exceeds the overall level of the country, which is the highest among all cities. This is mainly related to the fact that after the new coronavirus epidemic, the number of fourth-tier cities is lower, and the "independent travel just need" is stronger. Since then, sales in fourth-tier and below cities have continued to recover faster than first-tier and second-tier cities, becoming the main driving force for market recovery, which is in stark contrast to the sales decline in third-tier cities since 2018.

We have already explained in the previous paragraph that there is a significant positive correlation between the growth of economic aggregate and the number of passenger vehicles. However, from a micro point of view, urban road planning, congestion problems, and purchase restriction policies are already bottlenecks in the growth of the number of first-tier cities. Through the comparison of 1,000 people's car ownership in China's first-tier and new first-tier cities, it can be seen that in fact, the number of economically developed first-tier cities "North, Shanghai, Guangzhou and Shenzhen" (based on the permanent population) is not outstanding, and the corresponding relationship between 1,000 people's car ownership and the degree of economic development is not obvious after the number of people reaches more than 200. On the contrary, high population density and congested traffic conditions may become a bottleneck restricting the growth of the number of first - and second-tier cities. For example, among the top 10 cities in China, only Suzhou, Dongguan, Zhengzhou and Changsha are first - and second-tier cities, and many other cities with high car ownership are not economically developed cities in the traditional sense.