Whereas China will overtake the USA to become the world’s largest economy in purchasing power parity (PPP) terms this year, light vehicle sales in China already surpassed the USA in 2009. Admittedly, the recession means that light vehicle sales in the USA plummeted by 18% in 2008 and a further 21% drop in 2009 took the volume down to just 10.4 million units, whereas pre-crisis sales typically exceeded 16 million units. In contrast, however, light vehicle sales in China continued their ascent even throughout the global economic downturn and flew by the US with 12.6 million light vehicle sales in 2009. Moreover, sales climbed to 16.6 million units in 2010 and so China would have undoubtedly overtaken the USA even without the sales slump brought on by the global financial crisis. The key question then is why did China become the largest car market in the world years before it would become the largest economy and what does the future hold?
Light Vehicle Sales in China and the USA, 2005-2013
Source: Wards Auto
In GDP (PPP) per capita terms, China still ranks way below the USA; in fact in a ranking of 183 countries, China is in 75th place. Even in 2030, per capita GDP in PPP terms in China will remain at less than half that of the USA. Merely considering the economic performance of the two countries, especially in per capita terms, therefore provides little guidance as to vehicle demand although this does naturally highlight the significant differences in population size. In fact, even despite the one-child policy, the population of China is consistently four times larger than that of the USA. Considering population size does therefore not help to explain why light vehicle sales in China overtook the USA in 2009 either and, in contrast to economic performance, actually begs the question as to why it did not happen earlier. However, the key point is of course that a much lower proportion of the Chinese population can afford to buy a new car. In fact, Euromonitor International data reveal that just 7% of households own a car in China compared to 89% in the USA. Income levels are thus critical for car ownership and it is noteworthy that between 2005 and 2013, light vehicle sales in China essentially tracked the number of homes that exceed US$15,000 annual disposable income (ADI) in purchasing power parity (PPP) terms. On average over this period, light vehicle sales equated to 11% of the number of households with at least US$15,000 ADI.
China: Light Vehicle Sales and Households with Annual Disposable Income over US$15,000 (PPP)
Source: Wards Auto, Euromonitor International
Prior to the economic downturn, light vehicle sales in the USA also correlated closely with the number of households with annual disposable income over US$15,000 in PPP terms. Except in the recessionary period of the early 1990s and the boom years around the new millennium, demand equated to 15-17% of the number of ADI US$15,000+ homes. Despite a consistent recovery in demand since 2009, the light vehicle sales volume has still not recovered to be to at least 15% of the number of American households exceeding US$15,000 ADI. However, Euromonitor forecasts that light vehicle sales will rise to equate to 14.6% of the 103 million households with annual disposable income over US$15,000 in 2014 and thus come in at 16.4 million units, up 5% on 2013. Crucially, this will be the highest sales volume since 2006 and demand is therefore back to pre-crisis levels. Nevertheless, this pales into insignificance compared to China, where, underpinned by nearly 200 million households with over US$15,000 ADI, Euromonitor International forecasts 22.6 million light vehicle sales, up 9% on 2013. Moreover, although US light vehicle sales are forecast to climb, bolstered by immigration-led population expansion, rising incomes among China’s similarly expanding population means the growth in the number of potential car-buying households will significantly outpace the USA. Barring any major economic shocks or natural disasters, light vehicle sales in China are thus set to double the USA in the early 2020s and climb to over 50 million units in 2030 whereas demand will barely exceed 20 million units in the USA.
Light Vehicle Sales in China and the USA, 2014-2030
Source: Euromonitor International