Mainland Chinese Truck Market Remains Bearish with Supply Chain Shocks

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Mainland Chinese medium- and heavy-duty vehicles (MHDTs) have
entered a bear sector considering that mid-2021. While the market staged a
slight recovery subsequent the easing of electrical power shortages and
injection of policy stimulus from late very last 12 months, unforeseen
headwinds brought by the Russia-Ukraine crisis and domestic Omicron
outbreak plunged the market place back again into weakness in the 2nd
quarter of 2022. Amid pandemic-induced lockdowns in Jilin and
Shanghai, output of MHDT hit the cheapest looking at for April more than
a decade. In our May well forecast, we downgraded the mainland Chinese
MHDT generation for 2022 by 5% to 1.13 million units, a drop of
23% in comparison with 2021.

External geopolitical tensions push up producer expenditures

As raw materials stand for 20-30% of the charge of manufacturing for
heavy trucks, uncooked product expenses partially determine the
profitability of truck producers. Owing to the international economic
restoration from the COVID-19 scare, commodity costs have
been through an upcycle since late 2020. The rally obtained much more steam
in the very first quarter of 2022 with the outbreak of the
Russia-Ukraine war. Particularly, the cold-rolled metal selling price that
accounts for above 60% of the complete uncooked materials expenses for a major
truck surged by 3% in March 2022 from the degree of January,
expanding the development to more than 40% as compared to the similar
time period of 2020. Also, the diesel selling price lifted by 15% and passed the
RMB9,000 for every metric ton mark by way of January-March 2022. In
distinction, the movement of offering costs for significant vehicles have been
fairly flat less than slack demand from customers, as fuel price tag inflation elevated
the operating expenses even though oversupplied trucking constrained freight
amount expansion. As a final result, the truck producers’ obtaining and
offering price ranges logged substantial differentiation, even with an
boost in price tag of CN6-amount types. This sort of weak inflation
pass-through effect has manufactured truck makers to bear the brunt of the
gain margin squeeze specially just after dumping of CN5-degree vehicles.
With the Russia-Ukraine crisis expected to deepen into 2023,
small-expression truck production is for that reason cut by all around 25,000 units
in the May perhaps outlook.

Internal pandemic resurgences exacerbate offer chain
disruptions

The Omicron wave had triggered substantial lockdowns in Jilin
Province (March 11-April 28), Shenzhen City (March 14-20), and
Shanghai Town (March 28-May possibly 31) since March 2022, ensuing in
widespread company disruptions and logistics snarls. Even though
there are number of MHDT makers in the epicenters of the pandemic,
Changchun City and Shanghai City host around 40 significant offer bases
serving core parts to mainstream products covering previously mentioned 90% of
truck manufacturing. Starting off from mid-April, FAW Jiefang’s Changchun
plant and most suppliers managed to resume work in the closed-loop
method, but labor shortages less than the mobility management disabled
them to perform at normal capability. In the meantime, arduous
containment measures such as website traffic restrictions, nucleic acid
check and quarantine necessities, as perfectly as closure of toll
stations pent up highway freight desire and triggered wider repercussions
of part shortages, which in convert dampening truck creation.
Below the instances, the whole reduction of MHDT output in the
2nd quarter is estimated to achieve 100,000 models. With ramping up
efforts to sleek logistics and restore business, the perform
resumption charge of enterprises earlier mentioned designated sizing in Shanghai
Metropolis enhanced to 96% by mid-June and will fully get better from July.
Coupled with expansionary procedures and adequate ability
reserves, these could support MHDT generation to choose up and offset
the pandemic-induced loss in the next half.

A further more downgrade to outlook is underneath evaluation, as the
government’s reliance on the “dynamic zero-COVID” method and
capital outflows led by the Fed’s tightened cycle are probable to
weaken enterprise sentiment and subdue demand from customers restoration. On the other
hand, the rebuilding of dealer inventories of CN6-level MHDTs
climbed from 280,000 units in early this year to 380,000 models by
April, way larger than the common rates of 150,000-170,000 models.
Furthermore, there were extra than 70,000 units CN5-stage new
vans (bought as utilised vans) remaining in the market, exacerbating
de-stocking pressures.

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Posted 06 July 2022 by Cassie Liu, Automotive Analyst, IHS Markit&#13
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This posting was printed by S&P Worldwide Mobility and not by S&P World wide Rankings, which is a independently managed division of S&P Worldwide.

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