China’s rapid, credit-fueled boom is losing its punch as new credit creation is becoming less efficient at driving growth – despite the Communist Party reporting a 6.9% growth rate for 2017 (which conveniently surpassed the party’s “targeted” growth rate of 6.5% even though Chinese economic data is widely believed to be fabricated). And even though the risk of its economy collapsing in a mountain of bad debt remains ever-present, because there’s no telling when it’s “Minsky moment” will arrive, many economists believe its GDP will surpass the US some time during the next ten years, making it the world’s largest economy.
One UK think tank projected last year that China would overtake the US by 2032. But Honda implied an even faster shift in its latest sales guidance, where Japanese automaker behemoth projected that China will surpass the US as its largest market during the next couple of years, according to Reuters.
Sales in Asia have been so strong that the company lifted its full year profit outlook by 4%, with China leading the boom.
Indeed, while US sales stagnated last year, contributing to a 3% contraction in global sales, sales in China jumped 15.5% to 1.44 million units. In fact, Asia was the only region where Honda saw year-on-year sales growth in 2017.
Honda, Toyota Motor Corp (7203.T), Nissan Motor Co (7201.T) and other Japanese automakers currently count the United States as their biggest market. But Honda has experienced explosive growth in China during the past three years, luring consumers with new offerings in the sport-utility vehicle (SUV) segment including its CR-V and Vezel models.
Last year, its China sales jumped 15.5 percent to 1.44 million units, even as overall vehicle market growth slowed to just 3 percent year-on-year, the weakest in at least two decades.
In contrast, sales in the United States, for decades Honda’s largest country market, were largely stagnant at 1.64 million vehicles last year, and significant growth is unlikely given that overall vehicle sales in the country are widely expected to retreat after peaking in 2016.
In the third quarter, Asia including China was the only region where Honda saw year-on-year growth in vehicle sales, while sales at home, North America, Europe and other regions fell. Honda expects Asia to overtake North America as its biggest source of annual vehicle sales for the first time this year.
Because it relies on joint-ventures with local Chinese companies (as practically every foreign automaker is forced to do) Honda is scrambling to raise capacity, but said there might be some short-term difficulties until it completes a new plant in 2019.
Honda has been ramping up production in China, and Executive Vice President Seiji Kuraishi said that a further, significant rise in capacity would be difficult until it completes a new plant in 2019 through a joint venture with China’s Dongfeng Motor Group.
“We’re struggling to increase production in China, so it would difficult to match our sales in the U.S. market at the moment,” Kuraishi told reporters at a briefing.
“But given the current state of the market, it’s likely that China will overtake the United States soon.”
In keeping with China’s push to eventually phase out fossil fuels in cars to help combat its worsening pollution problem, Honda plans to launch a compact all-battery electric car in China later this year, and Kuraishi said that the company would also focus on developing car-sharing and other new mobility services for the country.
Expectations for stronger sales growth in Asia prompted Japan’s third-biggest automaker to raise its full-year forecast for operating profit to 775 billion yen ($7.06 billion), while it sees the yen averaging 110 yen versus the U.S. dollar in the year through March, from 109 yen previously.
While the latest forecast is an upgrade from a previous forecast for 745 billion yen, it still represents a 7.8 percent slide from a year prior, as costs for quality-related issues including recalls, along with investment for research and development offset higher sales and cost reductions.
Profit was 284.5 billion yen in October-December, up 37 percent from a year earlier, and exceeding a mean 281.6 billion yen estimate from 11 analysts polled by Thomson Reuters I/B/E/S.
2018 started off with a disappointment for the auto industry with total sales at 17.07mm SAAR (missing expectations and down from 17.76mm in Dec).
Meanwhile, after briefly spiking late last year, new car sales in the US started off 2018 with a disappointment. Domestic auto sales dropped notably to 13.10mm in January – that is the biggest Dec-to-Jan drop since 2010.
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