Growth Rate Slows for Non-Traditional ATVs in 2007

Editor’s note: Power Products Marketing, a Minneapolis research firm, has been tracking the non-traditional brand ATV market for over ten years. This market consists of distributors of ATVs manufactured in Taiwan, China and to a lesser extent South Korea who do not report sales figures to the MIC. It does not include the Youth models that MIC reporting traditional OEMs such as Arctic Cat, Polaris, Can-Am, Kawasaki and Suzuki are sourcing from Taiwanese manufacturers. This report was prepared by Matthew Camp, a powersports analyst with the firm.

In our non-traditional brand ATV article last year we shocked a few people in the industry with our analysis that U.S. retail sales of non-traditional ATVs had continued to grow sharply in 2006 to nearly 400,000 units. This year we may do so again, with our assessment that sales in this segment continued to grow through 2007 and reached a retail sales figure of around 465,000 units. While this represents a 17% increase over the previous year, it is nowhere near the exceptional growth rates the market experienced in 2005 and 2006.

Despite this 17% increase in the volumes of non-traditional brand ATVs it appears the overall U.S. ATV market, including both traditional and non-traditional brands, was down in 2007. The MIC-reporting manufacturers were only able to post sales figures of approximately 640,000. The total ATV market was around 1,105,000 units last year, down from the 1,150,000 units retailed in 2006.

There are now well over 100 distributors actively importing ATVs into the US, but the bulk of the sales volume continued to be driven by a handful of distributors, and the market remains very fragmented. The top ten distributors in 2007 were, in no particular order: Moto Dealer Import, AIM EX, Goldenvale (aka Roketa), SunL, Maxtrade, Baja Motorsports, BMX Powersports, Kazuma Pacific, Newstar, and Tank Sports.

Even with some distributors downsizing to the dealer level and others leaving the market or consolidating, new distributors saw an opportunity to get established. One of the most intriguing distributors on show at the recent Dealer Expo was Jetpower Motorsports who are going to bring Dinli-manufactured ATVs back to the U.S.

Of the established Taiwanese brands, only KYMCO appears to be holding their own. Market share in the Taiwanese-produced segment of the non-traditional ATV market has continued to fall steadily since 2000 but in the last couple of years that decline has increased dramatically. The decline is demonstrated by sales of Taiwanese-produced ATVs in 2003 representing 65% of the retail sales volume from the brands not reporting to the MIC. In 2007 distributors selling Taiwanese brands accounted for just over 2% of non-traditional ATV brand sales.

Part of the decline may be because some of the MIC-reporting brands have decided to import small displacement Taiwanese units of their own in order to attempt to compete with the non-traditional brands, but primarily it is a pricing issue. Recent reports are that many Taiwanese companies are now looking to Vietnam to produce their machines, because they can’t compete with the Chinese labor costs if they continue to manufacture in Taiwan but they won’t set up factories in China for ideological and political reasons.

Larger Displacements

The non-traditional ATV market continues to shift towards the higher displacements with the Y6 category of ATVs under 70cc now only representing 16% of sales compared to 26% the previous year. Sales of units with displacements between 70 and 90cc rose slightly but as a percentage of total non-traditional sales they were only 20%, down from 23% in 2006. Much of the growth in the import ATV market occurred in the 91cc to 150cc displacement range, otherwise known as Y14-16. Approximately 49% of Chinese and Taiwanese ATVs sold in 2007 were in this category, up from 38% the previous year. The non-traditional brands now represent just over 87% of all ATVs sold in the Y6-16 categories when their sales are combined with the traditional brands, up from 83% in 2006.

This pattern of moving up the displacement scale is also prevalent in the adult entry level segments. The non-traditional brands are beginning to make some headway, although not on the scale seen in the youth sector of the market. Currently about 10% of total ATV sales above 150cc now consist of non-traditional brands, compared to 6% in 2006 and 5% in 2005.

Interesting larger displacement units were on show at Indianapolis from CFMoto, Hsun, and Linhai while the new Xi 500cc from Tank looks to have some potential when it eventually reaches the marketplace. The KYMCO MXU 500 has been probably the most successful large displacement unit sold by any of the non-traditional brands to date.

Buying Trends

Consumer surveys we have undertaken recently continue to suggest that the majority of the buyers of non-traditional brand ATVs are price-driven and they are either purchasing as a new entrant into the ATV market or in order to own an additional machine. The Chinese are expanding the market to reach buyers who would not have been able to participate in prior years when they did not have a cheaper option to Japanese or U.S. machines.

The small displacement end of the market has now effectively been transformed so that ATVs are now seen more as a disposable commodity than a ‘unit-for-life’. One argument put forward to denigrate the Chinese impact on the market is that the purchasing of these ‘low quality’ units is going to irrevocably sour the new consumers’ impressions of the powersports industry completely when the inevitable failing of a Chinese-built unit occurs. While this may be happening in some instances, in many of our consumer surveys it appears that the buyers are on the whole satisfied with their purchase, even if it breaks down in a couple of months and they have difficulty finding replacement parts. Consumers are much savvier than many in the industry seem to give them credit for and they know when they’re buying a $400 unit instead of a $1,600 unit it is not going to be as durable.

We haven’t yet reached that point in time when the majority of young riders brought up on ‘Chinese’ ATVs, and more importantly their parents who make the purchase decision and payments, have to choose between a larger displacement Chinese machine and a traditional brand unit. It will be interesting to see whether consumers having to spend $4,000 on a ‘Chinese’ unit or $7,000 on a traditional brand will be willing to gamble that the cheaper unit will last as long, or be supported as well.

Summary

Looking around the Indianapolis Dealer Expo each year it becomes more and more apparent that the Chinese OEMs are generally improving their build quality and are certainly making a concerted effort to break out of the youth segment of the market. Many of the distributors and manufacturers bring their biggest units to the show but with over 85% of their sales in the under 151cc category it’s the smaller units tucked away at the back of the booth or left in the warehouse which are driving their market.

The impressive growth in the numbers of non-traditional ATVs being sold in the U.S. appears to have slowed somewhat in 2007, and this trend is likely to continue, particularly given the perceived state of the economy and the lack of consumer confidence. However, we expect that sales will continue to rise this year and they should cross the 500,000 units mark by year end. Conceivably, if the MIC manufacturers continue to experience the decline in ATV sales they had in 2007 the industry could be in a position by the end of 2008 where the non-traditional brands account for 50% of all ATV sales in the U.S. market.

There are some concerns on the horizon for the non-traditional brands though. How the distributors of these brands adapt to the rising labor, energy and raw material costs currently being experienced in China will prove very challenging in the coming year. Current inflation in China was running at 8.7% in February 2008 compared to just 2% from a year ago, but the Chinese government will have to respond carefully to prevent a slowdown just when the Olympics are scheduled.

The reduction of subsidies which the Chinese assemblers and manufacturers have long enjoyed to boost their profits could also signal increased price pressures for the non-traditional brand distributors. If they raise their prices to accommodate higher costs, will the consumer see the diminishing gap to the prices of traditional brands and stretch themselves to purchase the ‘name brand’? As we go into recession in the U.S. and disposable incomes diminish, will even spending $1,000 on an ATV seem too much? Will the enthusiast who can’t get financing for a new Japanese or American machine opt for a second-hand unit or buy a non-traditional ATV? It’s going to be a very fascinating ride in this sector of the market for the foreseeable future.