Speeding Up

China Economic Review, November 1, 2009

Car sales in China are on a roll. A total of 1.33 million units were cleared in September, making it seven months in a row that sales have topped 1.1 million. China is now comfortably the number one car market worldwide. Sales for the first nine months of the year reached 9.66 million vehicles, compared with 7.8 million in the US, the world number two.

Analysts say the sales are being driven by Beijing's subsidy plan that halved taxes on cars with engine displacements of 1.6 liters or less - these small cars made up 70% of September sales. The program is scheduled to end on December 31 and there has been no official news on whether it will be extended.

"As long as the government doesn't make a clear indication, I think lots of consumers are going to rush to buy small cars by the end of year," said John Zeng, senior market analyst for Asia automotive research at IHS Global Insight.

Even cars with displacements larger than 1.6 liters are seeing strong sales thanks to a rise in consumer confidence. However, success this year will have a downside - Zeng expects 2010 sales to be weak, with a growth rate of just 5%.

Nevertheless, Goldman Sachs has sufficient faith in the long-term strength of the market to invest US$250 million in local manufacturer Geely Automobile. Geely plans to use the money, which came via a Goldman-affiliated private equity fund, to expand its production facilities and to build up its brands.

Geely is also eyeing General Motors' Volvo unit. Klaus Paur, director of automotive research at TNS China, thinks a deal will happen once Geely has found the right fit for it in its portfolio.

Analysts are skeptical of another deal that was agreed to in October: Sichuan Tengzhong Heavy Industrial Machinery's US$150 million purchase of GM's Hummer brand. "It's not a surprise that they would see this as an opportunity, but Tengzhong as an organization is not experienced," said Bill Russo, managing director of Synergistics Limited, a consultancy. "It's going to be a very difficult task for them to step in and turn Hummer around."

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