by Bill Russo and Jeffrey Zhao
In 2009, China easily surpassed the US in total car sales to become the world’s largest automotive market. China’s vehicle sales total of 13.6 million units was more than 3 million units ahead of the second largest market, the United States. The dramatic rise of China’s automotive industry, in terms of both consumer demand and production supply, is truly unprecedented in the history of the industrialized world. No country has risen from a nearly standing start to the size and scale that China has achieved in just a few decades.
The astonishing growth in car demand is a direct result of many factors that are fueling China’s economy. This includes aggressive tax cuts as well as a significant investment made in the development of the infrastructure to support transportation. The China government views the automotive industry as a “pillar” of its economy since it brings technology, jobs and investment to the economy. As such, several agencies of the China government play an active role in sponsoring initiatives to further stimulate automotive development and growth.
Driven by the onset of the global financial crisis, the Automotive Industry Stimulus Plan published in early 2009 took specific measures designed to spark the growth of consumer demand. Measures included the reduction of sales tax for cars below 1.6L engine displacement, along with subsidies for new minibus or light truck sales for rural residents. These actions have accelerated the auto market expansion that was already in progress prior to 2009. The impact was particularly evident in China’s lower-tier cities, where the large number of first-time buyers helped to boost the performance of the manufacturers of these smaller vehicles.
While aggressive tax cuts and subsidies have been behind much of the demand growth in 2009, the question now turns to whether this robust demand growth can be sustained in 2010. While very few expect a repeat of the 46% growth experienced this year, most auto executives believe that the fundamentals are in place to push sales up at least 10 percent, even without the incentives.
However, unlike the “cash for clunkers” programs in Europe and the United States, which merely provided a temporary boost to sales, the China government has no intention of completely eliminating the incentives. On December 9, 2009, Chinese Premier Wen Jiabao chaired a State Council executive meeting and approved a number of policy measures including extension of automotive preferential tax and subsidy in 2010. There were four relevant decisions as follows:
- The “Vehicles to the countryside” project will be extended to the end of 2010; Subsidy of motorcycles sales to the countryside will be extended to January 31, 2013.
- The number of cities for demonstration of energy-saving and new energy vehicles was expanded from 13 to 20. Five cities would be chosen to execute the personal subsidy to private buyers of energy-saving and new energy vehicles for demonstration purpose.
- Purchase Tax relief for 1.6-liter and below passenger vehicles will be extended until the end of 2010, however, the degree of relief was reduced, as the tax rate will rise from 5% in 2009 to 7.5% in 2010.
- Vehicle Trade-in and recycling subsidy standard would be enhanced from 3,000-6,000RMB to 5000-18000 RMB. While a breakdown of new subsidy by vehicle type is so far not clear, the subsidy for passenger car is reported to be 18,000RMB - three times than initial 6,000RMB.
Impact Analysis
At first glance, many industry watchers expressed concern that cutting by half (from 5% in 2009 to 2.5% in 2010) the purchase tax benefit for 1.6-liter and below passenger vehicles would significantly impact sales in 2010. Another potential concern is that some personal-use vehicle buyers may have pulled ahead their purchase plan from 2010 to 2009 to realize the 5% tax savings. In addition, starting from January 2010 the China government began to issue a series of credit tightening measures, which may have an impact on the booming auto, housing and stock markets. China’s car market boom has certainly coincided with the increasing housing and stock valuations, due to the general wealth effect.
In 2009, sales of 1.6L and below cars accounted for almost 70% of total passenger vehicle sales, which was more than 7% higher than that in 2008. Indeed, maintaining such robust growth will be challenging once the new tax rates are in place.
However, there are still several fundamental growth drivers in 2010, which might help offset the negative impact of the reduction of purchase tax relief. Among those, urbanization is a primary driving force and expected to speed up in the coming years. Over the past six decades, the urbanization rate in China rose from 7.3% to 45.68% of the total population. Meanwhile, the urbanization trend is spreading from east coast to mid and west region, thus substantially expanding the coverage of “lower tier” (Tier 3 and below) cities.
Some other driving factors will also take effect. To be specific:
- Compact and medium-sized vehicle demand will continue their growth momentum from 2009, driven by higher economic growth expectations in 2010 and income levels. Additionally, both private and business demand for mid and large-sized cars will also increase.
- The increase in trade-in vehicle subsidy will create a powerful incentive for current car owners in urban areas to trade in their old vehicles and buy a new car.
- An extension of the “van and pickup to countryside” program to the end of 2010 will continue to drive rural residents to trade in their old vehicles. The first 10 months of 2008 saw year-over-year growth of light truck and micro truck by 44% and 22% respectively, due to subsidy stimulus. The coming year is expected to have another double-digit growth for those segments.
- The increase of the number of cities targeted for new energy vehicle demonstration will help generate demand for hybrid and EV product offerings. Implementation of a personal subsidy in 5 cities will be helpful to shape positive consumer perception.
It should be noted that even with a lower tax savings it is likely that demand in 2010 will downshift from an “exponential” to a “stable” path.
In 2009, China seized an opportunity from the global financial crisis, and used a targeted stimulus plan to spark demand, especially for first-time buyers. The speed and effectiveness of the stimulus plan were indeed impressive. It was an uncomplicated value proposition which Chinese consumers quickly acted upon.
The new plan continues to offer benefits to first-time customers entering the market, while simultaneously providing a strong incentive for people to trade in their older vehicles for newer vehicles with better fuel economy and lower emissions. Under such incentives, it is anticipated that demand structure will continue to move downward to smaller size vehicles including small cars, micro vans, and light trucks. Domestic brands such as Chery, Geely and Chang’ An will further benefit from such demand migration.
While the initial 2010 plan is a bit more complex and some parts are yet to be fully defined, it is clear that China does not intend to relinquish its position as the largest car market in the world in the near future. Moreover, we shall not overlook that plans for vehicle export in 2009 were sharply impacted by the financial crisis. With the global economic recovery, we can expect China to pick up their export growth in broad overseas markets seeking lower priced cars.
Bill Russo, is a Senior Advisor with Booz & Company as well as the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.
Jeffrey Zhao, is an Advisor with Synergistics Limited. He lives in Fairfax, Virginia and has more than 10 years of experience in the automotive industry, most recently serving as Senior Manager for New Business Development for Chrysler's business in North East Asia.
Click here to view the article published in GLG News
Click here to view the article published in gasgoo.com's China Automotive News
Click here to view the article published in GlobalAutoIndustry.com CHINAtalk
No comments:
Post a Comment