Car sales accelerating in China

Financial Times, October 22, 2010

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Beijing is at loggerheads with the rest of the world on issues from the Chinese currency to the Nobel peace prize but on one point all the world agrees: Chinese consumers should spend more.

When it comes to buying cars, China seems to be heeding that message. For the past 18 months – spurred in part by government stimulus measures including tax breaks – mainland auto sales have consistently outperformed expectations, making China the world’s largest carmaker in 2009, several years earlier than expected. But now that tax cuts are on the way out, is China’s car industry heading for a hard landing

The answer could have implications beyond the auto industry: Beijing has vowed to change the structure of the Chinese economy to boost the share of domestic consumption, and car sales are a barometer for that plan’s progress.

Last weekend’s meeting of Communist party leaders underlined that the main goal of policy is to boost the share of the economy that goes to household incomes, reducing the dependence on investment and exports.

Consumption increased as a percentage of gross domestic product last year for the first time in nearly a decade but it has been hard to tell how much of this shift was caused by stimulus measures. Analysts are looking to the car industry for signs of whether the consumption boost is sustainable.

At the Ming Qu Auto Trading company in the Shanghai suburbs on Thursday, just as news emerged that Chinese economic growth had slowed to 9.6 per cent in the third quarter, sales manager Ji Minxiang says government stimulus had only a temporary effect on sales – and often not the one it had intended.

He says Chinese consumers typically react perversely to tax cuts: they buy when taxes are rising and stop buying when taxes are falling – on the grounds that it is silly to buy until prices have hit rock bottom.

So sales of the Geely Panda mini-compact car from his showroom grew when taxes rose at the end of last year. He hopes rumours of another tax increase at the end of this year will spur another rally.

But either way, Mr Ji and auto industry analysts in China all agree: government stimulus measures in China are marginal: Mike Dunne of Dunne & Co, an Asian auto consultancy, says last year’s tax cuts were only a “minor event in the spectacular surge in demand that began in 2002”, driven by urbanisation, infrastructure development and low penetration of car ownership in China.

China’s car market has grown at a compound annual growth rate of more than 30 per cent for the past decade, says Bill Russo of Synergistics, a Beijing auto consultancy, and former head of Chrysler in China. Last year’s 40 per cent-plus growth was accelerated by stimulus measures, “but this is by no means the fundamental driver behind the growth over the past decade”, he says.

Ivo Naumann, head of Alix Partners Shanghai office, says car penetration in China is still very low, even compared with emerging markets such as Brazil and Russia.

China’s light vehicle penetration is only 30 per 1,000 people compared with 206 per 1,000 in Russia and 559 per 1,000 in Italy, he says. Further car industry growth will be driven by the fact that more and more households are passing the minimum income threshold to afford a car, with this number expected to double in the next five years from 35m to 70m households.

JD Power, the auto consultancy, says China car sales have surpassed expectations so far this year, in spite of the partial withdrawal of tax cuts at the end of last year, causing them to raise their forecast for 2010 to more than 18m units.

The government stimulus did have a role in overcoming a temporary attack of caution on the part of Chinese car buyers during the most uncertain months of the global economic crisis. “The December 2008 stimulus and tax breaks gave consumers a fresh dose of confidence to move ahead with planned purchases...But such incentives were sideshows to the big picture – sustained, explosive hunger for new cars,” says Mr Dunne.

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