China Car Sales Stay in the Fast Lane

Financial Times, January 5, 2011

By Patti Waldmeir in Shanghai

China’s automotive market, the largest in the world, is expected to grow strongly this year in spite of Beijing’s decision to phase out some tax incentives and restrict new car sales in the capital, analysts forecast.

General Motors, the largest foreign maker of cars and light commercial vehicles in China, on Tuesday announced sales up nearly 29 per cent year on year in 2010, to 2.35m vehicles – partly as a result of tax incentives that ended on December 31, when a partial purchase tax holiday for small cars was phased out by the government.

Beijing has gradually eroded tax incentives for small vehicles introduced in 2008 to help the Chinese market recover from a temporary hiatus as a result of the global financial crisis.

Purchase taxes on vehicles with engines of 1.6 litres or below were cut from 10 to 5 per cent in 2009, then raised to 7.5 per cent last year and back to 10 per cent for 2011. Some subsidies for rural car buyers were also phased out and Beijing announced sharp limits on the number of new licence plates to be issued in 2011.

But most car market analysts expect continuing sales growth in low double digits this year, in spite of these measures. Kevin Wale, head of GM China, has said he expects 2011 Chinese motor sales to rise another 10 to 15 per cent year on year.

Other Chinese vehicle makers have yet to report annual sales for 2010 but motor analysts expect total sales of about 17.5m to 18m vehicles – up about 30 per cent over 2009. Most car market analysts in China expect sales in the 20m range for 2011.

“The incentives were gasoline on the fire of Chinese market growth, and that fire will continue to burn, fuelled by urban wealth accumulation,” said Bill Russo, of Synergistics, a Beijing motor consultancy, and former head of Chrysler in China. “The rate of growth may slow down to a more sustainable level but it will still be enviably strong compared with the mature markets.”

Tang Nan, a Shanghai-based motor analyst with Tianxiang Investment Consulting, said the phasing out of tax incentives may hit carmakers’ profits but not sales – because carmakers may cut prices to compensate for higher taxes. “Sales will still be strong, because China is entering a period when most families need to purchase cars as they purchased bikes in the past,” she said.

Restrictions on Beijing car sales will also have limited impact, most analysts said, noting that Beijing accounts for only 5 per cent of mainland car sales, which are growing most strongly in areas outside first-tier cities.

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