TREND #8: China’s Rapidly Changing Demographics and Growing Demand in Lower Tier Cities

December 3, 2009

by Bill Russo

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 such a compressed time frame. It was, after all, just 17 years ago when Deng Xiaoping made his now-famous visit to Shenzhen where he announced the creation of Special Economic Zones and thereby sparked China’s wave of economic momentum. The logical question to ask is whether this momentum is sustainable, particularly as it relates to the most iconic of consumer goods: the automobile.

The last of the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry addresses the underlying socio-demographic forces that are driving the recent economic developments in China: and why there is every reason to believe that, barring unforeseen geo-political instability, China has a very bright automotive future.

China’s Multi-Tiered Cities

Since the early 1990s, China’s economic development has been centered the metropolitan areas of China’s coastal regions and surrounding areas. Shanghai, Beijing, Guangzhou and Shenzhen are typically identified as “Tier 1” cities with the highest income, largest population base and largest GDP.

This is followed by a group of 21 “Tier 2” cities. Chongqing is the largest municipality with a total population of 32 million residents, however only 6 million are considered urban. Other Tier 2 cities include Dongguan, Nanjing, Wuhan, Hangzhou, Shenyang, and Harbin. Smaller cities such as Zongshan, Xiamen, Changzhou and Zhuhai are also included because of their higher per capita GDP.

Over the last decade, a set of third-tier “emerging middle class” cities have also emerged, including cities like Dalian, Qingdao, Shantou, Kunming, Zibo, Huizhou, Shijiazhuang.

A fourth-tier “next wave” group of cities is also beginning to emerge as economic development begins in earnest in yet another group of mostly interior Chinese cities. And finally “rural” and “remote” population groups complete the classification of the Chinese population of over 1.3 billion people.

In fact, the emergence of this multi-tiered structure is a result of the economic development path that was initiated by Deng Xiaoping. Prior to this, over its history of nearly 5000 years, China had been a rural and agricultural economy. In the space of just few decades, a significant percentage of the population of our planet has migrated to the cities of “new China”, and in the process these people are moving from poverty to prosperity.

Urbanization Trends

At the start of the reform era, 82% of China’s population was considered rural. By 1990, this percentage had declined to 74%. By 2000, the percentage was 64%. In 2008 this had further declined to 55%, or approximately 720 million people. Clearly, these shifts represent a migration of population towards the areas of economic development and concentration of wealth. The creation of new wealth has had a profound impact on the development of the cities across all of the previously described “tiers”. This has also impacted the development of rural areas as urban wealth has a positive impact on extended family members who remain in the rural population.

While China possesses a migrant workforce of over 200 million people, there is no mistaking the trend of permanent migration of rural population to existing urban areas. Looking forward, it is expected that nearly two-thirds of China’s population will be in urban areas by 2020. This represents a whopping rise in urban population of nearly 200 million people in just over 10 years. Essentially, China creates the population-equivalent of a city of between 1.5 – 2 million people each month! It is no wonder why China’s cities are continually under construction.

Income Growth

A growing middle-class is emerging in these urban areas. If we define “middle class” as people with annual income greater than 150,000 RMB ($22,000 US), this number has increased from 1.5 million to 4.8 million individuals from 2000 through 2008. This number is expected to increase to over 40.3 million individuals by 2020.

The China government estimates that there are over 45 million families that have reached the threshold of 30,000 RMB ($4,400 US) of expendable money, which is considered a threshold for entry into the car buying population. Urban wealth accumulation is undoubtedly fueling the growth in automotive sales. The fact that 85% of all vehicles are sold to urban residents is a clear sign of the relationship.

Ageing and Increasingly Affluent Population

The growth of a more affluent urban middle class, combined with a generation that has lived under a one-child policy is creating yet another consequence: wealth accumulation for an increasing number of middle and older age groups. By 2020, it is estimated that China’s population will grow by approximately 110 million, yet the number of individuals over 45 will increase by 118 million. It is also expected that the population of individuals between 25 – 44 will shrink by 22 million. This has significant implications for product preference, as middle-aged and older consumers tend to seek more luxurious products.

Automotive Implications

The statistics on urbanization, income growth and population demographics point to very favorable conditions for the continued robust growth of the automotive market. However, many people question whether China has sufficient infrastructure to handle the increased volume of cars and whether resource constraints (people, energy, investment capital) may eventually limit the growth of the market. While these are all legitimate issues, it is useful to first view China’s automotive development in contrast with that of other developed countries.

A commonly used benchmark to compare the development of the car industry across markets is cars per 1,000 of population. On this measure, China is tied with Belize in 107^th place at 10 cars per 1,000 (source: www.nationmaster.com). The US leads with 765 cars per 1000. Of course, the US market may not be a fair comparison as it is a mature market with a historically large car population. A fairer comparison would be a market like Mexico with 138, Russia with 124, and Brazil with 81. Clearly, there appears to be upside growth potential for China.

Forecasts of the China market over the next decade anticipate that the passenger vehicle population will grow from 100 – 200%. Global Insight’s base forecast anticipates growth in the passenger vehicle population from 10 – 153 million units from 2005 to 2030. The high forecast places the number at 327 million units. The bottom line here is that it is hard to be pessimistic China’s future automotive prospects.

The Growth of the Lower-Tier Cities

A key reason for optimism is the anticipated development of China’s lower tier cities. While China’s economic revolution has been clustered around the Tier 1 and 2 cities, it is important to understand the real impact that the lower-tier cities will have on the future development of the market.Interestingly, most multi-national corporations had focused their businesses and sales activities around the Tier 1 and Tier 2 cities. For example, Toyota has derived 20% of its sales in 2009 from Guangdong province, and 5 of China’s 31 provinces account for 49% of their sales. Similarly, VW generates 40% of its sales from its top 5 provinces.

The Chinese local manufacturers, by contrast, are more focused on the lower tier cities. Local brands offer a better fit to the purchasing power of the consumers residing in these lower tier cities. 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 in these lower income cities. Measures including 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 have accelerated the auto market expansion in these markets, helping to boost the performance of the Chinese local manufacturers. Recognizing this, multi-national companies are placing more focus on the development products suited for the tastes and preferences of consumers in these lower tier markets.

Lower tier cities are capturing an increasing share of the market and are experiencing the highest year-over-year growth. Recent data from China’s National Statistics Bureau highlight this trend:

City Classification	Market Share	Growth Rate
Tier 1	13.9%	+8.1%
Tier 2	47.2%	+27.6%
Tier 3	21.3%	+33.7%
Tier 4	17.7%	+36.0%

As a result, we can expect to see even more intense competition among the foreign and domestic brand vehicle manufacturers as they attempt to capture this growth opportunity (see Trend 6: Hyper-competition Across The China Auto Market Segments). As this is happening, the local manufacturers are striving to upgrade their brands and product portfolios to meet the more upscale image aspirations of Chinese consumers (see Trend 7: Local Vehicle Manufacturer's Push To Build Brand Equity).

Clearly any growth strategy in China requires an understanding of the rapidly changing demographics and a plan to capture the growth in China’s lower tier cities.

Summary

This brings us to the conclusion of our in-depth look into the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry, which are summarized here:

Eight Overarching China Automotive Trends:

1. Policy-driven Consolidation of Chinese Vehicle Manufacturers
2. Global Redistribution of Assets by Non-Chinese Companies to Capture China Market Growth
3. Acquisition of Foreign Assets and Key Development Competencies by Chinese Companies
4. China's Investment in New Energy Vehicles and Associated Infrastructure
5. Utilization of China's Automotive Capacities for Global Expansion
6. Hyper-Competition Across the China Automotive Market Segments
7. China Vehicle Manufacturer's Push to Build Brand Equity
8. China's Rapidly Changing Demographics and Growing Demand in Lower Tier Cities

Taken collectively, it is clear that these trends signal a shift in the global center of gravity towards the east. The dramatic shifts that have occurred over the past year in the structure and brand portfolios of the vehicle manufacturers are simply the early stages of a process of asset reallocation and global realignment that will unfold over many years. These trends are reshaping the brands, products and global footprint of those who hope to prosper in the 21^st century automotive industry.

Indeed, China has taken center stage in the battle for global auto industry dominance.

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U.S. Auto Makers Expect Gradual Recovery In 2010 But Challenges Remain: Expert

Xinhua News, November 29, 2009

CHICAGO, Nov. 28 (Xinhua) -- U.S. auto makers will see a very gradual recovery in demand in 2010 after their dramatic restructure while many challenges will still remain, a U.S. auto industrial expert told Xinhua in an interview on Friday. Bill Russo, founder and president of Synergistics Limited and senior advisor with Booz & Company, has extensive experience in the automotive and electronics industries. When commenting on U.S. auto market in 2010, Russo predicts a slow recovery in demand in 2010 after the dramatic contraction in 2008 and 2009. "Many U.S. auto makers have had to dramatically restructure their operations to regain a profitable footing in their domestic market. Starting in 2010, the industry will gradually recover to above 10 million units. However, it will be quite a long time before we see overall industry volumes restored to the pre-crisis levels," he further explained. While everyone is hoping for a sustained recovery, Russo believes that 2010 will see a very gradual recovery in demand. While media attention seems to focus on the near-term sales performance and forecast, he thinks it is wise to view the market from a longer-term and "macro" perspective. "The U.S. auto makers have been in decline for almost 40 years, and have not yet addressed the structural weakness that has caused them to lose the loyalty and market share loss that began in the 1970's when the oil crisis caused Americans to seek smaller, more fuel-efficient cars from foreign car makers," he said. He warned that until U.S. auto makers begin to reverse this trend, their long-term viability is questionable. When asked about the biggest challenge the U.S. auto makers are facing, Russo said that like all global auto makers, they need to know how to deliver to the market the right products with a proper combination of value, quality and innovation to allow for sustained performance and growth. "They must also conceive of ways of leveraging their global businesses in order to improve the products and technology offerings for the American consumer. While Ford and GM are challenged to grow domestically, they have been able to enjoy strong growth in China," he said. "They must find a way to reinvest the proceeds from their global businesses in order to gain competitiveness in the U.S. market. They can achieve this by leveraging the cost structure and scale of their global operations when presenting products to the U.S. market," he added. When talking about the effect of the U.S. government incentive programs such as cash-for-clunkers, Russo thinks that they did provide some short-term relief, but they only buy time, because they do not provide a sustainable solution that addresses the root cause of the problem. "They prolong the problem and help sustain companies and brands that would have otherwise been dissolved. Consolidation is often a necessary step that allows the surviving industry players to emerge even stronger," he said. Regarding the role of the U.S. government in the auto industry, Russo told Xinhua "Ultimately, market forces should prevail and the U.S. government should be careful not to intervene too directly in the business, or they risk becoming a 'benevolent crutch,' without which the Big 3 can no longer walk." He suggested that the government must stop injecting cash either directly into these companies or into the market as incentives. Instead, government incentives should be redirected toward the root causes of the problem. "Mainly, the government should encourage the auto makers to develop cars that meet current and future consumer demand. They must also reduce the burden placed on manufacturers in the development of the next-generation green technologies," he said. Russo believes that the government can help fund research in the area of development of green technologies and create a vision for transition from an oil-based infrastructure to a "new energy" infrastructure, and must encourage consumers to migrate in this direction. When asked about his advice to the U.S. government, Russo believes they should accelerate their efforts to address the root causes of the problems noted earlier. "U.S. auto makers must eliminate underperforming assets and reallocate capacities away from segments and products which are no longer wanted in the marketplace. While this macro re-adjustment may take several years, they must avoid the temptation of relying on artificial incentives or they may not get an accurate understanding of true market demand," he said. Russo advised that the U.S. auto makers must leverage their global businesses and partnerships in order to more efficiently address the opportunities in the American market. Russo has more than 25 years of experience at driving strategy and performance improvement in Fortune 500 environments. In his role as the first vice president of North East Asia automotive operations for Chrysler, Russo successfully negotiated and secured government approval for six vehicle programs within a 3-year time period with three different Asian partners. He also oversaw the industrialization of the first Chrysler and Dodge-branded vehicles in Asia.

Editor: Mu Xuequan

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Dialogue: China Auto Market Booming CCTV-International

November 26, 2009, CCTV-International

Interview with Bill Russo of Synergistics Limited, and Alfred Tian of China Automotive Review which aired on China Central Television.

Dialogue 09/11/26 China auto market booming CCTV-International

China’s Consolidating Auto Industry Can Learn From DaimlerChrysler

November 21, 2009

In an increasingly competitive and globalized automotive industry, companies that lack scale or a global production footprint are believed to be at a significant disadvantage. Many automotive companies have launched plans to address this “organically” by introducing new brands, developing new products and entering new markets. However, in an industry characterized by high capital investment and long technology and product development lead times, it may not be feasible to proceed organically. As a result, many automotive companies have sought to address their needs “inorganically” via M&A or a strategic alliance.

While auto sales in 2009 indicate a bright future for China’s automotive manufacturers, one must look deeper into the facts before drawing quick conclusions. In fact, there are numerous structural problems in the China automotive industry. While light vehicle sales stand at historic highs, overcapacity and lack of scale remain major problems. This is true largely because of the highly fragmented and scattered OEM landscape. China’s auto industry today includes over 150 registered automotive manufacturers. The top 10 OEM’s account for 83% of vehicle sales and the top 20 OEM’s account for 95% of sales. Additionally, approximately 60% of vehicles sold carry a foreign brand, which makes it very difficult for Chinese domestic brands to generate sufficient volumes or profit margins to remain economically viable. This fragmentation is mirrored in China’s automotive component supply base, where a significant percentage of auto suppliers face severe liquidity issues in 2009.

As a result, the Chinese government has pulled-ahead its plan to consolidate the OEM landscape in order to achieve economies of scale for the remaining manufacturers. Prompted by the economic crisis, the China government in early 2009 published revitalization plans for its key industries including automotive. The plan clearly articulates the vision for industry consolidation, technological upgrade, export, and brand development.

The most sweeping proposal in this plan is the intention to consolidate the industry into a “top 10” group organized into 2 distinct “tiers”: the Tier 1 group consisting of companies with an annual capacity of 2 million units that are encouraged to acquire smaller automotive companies throughout China, whereas Tier 2 consists of companies with an annual capacity of 1 million units that are encouraged to drive regional consolidation. Earlier this month, a major step was taken towards implementing this plan with the announcement that Changan Automobile Group Co. agreed to take over the auto operations of Aviation Industry Corp of China (AVIC).

Deals like this are just starting and there will be more. While it may be relatively easy to put together a deal to consolidate assets, there is enormous risk and the vast majority of acquisitions ultimately fail. The most recent case of SAIC’s acquisition of Ssangyong ultimately failed because the interests of both parties were not aligned. SAIC was: unable to secure concessions from Ssangyong’s labor union to lower costs, unwilling to inject billons of RMB incremental capital to fund the business, and unable to manage the loss of leadership at Ssangyong. Ultimately, SAIC decided to dissolve the deal. Sadly, automotive acquisitions are rarely successful.

One of the most famous cases was the failed 9-year marriage of Daimler-Benz and Chrysler. Announced to the world in 1998 as a $38 billion “merger of equals”, the deal was ultimately dissolved in 2007. The causes of failure are noteworthy:

1. Strategic Mis-Alignment: While each company had a sound rationale for partnership, there was a lack of alignment between the architects of the deal and the organizations they led. Juergen Schrempp was seeking to build scale and elevate the prominence of the automotive business in the Daimler-Benz portfolio of companies. Bob Eaton was seeking to expand Chrysler’s global reach beyond its core North American market. While on the surface it appeared compatible, this vision lacked sufficient top-down direction needed to build a globally integrated automotive enterprise. The target for achieving “synergy” resulting from achievement of a cost-savings target became the sole objective of the post-merger integration team, and meaningful integration of the core automotive business was never established as a concrete target.

2. Brand Tension: The brands of Daimler and Chrysler do not overlap, however the struggle over brands cut to the heart of the merger integration challenge. In many ways, the brands of a company define the image and aspirations of both its customers as well as its companies. For this reason, the idea of sharing any product, technology, or even resources used in the development or distribution of the product was viewed as a risk of compromising the value proposition of the brands. Daimler was concerned that a direct association with Chrysler would damage the Mercedes-Benz “premium” image. Chrysler was concerned that Daimler’s higher cost structure would make Chrysler’s mass-market brands less cost competitive.

3. Lack of Core Business Integration: The “Chrysler Group” essentially became a division within Daimler-Benz, which was renamed “DaimlerChrysler AG” in November 1998. The only functions that were integrated were the Financial Services division and several corporate staffs including Human Resources, IT, and Corporate Finance. Staff reductions in these functions accounted for much of the “Synergy” of the merger. The core business functions were left unchanged. As a result, the complex decisions of how to share development costs, develop new technologies, share product platforms, cross-load manufacturing plants, and combine marketing and sales functions were completely avoided. As a result, the automotive businesses failed to realize any benefits from the partnership.

4. Brain Drain: It is often stated that the majority of senior leaders of an acquired company leave within a two-year period after the merger. While efforts were made to retain Chrysler’s top leadership, it became very difficult once it became clear that this was never actually a “merger of equals”. Starting with Bob Eaton’s decision to step down as co-CEO, the leadership "flight" at Chrysler accelerated. Within two years, a significant percentage of Chrysler’s top 100 managers had left the company. While it may be difficult to avoid completely, it is critical to plan for the retention of the key leadership, or company performance and employee morale will suffer.

5. Culture Shock: This issue is often mistakenly attributed to differences in language, culture between Germans and Americans. However, this is not the root cause. The challenge is to achieve a true understanding of the respective needs of each partner. This tends to get oversimplified by assuming that language and culture are the problems. Language and cultural misunderstanding creates “resistance” and adds friction among the partners – which makes it difficult to develop a common understanding, but this is not the most fundamentally challenging issue. If this were the case, it would be impossible to explain why similar problems occur when companies merge within the same country. The most difficult issue is to establish a common understanding of what each partner wants out of the relationship – and finding a way to work with that.

Businesses hoping to grow “inorganically” would be wise to learn the lessons from the causes of the failed DaimlerChrysler merger.

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Geely's Volvo Coup Raises Eyebrows

Financial Post, October 28, 2009

by Nicolas Van Praet, Financial Post

Chinese automaker Geely has become a shining star in its domestic market by selling affordable small cars to buyers hungry to jump off their scooters and into auto ownership.

Now it wants to build up its image and international credibility with a takeover of a Swedish corporate icon prized for its safety technology and reputation for quality: Volvo.

Ford Motor Co. said Wednesday it picked Zhejiang Geely Holding Group Co. Ltd.'s as its preferred bidder to buy its Volvo unit. Terms of Geely's bid were not disclosed but estimates for a transaction price are in the US$2-billion range.

"Ford believes Geely has the potential to be a responsible future owner of Volvo and to take the business forward while preserving its core values and the independence of the Swedish brand," Ford Chief financial officer Lewis Booth said in a statement. "But there is much work that needs to be completed."

There is no specific timeline to conclude the negotiations, Mr. Booth said. Ford will not retain a stake in Volvo, he said.

Geely welcomed the development, saying Volvo's manufacturing plants, research facilities, union agreements and dealer networks would all be maintained. Volvo management would be independent and headquartered in Gothenberg, Sweden, Geely said. The company said it would enhance Volvo's access to sales networks and parts sourcing opportunities in the growing Chinese market, where automakers now sell more new vehicles than the United States.

But exactly how a deal will play out is unclear.

Ford said that in any sale the deep connections between Ford and Volvo in shared component supply and engineering would have to be resolved. The Detroit maker of F-150 trucks and Focus cars is understood to be worried that its patents and other intellectual property may leak to rivals in China.

The nature of Chinese state involvement in a transaction and subsequent ownership is also unknown. Geely said its bid is backed by "Chinese banks" which it did not name.

Chinese automakers are desperately trying to shed their reputation for low-quality so they can grow their share of the domestic market and speed up their export capablity. In 2008, barely one in three new vehicles bought in China were Chinese brands.

By leveraging the capacity of some parts suppliers and selectively buying some of them, Geely has introduced several vehicles and brands at higher price points than its namesake Geely marque, China-based auto consultant Bill Russo said in an analysis published Oct. 27. These include Gleagle, London Taxi, Shanghai Maple and Emgrand.

"Geely intends to increase their brand equity by sourcing from the world's leading auto parts suppliers, and in the process upgrade their image from a maker of ‘affordably priced cars' to one that delivers ‘safe, fuel efficient, and environmentally-friendly cars,'" Mr. Russo said.

However, unlike previous acquisitions by Chinese companies of Western automotive assets like SAIC's purchase of the Rover brand, a deal for Volvo isn't about buying off-the-shelf technology for a cheap price. And some analysts say Geely may be biting off more than it can chew.

"I'm somewhat stunned to be honest that Ford are even entertaining it," said Paul Newton, a London-based analyst for IHS Global Insight. "If [Geely] was a larger concern with a bit more international experience, I'd say that ‘Yeah, it could well be a positive thing for the Chinese companies.' But Geely I'm not so sure. They don't have a joint venture. They don't have any alliances with anyone. And they're buying a very complex, subtle, European premium brand that is struggling."

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China's Geely to Purchase Volvo Unit from Ford

Financial Post, October 29, 2009

US $2-Billion Estimated

by Nicolas Van Praet

Chinese automaker Geely has become a shining star of its domestic market by selling affordable small cars to first-time buyers hungry to jump off their scooters and into auto ownership.

Now it wants to build up its image and international credibility with a takeover of a Swedish corporate icon prized for its safety technology and reputation for quality: Volvo.

Ford Motor Co. said yesterday it picked Zhejiang Geely Holding GroupCo. Ltd. as its preferred bidder to buy its Volvo unit. Terms of Geely's bid were not disclosed but estimates for a transaction price are around US$2-billion.

"Ford believes Geely has the potential to be a responsible future owner of Volvo and to take the business forward while preserving its core values and the independence of the Swedish brand," said Lewis Booth, Ford's chief financial officer.

There is no specific timeline to conclude the negotiations, Mr. Booth said. Ford will not retain a stake in Volvo, he said.

Geely welcomed the development, saying Volvo's manufacturing plants, research facilities, union agreements and dealer networks would all be maintained. Volvo management would be independent and headquartered in Gothenberg, Sweden, Geely said. The company said it would enhance Volvo's access to sales networks and parts-sourcing opportunities in the growing Chinese market, where automakers now sell more new vehicles than the United States.

But exactly how a deal will play out is unclear.

Ford said that in any sale the deep connections between Ford and Volvo in shared component supply and engineering would have to be resolved. The Detroit maker of F-150 trucks and Focus cars is understood to be worried that its patents and other intellectual property may leak to rivals in China.

The nature of Chinese state involvement in a transaction and subsequent ownership is also unknown. Geely said its bid is backed by "Chinese banks" that it did not name.

Chinese automakers are desperately trying to shed their reputation for low quality so they can grow their share of the domestic market and speed up their export capability. In 2008, barely one in three new vehicles bought in China were Chinese brands.

By leveraging the capacity of some parts suppliers and selectively buying some of them, Geely has introduced several vehicles and brands at higher prices than its namesake Geely marque, China based auto consultant Bill Russo said in an analysis published on Tuesday. These include Gleagle, London Taxi, Shanghai Maple and Emgrand.

However, unlike previous acquisitions by Chinese companies of Western automotive assets like SAIC's purchase of the Rover brand, a deal for Volvo isn't about buying off-the-shelf technology for a cheap price. And some analysts say Geely may be biting off more than it can chew.

"I'm somewhat stunned to be honest that Ford are even entertaining it," said Paul Newton, a London-based analyst for IHS Global Insight. "If [Geely] was a larger concern with a bit more international experience, I'd say that 'Yeah, it could well be a positive thing for the Chinese companies.' But Geely, I'm not so sure. They don't have a joint venture. They don't have any alliances with anyone. And they're buying a very complex, subtle, European premium brand that is struggling."

Click here to view the original article from Financial Post

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."

Click here to view the article posted in China Economic Review