Even a year ago nobody would have thought that China would be able to grab the global top spot in terms of auto sales as soon as 2009; predictions lay somewhere in the middle of the next decade. The publication of half-year figures just a few days ago, indicating sales of around 5 million vehicles in the first half of 2009, has confirmed that China is now the biggest auto market in the world.
This alone, however, doesn’t really give much cause for celebration since China’s ascent to the top position is at the expense of the US market, where vehicle sales have dramatically declined since last year. What gives rise to optimism though, not only for China but for the global auto industry, is the indication of a healthy long-term development of the Chinese car market after the minor slowdown at the end of 2008.
The Chinese government has proven itself capable of efficiently navigating through the difficult times triggered by the global economic downturn. As early as January, when the impact of the slowdown on China’s passenger car market became clear, the State Council adopted the "Automotive Industry Revitalisation Program" along with guiding principles for market development in the short- and long term.
An immediate measure taken to turn around declining sales figures and proven to be extremely effective, was the reduction of purchase tax by 50% for small displacement vehicles. A tax decrease from 10% of the purchase price to 5% for 1.6l engines and smaller succeeded in kick-starting new passenger vehicle sales and helped to achieve a 26% year-on-year market growth by mid- 2009 (including mini vans). Besides creating a tangible incentive for car buyers, this measure has also contributed to restoring consumer confidence by showing the government’s determined commitment and success in dealing with economic challenges. While the market is still leaning towards small and lower medium cars we can see the sales of several larger vehicles taking off - proof that Chinese consumers are getting back to big-ticket spending. This highlights the nature of government incentives as only a kick start for sales and not a tool for sustainable market development. It also points to the fundamental difference between the Chinese and German auto markets, the latter of which is also currently enjoying growing vehicle sales. The scrapping incentive provided by the German government has motivated people to advance their new car purchases, but does not impact consumer confidence. It is therefore reasonable to expect another sales slump after the scheme’s expiration at the end of 2009 whilst new vehicle sales in China are expected to continue increasing even if the purchase tax reduction is phased out.
A longer-term and more strategically motivated initiative by the government is the massive investment in the development and promotion of alternative energy vehicles, in particular hybrid- and electric powertrains. Within the next three years, more than 10 billion RMB will be granted to Chinese domestic car manufacturers for R&D of new energy vehicles and an additional 20 billion RMB will be set aside for subsidising their use (sales incentives, tax reductions, etc.). This measure is based on the clear objective that, by the end of 2011, every domestic car manufacturer benefiting from government support should have at least one alternative energy car in mass production, and 5% of annual new car sales should be composed of new energy vehicles. This could potentially add up to 500,000 units; if the Middle Kingdom can achieve this, it will be a truly major player in the field of alternative energy vehicles, and will have considerably closed the gap with international car manufacturers. All paths to conquering the world markets will be open to Chinese car makers.
Until then, there is still a long way to go. Overall vehicle quality and reliability have to be improved, and strong Chinese car brands have to be built - provisions for these tasks can also be found in the Revitalisation Program. Even if it sounds very ambitious today, who can really doubt the Chinese government’s capability to push its ideas forward?
For any further information or enquiry, please contact Klaus at Klaus.Paur@tns-global.com
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