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Car sales enter the slow lane

Shanghai Daily, January 24, 2011

China's passenger car sales continued to enjoy staggering growth in 2010 thanks to government incentives and the overall economic recovery.

Auto makers in China sold a record 13.8 million passenger cars, up 33.2 percent year-on-year. Don't expect a similar story in 2011.

Car sales jumped 18.6 percent to 1.3 million units in December but this spike was actually a sign that the good times are coming to an end. People were rushing to showrooms to take advantage of stimulus measures that expired at the end of the year.

In 2009, Chinese authorities halved the purchase tax for vehicles with engines under 1.6 liters to 5 percent. The levy is now back to 10 percent. Also, in 2009, a new-for-old program was launched under which drivers received subsidies for trading in their aging autos. The program lapsed at the end of 2010. The only policy that has been extended into 2011 is subsidized purchases of fuel-efficient and new-energy vehicles.

This illustrates the central government's determination to facilitate the development of a greener auto industry.

China is now the world's largest car market, but domestic manufacturers still lack innovative model designs and core technologies. At the same time, the explosion in sales may have supported economic recovery, but it has led to major traffic and pollution problems.

The removal of purchase incentives - together with the high comparative base and general monetary tightening - is likely to see sales growth slip markedly in the first few months before settling to a full-year rate of around 15 percent.

Larger auto makers with a wide range of products will inevitably squeeze out smaller rivals thanks to economies of scale in procurement of raw materials and greater bargaining power in retail.

This is in keeping with Beijing's wishes. The larger the manufacturer the easier it is to make the technological upgrades required to produce fuel-efficient and new-energy vehicles able to compete internationally. From here on, the government is more likely to direct its financial support toward car makers seeking to buy their way up the value chain.

Further restraints on auto sales will come via local government policies.

Beijing, suffering from severe traffic congestion, has already announced measures to control vehicle numbers. A Beijing driver will be allowed to own only one car under his or her name and the total number of new license plates issued this year will be capped at 240,000.

Industry insiders expect other cities to introduce similar policies.

But this does not mean car sales will tank. As long as China's economic fundamentals stay sound, and inflation is well managed, auto sales will remain strong, with demand from third-tier and fourth-tier cities becoming ever more significant. Meanwhile, concerns about the potential impact of restricted car licensing and traffic congestion fees appear to be exaggerated.

Much as the central government wants to steer the industry in a new direction, it won't allow sales to slow too abruptly – this would have grave consequences for related businesses such as steel and electronics. With autos as in many other industries, China has learned the perils of over-regulation. Tough measures designed to help deal with economic overheating in 2004 saw car sales growth slip into the single digits for the next year or so.

Beijing has no desire to repeat this setback.

On a wider macroeconomic level, interest rates and banks' reserve ratio requirements will continue to rise during the year, but there will be no massive cut in lending growth. It is also unlikely that the banking regulators would tighten auto credit.

Still, the blistering sales growth of 2010 has gone. As competition grows, car makers will have to focus on meeting the needs of ever more discerning consumers rather than on the tailwinds of government policy.

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