China gasoline price increase may damp SUV sales

June 23 (Bloomberg) -- Sales of sport-utility vehicles in China, the fastest-growing segment of the country's auto market last year, may slow after the government raised gasoline prices, Fitch Ratings Ltd. said.

The increase "will change motorists' behavior and push them toward vehicles with better fuel consumption," Fitch analyst Matthew Kong said by phone on June 20. ``The change of preference will impact the makers of cheap SUVs, such as Great Wall, the most."

Sales of Great Wall Motor Co. Hovers and other SUVs leapt 50 percent last year, twice the pace of the overall auto market, helped by China's surging economic growth and cheap fuel. The 17 percent increase in gasoline prices may stunt demand, mirroring the U.S., where higher fuel costs have caused sales of large SUVs, such as Toyota Motor Corp.'s Sequoia to plunge a third this year.

"Rising fuel prices will surely damp demand for SUVs in China," said Vivien Chan, an analyst at Sun Hung Kai Securities Ltd. "Consumers who want to own an SUV will hold on and watch how much further prices will go up."

China, the world's second-largest auto market, raised the price of gasoline, diesel and other fuels last week to cool its economy and reduce energy use. Automobiles account for about half of China's total oil consumption, and this may rise to 60 percent by 2020, according to the Development Research Center of the State Council.

Compacts Plunge

Rising affluence has boosted sales of SUVs and larger cars, while also causing a plunge in demand for cheaper, more fuel efficient autos. Sales of low-cost compacts, powered by engines of less than 1 liter, fell 31 percent last year, even as industrywide passenger-car sales jumped 22 percent.

Chery Automobile Co.'s 1-liter QQ compact, costing 45,800 yuan ($6,700), can go as far as 28 kilometers on a liter of gasoline. Great Wall's Hover, which starts at 105,800 yuan, gets an average of 8.1 kilometers a liter, according to Sina.com.

Great Wall Motor, China's largest maker of SUVs, is developing a more efficient 2-litre engine to help cut fuel consumption, Board Secretary Bai Xuefei said by phone. Still, the automaker doesn't expect the fuel price increase to curb demand.

"SUV drivers place more value on the joy and comfort of driving rather than a comparison of fuel costs," Bai said. "Consumers have been expecting increases in fuel prices and they may start buying SUVs now that the sword has finally dropped."

Great Wall, based in Hebei province, has fallen 46 percent in Hong Kong trading this year. The stock dropped 3.7 percent to HK$6.07 on June 20.

Hip-Hop Image

The price of gasoline has climbed to 23.50 yuan ($3.42) a gallon in China following the increase. That's still about 15 percent less than in the U.S., the world's largest auto market, so the increase may not deter buyers able to afford more expensive SUVs, such as the 380,000 yuan Toyota Prado or the 145,000 yuan Hyundai Motor Co. Tucson.

"Some SUV drivers opt for the vehicles for the hip-hop image, especially owners of high-end models," said Kong. "They won't be put off by higher fuel prices."

Still, higher fuel costs may force cost-conscious drivers to abandon plans to buy entry-level SUVs, and cause them to stick with sedans instead, said Kenneth Hsu, Ford Motor Co.'s China- based spokesman.

"Higher ownership and fuel costs will force drivers to think about more things when buying a car," he said. "That may move them toward a segment lower than their original intention."