How much stimulus does China's auto market need?

With new vehicle sales exceeding one million units a month, it is difficult to remember that forecast scenarios for the China auto market were pretty grim at the beginning of this year. In the light of the global economic downturn predictions for 2009 initially went as low as 0% growth – in other words stagnation – before making their way up to 5-7% year-on-year growth, signifying a similar performance as in 2008. Back in the early months of this year, only a few “brave” ones started to express confidence in the Chinese market and dared to think of materializing a double-digit annual sales increase.

Since then, we have become used (again) to growth rates of 20% and more, and the discussion has shifted from the concern about whether there would be substantial growth in the China market in 2009 to the question about how long the Middle Kingdom will be able to remain the biggest auto market in the world, a crown that it has taken from the United States this year.

There is no doubt that the Chinese government has brilliantly countered the slowing vehicle sales by implementing stimulus measures into the market. In the first place, the cut of purchase tax for low displacement engines (up to 1.6 liter) has brought back consumers into the showrooms, and played its part to motivate the purchase intenders to buy a new vehicle. As a consequence, the sales of small and lower-mediums cars, as well as of minivans have been soaring, much to the benefit of Chinese vehicle manufacturers. But not only! GM’s record sales in China, very much in contrast to the sluggish performance in the US, were made possible by the purchase tax cut which lead to a literal explosion of sales of their minivans, jointly produced with its partner Wuling. Admittedly, GM has proven to ride well on this wave!

In a phase of market development where consumer confidence has apparently returned, and sales of higher displacement vehicles in the upper car segments have started to take off, the question comes to mind whether there is still need for such a state support. The high volume of new car sales has already led to shortage of vehicle availabilities, and is a driving force for higher retail prices. As car manufacturers plan to increase their production capacities, the risk of over-production emerges at the same time, since demand is artificially kept high and expected to re-adjust itself without favourable government policies. Excess capacities almost certainly will lead to pressure on prices and even may end in a price war which, ultimately, nobody will benefit from.

While car and light commercial vehicle markets seem to be back on track, the entire bus sector still hits rock bottom. Today, the passenger vehicle market is driving the development of the mainland’s auto industry, and a lot of attention is justified to ensure that China will become a major global player in this sector. Nevertheless, this should not come at the cost of the commercial vehicle segments. Their sound development should remain in the focus, and be supported. If stimulus measures are considered, now is the time to become active.

It is difficult to say what exactly a healthy growth of the Chinese auto market is. For such an important industry that contributes substantially to economic development and GDP growth, an increase of less than 10-12% appears to be too little. On the other hand, a growth of continuously more than 20% bears a considerable risk of overheating as well as a lagging infrastructural development, such as road construction, parking space offer, improvement of traffic flow systems, etc. A sustainable market growth somewhere between 12% and 20% seems then to be optimal.

Beside its fiscal policy, the government has introduced incentive packages to steer the development of its auto market, most prominently the “old for new” trade-in program as well as subsidies for buying alternative energy vehicles. These measures target the vehicle market development differently and will help to bring positive structural effects. A closer look reveals considerable risks, and possible pitfalls, though (to be continued).

About the authour: Klaus Paur, Gasgoo's columnist, is Regional Director Automotive for North Asia at TNS China who has over 20 years of experience in marketing and market research, 13 of which have been spent specialising in the automotive industry.

Chinese version