The Chinese passenger vehicle market in 2010 will still drive on the fast lane

The Chinese government has recently announced to continue the purchase tax reduction for small displacement vehicles into 2010, and reminded us how important the automotive sector is for the growth of the economy.

Market analyses suggest that the current dynamics in the Chinese passenger vehicle market would have supported a sustained growth without this specific incentive program, yet the government apparently did not want to leave anything to chance. The political leaders have certainly taken the information from the China Association of Automobile Manufacturers into consideration, namely that the vast majority of the auto industry growth (around 85 percent) comes from sales of low engine displacement vehicles. On the other hand, since mid-year 2009 already the sales momentum for vehicles >1.6l engine displacement has picked up, and we head towards a remarkable 20 percent and more increase year-on-year in the upper-medium/luxury car segments combined.

We can explain the accelerated rhythm of car sales not only in segments without purchase tax reduction by an increasingly reigning consumer confidence that was restored after considerable uncertainties about the economic development in the second half of 2008, and the quick government intervention in early 2009. As such, the purchase tax reduction as well as the announcement of the entire Automotive Revitalization Program has had a non negligible psychological impact on consumer behaviour and the economic development as a whole.

The decision to continue the purchase tax reduction and to avoid an abrupt end of this measure can be considered a thoughtful move that secures support above all on the psychological level. Economic prosperity has a lot to do with consumer confidence, and as much as rising confidence can lead to positive developments, a lack of faith can also drag mindsets down, particularly in a vulnerable global economic context as we currently experience. 

On the other end of the spectrum, the extraordinary year-on-year growth of 40 percent in the new vehicle market this year requires attention of a possible overheating. Most experts agree that such an elevated growth is not sustainable, and brings with it huge negative effects in terms of infrastructure, traffic regulation and risk of excess capacities due to over-optimistic enhancement of production facilities. By decreasing the tax reduction by 2.5 percentage points the Central Government takes note of that, and passes a clear message to the marketplace: This support will not remain in place in the long-term. And rightly so! As experience shows, subsidizing is an appropriate means to kick-start a stalling economy, or to bring a weak economic activity to a strong and more substantial level. Building the entire economic development on subsidies bears the risk of offsetting market forces at play, though, and in fact, counters a healthy progress in the long term. This also applies for the sustainable success of Chinese domestic car makers which have considerably benefitted from the purchase tax reduction. Consumer decisions to choose home-grown cars must be above all based on product- and brand related considerations, and not on price solely. Still, consumers in rural areas will receive additional subsidies for vehicle purchase, as in 2009.

The incentive program in 2010 shifts its focus further to environmental sustainability. The trade-in amount for old cars will be substantially increased, from a maximum of 6,000 RMB to a maximum of 18,000 RMB. This should make it more attractive to trade-in old vehicles, rather than to sell them to the used car market. Real clunkers from the early days will easier to be exited from the market.

With the new regulations for 2010 the government also takes important steps for the market penetration of alternative energy vehicles. More pilot-cities for “green” energy have been chosen, and the offer of subsidies for the purchase of “green” cars will be extended.

All in all, the revised automotive consumer incentive scheme appears to be a sensible package to ensure sales growth and to tackle unavoidable challenges for a sustainable market development. Against the apprehension of some, we can be confident that it will keep the Chinese passenger vehicle market on the fast lane.