Sustainable growth fueled by China's urban economic development (1)

In last week's introduction, we introduced six Emerging Trends Driving the 2010 China Auto Industry:

• Sustainable demand growth fueled by urban economic development
• Shifting preferences for increasingly savvy consumers
• Hyper-competition across the automotive market segments
• Adaptive brand innovation to extend product reach and grow share
• Increasing focus on the automotive aftermarket
• Accelerated drive to globalization

We will cover each of these trends in depth in this and subsequent articles.

Sustainable demand growth fueled by urban economic development

As previously noted, year-to-date Chinese auto sales are 36% higher than the same period of 2009, with an annualized yearly sales forecast to be over 17 million vehicles. While this is quite a strong performance, it was apparent that starting in April, annualized growth began to decelerate, which indicated a transition from the explosive growth of 2009 to a more stable and sustainable pattern in 2010. Such a change is mainly attributable to adjustments made in the Chinese economy to tighten credit and government investment to tackle inflation. In addition, tax subsidies and sales incentives offered by government during 2009 financial crisis were reduced with a resulting impact on more price sensitive car buyers.

Despite that, China is still the world largest and fastest growing market. The double-digit growth momentum will be maintained for at least the next three years. A key reason for continued growth is the rapid development of China's lower-tier cities. While China's explosive automotive growth has been most evident in the Tier 1 cities, it is important to note that the trends of urbanization and growth of per-capita GDP will continue into the foreseeable future. As these factors are directly linked to the growth in demand for automobiles, one can expect a continuation of growth next year and thereafter. Urban wealth accumulation is undoubtedly fueling the growth in automotive sales. The fact that 85% of all vehicles are sold to urban residents is a clear sign of the relationship.

There is no mistaking the trend of permanent migration of rural population to existing urban areas. Looking forward, it is expected that nearly two-thirds of China’s population will be in urban areas by 2020. This represents a whopping rise in urban population of nearly 200 million people in just over 10 years. Essentially, China creates the population-equivalent of a city of between 1.5 – 2 million people each month! It is no wonder why China's cities are continually under construction.

In our next article, we will address "Shifting preferences for increasingly savvy consumers".

................................

About the authors:

Bill Russo, Gasgoo.com's columnist, is a Senior Advisor with Booz & Company as well as the Founder and President of Synergistics Limited. He lives in Beijing and has more than 20 years of experience in the automotive industry, most recently serving as Vice President of Chrysler's business in North East Asia.

Jeffrey Zhao, is an Advisor with Synergistics Limited. He lives in Fairfax, Virginia and has more than 10 years of experience in the automotive industry, most recently serving as Senior Manager for New Business Development for Chrysler's business in North East Asia.