Analysis: Possibility of new policies aimed at stimulating growth in the Chinese automobile market

Gasgoo.com (Shanghai) - Ever since the Chinese government announced that it is investing six billion yuan ($950.53m) to encourage purchases of energy-efficient automobiles, there have been non-stop reports that a new round of stimulatory policies aimed at increasing growth in the automobile market are in the works. Among them, there is speculation that the 'down to the countryside' and 'old for new' policies, previously implemented three years ago, may be renewed.

In the multiple statistics released since the beginning of the year, the Chinese automobile industry has yet to show signs of recovery in 2012. Meanwhile, reports of rising inventory levels and decreasing dealership profits have also been an issue of concern for many in the industry. At the same time, several manufacturers are in the process of expanding their sales networks. Whether or not the government decides to introduce new economic stimulatory policies will directly influence all of these issues.

In order to learn more about the issue, Gasgoo.com conducted a weeklong survey earlier this month. Analysts, experts and other influential figures from across the industry participated in four question survey.

In the first question of the survey, participants were asked to evaluate the probability that the government will introduce new economic stimulatory policies for the automobile market. 42 percent responded that it was very likely that such policies would come into effect, while 26 percent answered that it was a slight possibility. 25 percent said that it was doubtful that such policies would come to fruition, while the remaining seven percent were undecided.

With the economy as a whole under a great deal of pressure, it seems natural that the government would come to support key segments such as the automobile industry. The fact is that the automobile market has been in a cold spell since the beginning of the year, with many manufacturers and their dealerships under increasing pressure to turn a profit. Domestic own brand manufacturers in particular would benefit greatly from policies aimed at stimulating consumption, much like those implemented four years ago.

In 2008, when the global financial crisis was in full swing, the government implemented several new policies, including 'down to the countryside' and 'old for new' subsidies, which helped fuel growth in the automobile industry. According to official statistics, the 4.97 billion yuan it invested in the 'old for new' program alone helped generate 38.2 billion yuan in new sales for over one million subsidized vehicles. Both policies combined were estimated to have helped sell over 1.5 million vehicles, equivalent to about ten percent of all automobile sales in the country.

Its recent decision to invest six billion yuan to provide subsidies for energy-efficient vehicles has been taken as a sign by many that the government will continue to support the industry in times of crisis. They believe that the move is only the first in a series of policies to stimulate spending in the market.

However, there are also those who believe that the primary goal of the subsidy is simply to promote further usage of energy efficient vehicles, rather than purely stimulate market growth. In their eyes, the 170 billion yuan the Ministry of Finance has earmarked for decreasing automobile emissions is further evidence of this. They believe that the government is aware that relying on economic stimulatory policies alone will only boost large luxury car and SUV sales. Sales of small vehicles, the type that own brand manufacturers specialize in, would only improve slightly at the best. In a conference in April, the China Association of Automobile Manufacturers (CAAM) made a clear stance on the issue. In its statement, the CAAM said that it hoped that any policies instated by the government would maintain stable growth, and not excessively intervene in the natural development of the market.

When asked how necessary government intervention was to help the market recover, survey participants were divided. Half of all participants concurred that it was indeed necessary, while 41 disagreed with the notion. The remaining nine percent were undecided.

From 2001, when China first joined the World Trade Organization, all the way until 2010, the country's automobile market generally maintained year-to-year growth of around 25 percent. Furthermore, in 2004 and 2008, when the growth rate dropped, it soon recovered the following years. Following those examples, many believed that the slow down last year would improve quickly again this year. However, up to April the market has yet to show signs of recovery, causing many to worry. Rising inventory levels and falling dealership profits have not helped to ease their reservations, either.

There are many believe that the government should quickly interfere to aid one of the economy's driving markets before it worsens even further. However, there exists a divide on which policies the government should implement. Some believe that there is a danger that reinstating the 'old for new' and 'down to the countryside' subsidies may be viewed as unfair. They believe that reductions to the tax rate would be a much more equal way of increasing consumption.

However, there are still those who maintain that the current cool down in the market is the aftereffect of previously unsustainable growth rates. The market will naturally recover, they believe, and as such, no government intervention is necessary. Not only that, stimulatory policies might further exacerbate the already serious issue of high inventory levels, as manufacturers look to add more vehicles in anticipation of increased sales.

The third question of the survey asked participants which aspects of the market stimulatory policies should focus on. 36 percent of respondents each voted for coercing consumers to buy energy efficient vehicles and protecting domestic own brand manufacturers. 23 percent answered that the government's primary goal should be to boost consumer spending.

Currently, Chinese consumers tend towards purchasing gas guzzling and high emission vehicles. Sales of energy efficient and new energy vehicles are still relatively poor. According to statistics from the China Passenger Car Association, year-on-year growth rates of cars with engines 1.0 L or smaller from January to April were around negative 15 percent. Furthermore, CAAM statistics revealed that the market share held by passenger cars with displacements 1.6 L or smaller fell from 69.65 percent in 2009 to 67.99 percent last year. In contrast, sales of large luxury sedans and SUVs have continued to grow rapidly.

The effects of consumer vehicle choices on traffic congestion and air pollution, especially in large cities, are becoming increasingly apparent. In response, the government is coming out with stricter and stricter guidelines to help popularize the use of low-emission vehicles. According to industry guidelines, the government aims for Chinese sales of pure electric and plug-in hybrids to reach 500,000 units by 2015 and five million by 2020. Whether or not future economic stimulatory policies would help further address this issue remains to be seen.

The declining performance of own brand manufacturers and local industry is another issue of concern. The government has taken some proactive steps, such as introducing legislation that protects the rights of Chinese parties when forming new joint venture partnerships with foreign manufacturers. Meanwhile, own brand models were prominently included on the latest lists of vehicles partially or fully exempt from the Vehicle and Vessel Tax.

The final question of the survey asked participants what prospects they held for the success of such policies. 48 percent were moderately hopeful, believing that the policies would help boost market growth to over ten percent. Eight percent were even more optimistic, believing growth could even exceed 15 percent. 34 percent, meanwhile, doubt that the policies would do much to affect growth. In their perspective, China faces issues of high traffic congestion, limited parking space and rising fuel prices that were not as evident in 2009 when the last set of economic stimulatory policies were introduced.

Figures from across the industry will be paying great attention to the government's decisions over the next few months.