The party is over for China's automakers; a hangover awaits in 2017

SHANGHAI -- Automakers in China should enjoy their booming sales this year because the party will be over all too soon.
After unexpectedly high sales growth this year, the automakers likely will confront two big headaches in 2017: Stagnating vehicle sales, and pressure from Beijing to boost electric vehicle production -- with or without consumer demand.
Early this year, industry executives warned that China's heady auto market had begun to "mature." That was a polite way of saying they expected sales to stagnate as the economy lost steam.
But the naysayers were wrong. The government halved its purchase tax on vehicles with small engines, and now shoppers are rushing to buy cars before the incentive expires on Dec. 31.
Last month, Geely deliveries nearly doubled, while Honda and Great Wall reported sales gains of 40 percent-plus. China's light-vehicle sales are expected to grow 16 percent this year -- about 10 percentage points higher than the market would have grown without the tax cut.
Payback time
But payback time is coming. Consumers have spent the money they otherwise would have saved for the future, so the market is unlikely to grow much.
LMC Automotive predicts light-vehicle sales will drop 2 percent in 2017, and other forecasters have made similar predictions.
The China Association of Automobile Manufacturers is lobbying the government to extend the tax cut, but it might not matter. Even if the tax cut is renewed, LMC expects industry sales will grow only 1 to 2 percent next year.
The consultancy expects the market will crawl at an equally slow pace in 2018.
A flat market would deal a heavy blow to state-owned carmakers such as Chery Automobile Co. and China FAW Group Corp., which are using only half of their production capacity. 
It would also create problems for global automakers such as PSA Peugeot Citroen and Hyundai Motor Co., which have significantly expanded capacity over the last two years.
EV mandate
As if that weren't enough, China's bureaucrats appear determined to force-feed the market for EVs. Beijing has announced plans to introduce a California-style carbon credit trading scheme to goad automakers to produce more EVs.  
According to draft rules issued in September, carmakers must produce one EV or two plug-in hybrids for every 50 conventional vehicles they will build in 2018. 
Details of this plan may yet be fine-tuned, but it would be a mistake to underestimate Beijing's determination. 
This is especially bad news for foreign automakers, which hesitated to follow their faster-moving Chinese rivals into the country's EV market.
Among global automakers, only Volkswagen and Mercedes have announced production plans for EVs. Volkswagen will form an EV joint venture with China's Jianghuai Automobile Co., while Mercedes plans to build its EQ electric cars and batteries in China.
The new year is just a few weeks away. Automakers must figure out how to jump-start EV production just as vehicle demand begins to stagnate. That will force them to spend heavily on EVs even as they slash costs elsewhere.
Auto executives may want to rethink their party plans for New Year's Eve. The hangover is likely to be nasty.