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Aug 2011Which Road to Take? The Future of China's Automobile Industry

By: Stefan Kracht

China's automobile market grew by 32% in 2010 with sales of over 18 million vehicles. This new all-time high makes China the world's biggest market for automobiles, followed by the US and Japan. Passenger vehicles constituted the largest share of the market with sales of 13.8 million, while commercial vehicle sales amounted to 4.2 million. Both categories saw equally high annual growth rates of above 30%.

The government's stimulus policies in reaction to the global financial crisis spurred low-end demand from first-car buyers and boosted the sales of domestic vehicles (e.g. tax reduction for cars smaller than 1.6 litres and “Auto Goes Country” program - see China Focus Jul/Aug 2009). From 2008 to 2010 domestic carmakers' sales increased by 70%, notably much faster than the overall growth rate of 40% for overall sales.

 

China may sell a lot of cars as a nation, but a closer look at what is happening within the country reveals a highly fragmented distribution where the majority of sales concentration is in the coastal areas. The top 8 provinces contributed 50% of the new vehicle registrations in 2010.

 

China's car sales: the other side of the coin
The enormous growth of the number of vehicles on the streets is leading to serious problems; development of public infrastructure cannot keep up with the growth of the car community. Beijing is already infamous for its frequent traffic congestions in the inner center – in August 2010 the traffic came to a halt for twelve days on a national highway linking Beijing to Tibet. Cars did not move more than 1 km per day, and at its peak the traffic jam was longer than 100 km.

Infrastructure development takes time so the government turns to alternative measures to alleviate the situation. In Beijing we've seen a driving ban on certain weekdays for odd- and even-numbered license plates, a ban for outside license plates during rush hours, and a rule where big trucks are only allowed to enter the city at night. The latest measure introduced in January 2011 is a license plate lottery where only 20,000 people picked at random are permitted to buy a car each month. The aim is to limit the number of new plates to a third of the 800,000 sales in 2010.

These problems are not limited to Beijing. In Shanghai, road traffic volume has been up 10% each year since 2008. Guangzhou in 2010 recorded an average speed on the city's 60 main roads at below 20 km/h during rush hour. It is likely that the measures in Beijing will be adopted in other trouble spots; for example, Guangzhou also used the odd- and even-numbered license plate ban during the Asian Games.

 

Car Rental business profits from restrictions
Although restrictions are increasing and owning costs are surging, the demand to drive is still there. This has triggered the growth of the previously not-so-popular car rental industry. Beijing's car rentals surged to 300% during the 2011 Spring Festival, and overall rental rates have risen by 90% during peak times.

Not only are domestic car rental companies expanding, foreign companies have also begun to invest in this immature market. Goldman Sachs led a EUR 50.7 million investment into Shanghai-based eHi Car Rental in August 2010, which plans to expand its business within one year to about 100 cities across China. Mitsubishi invested EUR 14.5 million to set up a joint venture with Zhejiang-based Cheeyo Car Rental in November 2010. US car rental giant Avis, which entered the China market eight years ago, also released a plan to expand its branches from currently 38 to 500 in the next five years.

Will the latest fashion trend be EVs instead of LVs?
The government continues to promote electric vehicles (EVs) usage despite curbing car sales. For example, Beijing released the plans to promote individual sales of EVs to 30,000 units by 2012. Additionally, the city plans to experiment on the use of solar and wind power for charging car batteries. The Ministry of Finance initiated an incentive policy in five pilot cities – Shanghai, Shenzhen, Hangzhou, Changchun, and Hefei. For example, in Hangzhou, EV buyers can receive subsidies of RMB 6,000 (EUR 660) and additional RMB 3,000 (EUR 330) by exchanging their existing gas-powered vehicle. They are also eligible to receive RMB 0.09 (EUR 0.01) reimbursement on recharging for every kilometre driven. Whether this will be enough to lead the EV breakthrough in China is questionable.

New avenues to pursue
After the fading out of stimulus programs, and assuming that a large amount of the demand for smaller cars was satisfied in the last two years, Fiducia expects that personal vehicle growth has already reached its peak and will start to slow down to 10-20% over the next 3 years. It is very likely that domestic producers will shift their focus from volume and put more emphasis on quality, emission, and safety instead. Currently Chinese carmakers clearly lag behind their international competitors in these areas. For instance, China is many years behind Europe in terms of achieving emission standards; however, China is catching up quite rapidly.

 

In turn, many international car makers together with their JV partners are working on plans to launch new domestic brands, specifically developed for the Chinese market. With this move they want to tap into the potential at the lower end of the market, which is so far dominated by the domestic producers. It also follows pressure by the central government to increase local innovation and development work by accelerating knowledge transfer. Some industry insiders are skeptical if this move will eventually pay off or rather nurture domestic independence in the end.

 

 

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Stefan Kracht

Author: Stefan Kracht
Stefan, a member of CDI Global, is based in Hong Kong and Shanghai, China. Stefan is also a committee member of the Association of Corporate Growth (ACG) China Chapter.

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