China’s Central Bank announced on June 16 that the deposit reserve ratio for commercial banks that satisfy prudent operation requirements and has certain percentage in offering loans to support “three rural” development (agriculture, farmer and rural area) and small and micro businesses will be reduced by 0.5 percentage point. This most recent adjustment and a series of economic policies issued recently by the new administration led by Premier Li Keqiang indicate a milder policy environment in adjusting the economy. The heavy-duty truck industry, which is heavily influenced by macro-economic control, will therefore see more stable development in the future. The sudden rise and fall of the market in the past few years are not likely to happen again.
Milder economic policy
Former Premier Wen Jiabao frequently adjusted interest rates for economy control. Premier Li, on the other hand, has not adjusted the interest rate in the past one year and three months since taking office. The one-year fixed deposit rate remains at 3 percent.
Besides the adjustment of bank interest rate, the Wen Jiabao administration also frequently used the reserve requirement ratio as macro-control tool by adjusting the rate for 39 times, both up and down, during his 10-year tenure as Premier (2003-2013).
Premier Li, on the other hand, only reduced the reserve requirement ratio twice in April and June this year, indicating a more stable economic policy in the future.
Heavy-duty truck industry fluctuates under frequent adjustment
Besides monetary policy, the Wen Jiabao administration also released a series of inconsistent financial, tax, industrial and macro-economic policies. For example, industries such as coal, iron, cement and electrolytic aluminum kept on expanding and shrinking due to several round of restrictions and incentives starting from 2004.
The heavy-duty truck industry is closely related to the macro-economy and any fluctuation of the macro-economy brings severe fluctuation in the heavy-duty truck industry.
According to the above chart, heavy-duty truck sales had kept on rising before the Wen Jiabao administration. Sales started to drop in 2005 and 2012 and fluctuated repeatedly from 2003 to 2013.
The ups and downs of the heavy-duty truck industry caused large waste and made it hard for truck makers in their decision making. Some companies do not even expect sales to fulfill their sales expectation. And executives of auto parts suppliers even complained that it was too hard to catch up with the pace of policy change.
However, this condition may be improved significantly in the Li Keqiang era.
As could be expected, the new government will not frequently adjust the macro-economy, nor provide large incentives or control to the economy. This means that the ¥4 trillion ($640 billion) stimulus plan would not happen for the second time, nor would heavy-duty truck demand suddenly rise significantly again.
A stabilizing heavy-duty truck industry
The heavy-duty truck market started to witness skyrocketing growth in the year 2000, along with the 10 percent growth of the economy, mass urbanization, quick increase of the second-tier industry and the popularization of real estate and automobiles. Annual sales of heavy-duty trucks jumped from 80,000 units in 2000 to more than one million units in 2010.
The one million heavy-duty trucks sold in 2010 consisted of large amount of inventory as a result of economic incentives. Sales of heavy-duty trucks dropped to 630,000 units in 2012 after two years of de-stocking. And the 770,000 units sold in 2013 is a reasonable volume for the heavy-duty industry.
China’s economy has entered into a stable growth period with GDP growth rate of around 7.5 percent. A growth rate of more than 10 percent for both the economy and the industry is unlikely to repeat.
Companies need to adapt
First, truck makers should study government policies and abandon the “the market is unpredictable” mindset. For example, after two reductions in the deposit reserve ratio, the heavy-duty truck market would rebound in one or two months.
Second, they should pay more attention to structural change. The new administration started to delegate approval power to lower levels, and local governments will issue targeted policies in different regions and release various investment and energy-saving and emission reduction policies.
Thus, enterprises should shift their focus from total sales volume to product structure and pay attention to tailored policies of different regions.
Unlike the past administrations, many government officials of this administration hold degrees of economics or management. And policies of this government are in line with the economic development.
Most executives of automakers have science and engineering background, and it is necessary for them to study the economics and management systematically.
For example, U.S. diesel engine maker Cummins in recent years has hired more employees with management-related majors (including finance, law, economics and management) than those with technical majors.
As there is a saying in the auto industry that “automobile development consists of 30 percent technology and 70 percent management,” it is necessary for current executives to learn more economics and management knowledge and increase the ratio of economic and managerial talents in personnel recruitment.
(Rewritten by Jennifer Chen based on author’s article on find800.cn)