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Pains behind the world’s “No. 1”

When China witnessed 13.6 million in sales and 13.8 million in output of automobiles in 2009, it has replaced the U.S. as the world’s largest auto market in terms of new vehicle sales and production volume.

If the U.S. would sell 1.2 million vehicles in 2010 as analysts predict, China is much likely to stay on the No. 1 throne this year. And the trend will probably continue in the foreseeable future given China’s great potential of market demand. After all, this is a country of 300 million families on the road to industrialization and urbanization. Personal mobility stands to grow as the national economy pushes forward and per-capita GDP continues to rise.

Longer term, however, the high growth of the automobile sector helps not only grow the national economy and bring about profits for OEMs, suppliers and the upstream and downstream industries, but also uncertainties to the market and society.

The stimulus policies, though very effective, may lead to unstable future development of the automobile industry. As is well known, the market explosion in 2009 largely benefited from the Automotive Industry Readjustment and Revitalization Plan issued by the Chinese government in early 2009. The halving of the sales tax from 10 to 5 percent boosted sales of passenger vehicles with 1.6 liter and smaller engines by 85 percent to around 2 million units, while rural subsidies and cash-for-clunkers program increased sales by another million, most of which were microvans and light commercial vehicles. Chinese consumers saw government subsidies as a one-time deal, which led to the rush in buying automobiles. Once the stimulus policies expire, sales are likely to cool off.

One of the big drivers for China’s booming car market has been the demand of institutional and fleet automobiles. According to incomplete statistics, annual demand for automobiles from central and local Party and government agencies and institutions and State-owned companies is at least 1 million units valued at ¥400 billion ($58.8 billion). Addressing the increasing financial burden of official cars as well as an unpopular issue of corruption, the central government is mulling on revising government vehicle procurement standards, which would directly affect demand. The central government has just decided to close down most of the 10,000 offices of local governments established in Beijing for purposes of building relationships with central government agencies. 

A booming market may also have delayed consolidation of the industry. In 2009 we saw the M&As between GAC and Changfeng, Chang’an and Hafei and Changhe, two micro-vehicle manufacturers under the country’s aviation industry. But such consolidations are more or less tailored by the central government. It is far from enough as an explosive market had boosted sales and profits of most of the 100 or so automakers in China. Reports said that Southeast Motors, passenger vehicle subsidiary of Fujian Motor, refused to merge with BAIC after a year’s negotiation. Southeast Motors was profitable in 2009 and decided to invest more in their own-brands. In a thriving market, nobody would be willing to consider M&As.

Independent automakers are still distance away from selling in developed markets. Despite good domestic performance in 2009, automobile export fell 50.77 percent in the January-November period. Robust domestic demand and downturn in the western markets reduced their efforts of foraying into the overseas market. In contrast, major foreign brands, including GM, Ford, Volkswagen, Toyota, Nissan, Peugeot, Citroën, Hyundai and Kia, sold a total of 613 million vehicles through their China JVs in 2009, accounting for 45 percent of total sales.

It will be an uphill battle for local independent OEMs to be able to sell in volume in developed markets such as Western Europe and North America. While it may take less time for them to bring out vehicles that meet local safety and emissions standards, successful sales in large quantities will depend on whether they are able to set up a sufficient dealer network and resolve a host of sales and distribution issues such as financing, parts supply, aftersales service, PR and advertising and brand building.

With total annual sales volume reaching close to 14 million units and an expected annual growth rate of 10 percent in the coming years, China will face mounting problems of energy consumption, environmental protection, CO2 reduction and urban traffic congestion. Analysts already cry out that neither China’s economy nor the mother earth will be able to sustain a healthy development of the automobile industry if such problems are not addressed now.

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