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Stimulus package to boost demand, not bail out automakers

In the last couple of months the crisis of the auto industry in the West has been a daily fare of the media. Thanks to a high concentration of the industry, the ups and downs of any of the multinational auto giants are headline news. As automobile sales rely heavily on financing, the global financial meltdown inevitably led to plummeting sales in mature markets.

In China’s less consolidated auto industry, the changing fortunes of numerous local automakers, relatively small in scale, attract much less attention. As consumers in China mainly use cash buying automobiles, the country’s auto market is largely immune to the “virus” of international financial ailment. Moreover, China is still a growth market. While automobile sales declined in most developed markets, sales in China last year reached 9.4 million units, up 6.7 percent from 2007.

In a vicious sequence, a sub-prime crisis in the United States has led to a financial crisis, which in turn has caused a world-wide economic downturn. The first that has been hit hard is the automobile industry that requires large amounts of cash flow to operate. A tightening of credit then hits the consumption end of the automobile value chain. The double hit battered all automakers that have a presence in the United States, with Detroit’s “Big Three” lying prostrate first. Blocked suddenly of their two lifelines – the market and credit, the “Big Three” have to ask the government and the Congress for bailout, which breaks the rule of the game in a capitalistic free market economy, of which U.S. businesses have always felt proud of.

Coincidentally, the crisis has deepened as the United States had a change of government. The new administration cannot afford to run the risk of too many autoworkers losing jobs. Besides, politicians from the Democratic Party, which won the election in the state of Michigan, cannot break the promises they had made to the electorate. The Congress and the new administration were compelled to offer a big bailout pay for the Detroit auto giants. The European Union has followed suit, not because European automakers have been mired in the same kind of predicament as the American “Big Three” but lest the saved American automakers would grab a greater market share at home and abroad.

The occurrence of such a rare phenomenon in the United States and European countries is imperceptibly having a subtle influence on China where a command economy has been on its transition to a market economy. Chinese automakers, confronted with a sudden slowdown in growth, also hope that the Chinese government would, following the example of the U.S. government, give them some aid.

Structurally, however, China’s auto industry is quite different from that in developed markets. After a century of full competition in North America and Europe and half a century of the same in Japan and South Korea, the auto industry is now highly concentrated in these areas, with just a handful of multinational auto giants ruling the roost. These auto giants not only have great importance for the economies of their respective home countries but also, because of their global reach, contribute greatly to their respective national interests. That is why, in a major crisis, the governments of their home countries are willing to make an exception and lend them a helping hand.

China’s auto industry, in comparison, is fairly fragmented. An automaker may be economically important for its home city or province, but each individual automaker or auto group is hardly of critical importance at the national economic level and is of minimal importance at the global level. The government cannot be expected to provide aid to one or a few or all of the 100 or so automakers in China, nor can it exercise effective supervision over the management of those that receive government aid.

Although the global financial crisis has an adverse effect on China, we must remember that the country remains a growth market. China’s automobile market in 2009 has every potential to achieve a high single-, if not double-digit growth. Soon China stands to surpass the U.S. to become the world’s biggest in sales. Chinese OEMs should rejoice at the high potential market demand even without much help from automobile financing. Playing up the possibility of a market collapse is nothing more than a public relations ploy by some automakers that feel threatened as demand slows down, hoping that the crying babies get the candies.

The State Council, China’s cabinet, adopted in January an Automotive Industry Revitalization Program. Many automakers complain that the specific measures proposed are “not adequate.” Indeed, other than the cut by half to 5 percent of the sales tax for cars with engine displacement of 1.6L or less, the other four measures are little more than the usual policy announcements or directives, namely: to support “consolidation, independent innovation, new energy vehicles and independent vehicle brands.” Only when the government allocates real fiscal and financial support and tax benefits in these areas can such measures become really effective.

For automakers that have enjoyed explosive growths for years, any slowdown is disappointing and maybe painful for smaller and unsuccessful players. They are now faced with a harsh reality of how to win out in quality, technology, service and cost effectiveness. Looked at from the industry as a whole, however, the current downturn serves as a much-awaited booster for market consolidation, where intensified competition is to filter out the inferior and the weak.

For a fairly long period of time to come, automobile demand is expected to continue on the rise. It is neither necessary for the government to come to the rescue of the market, nor can it guarantee the survival of all of the 100 or so automakers in the country. With the end of explosive growth, the disappearance of protected market advantages, and the leveling of playing field for all players – State, private, public and joint venture, we should witness the arrival of a period of consolidation in China.

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