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Stimulus policies inject more confidence into Chinese auto market

Despite a worldwide economic downturn, auto giants are shifting into high gears and driving into the revved-up auto market in China to escape financial woes in their home markets.

What makes the emerging market even more irresistible is the recent stimulus moves announced by the government to boost auto sales since the beginning of this year. The moves will add 300,000 units to market demand this year and also help in the upgrade, reshuffle and integration of the entire industry, according to a report in China Daily.

The most potential market

The stimulus package is expected to boost sales both in big cities and rural regions, especially for small cars and farm vehicles.

Sales tax on vehicles with engines of 1.6 liters and less has been halved, effective from January 20 to December 31 of 2009. A total subsidy of ¥5 billion ($725 million) will be given to farmers who scrap high-emission farm vehicles for cleaner light trucks or minivans from March 1 to the end of the year.

In 2008 cars with engines of 1.6 liters or less sold across the country accounted for 60 percent of the total car sales, with volume of over 3.1 million units, according to statistics released by China Association of Automobile Manufacturers (CAAM).

“The purchase tax cut measure is the most effective tool that the Chinese government has adopted for market recovery in the current situation,” Ricon Xia, analyst at Daiwa Securities, told China Daily. The tax adjustment is expected to boost auto sales in China this year by 3 to 6 percent, he said.

“China’s auto market is set to pick up in the second half of this year and continue its steady progress in the future,” said Yale Zhang, director of Greater China Vehicle Forecasts for U.S. consultancy CSM Worldwide Corp. He expected the market to grow at 6 percent this year and maintain a healthy growth rate of around 10 percent starting from 2010.

He added that the measures would also help the country come close to the annual sales target of 10 million units set by CAAM last year.

Automobile sales in China in 2008 reached 9.38 million, up 6.7 percent from the previous year, which was the lowest growth for the past 10 years, according to CBU-Autostats.

But analysts said China would also be the first to rebound from the industry downturn and maintain a steady growth rate around the globe. Automakers still showed confidence and determination for their business in the Chinese market.

“We continue to hold confidence towards the future of the Chinese auto market. In 2009, Mercedes-Benz will bring an increasingly variant brand experience for Chinese customers,” Klaus Maier, president and CEO of Mercedes-Benz (China) Ltd., was quoted as saying by China Daily.

Dieter Zetsche, chairman of Daimler AG and head of Mercedes-Benz, has promised that the German luxury sedan supplier would “definitely increase the investment in this most potential market.”

Kenneth Hsu, spokesman for Ford China, said the U.S. auto giant’s financial woes in its home market would in no way affect their expansion plans in China. “We will continue to introduce new products and invest more in China with profits from our local operations,” Hsu said.

“The financial crisis and slowdown of China’s auto industry wo’t make us reduce production or sales in China. Instead, we are considering expanding our product portfolio here,’ said Peter Schwarzenbauer, member of the board of Audi AG.

Opportunity for industry integration

The revitalization plan would also direct industry reshuffle for a long-term effect, as it encourages industry restructuring and integration.

“Industry reshuffle is routine in the downturn. As the whole vehicle manufacturing industry in China is not so capable and segmented comparatively, the government should encourage and regulate the parts and components industry more,” Jia Xinguang, an independent auto analyst based in Beijing, was quoted as saying by China Daily.

Jia said there are about 5,000 part and components manufacturers in China, with most of them having assets of no more than ¥100 million, producing low added-value products.

Winfried Vahland, president of Volkswagen Group China, agreed that “the industry downturn should be an opportunity for China’s auto industry to optimize itself through mergers and acquisitions of smaller enterprises with low capacity and capability.”

Werner Struth, president of Bosch Chassis Systems Control, said China’s auto industry is like a healthy man who has suddenly caught a cold in such a freezing weather. “By taking the right medicine, it will become stronger after the illness,” he said.

The Ministry of Finance has recently announced government subsidies from ¥50,000 up to ¥600,000 per unit to support the energy-saving and new energy vehicles on trial operation in 13 major Chinese cities including Beijing, Shanghai, Chongqing and Changchun.

One-off subsidy will be given to consumers when purchasing hybrid, electric and fuel cell vehicles in these cities, according to the revitalization plan.

Over the next three years, the government would provide ¥10 billion to help automakers upgrade their technology and develop alternative energy vehicles.

Zhang Xiaoyu, vice president of China Machinery Industry Federation, told China Daily that the Ministry of Science and Technology is considering expand China’s new energy vehicle fleet to 10,000 units by 2010 through the promotions.

China’s private carmaker BYD Auto has gained an edge over auto giants, like General Motors, Ford, Toyota and Nissan, by being the first in the world to sell mass-produced plug-in hybrid vehicle since last December.

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