Serving the World's Largest Emerging Automobile Market
Home > Commentary > Tier 2 and 3 cities present bigger opportunities for growths in the next decade

Tier 2 and 3 cities present bigger opportunities for growths in the next decade

China’s economy saw a V-shaped return during the global financial crisis which has seriously battered most of the world’s major automobile markets.

Spurred by a strong economy, government’s sales tax cuts for small cars and burgeoning demand in Tier 2 and 3 markets, China’s passenger vehicle sales skyrocketed to 10.33 million units in 2009, a jump of 52.93 percent year-on-year.

Tier 2 and 3 markets replaced Tier 1 markets to become the No. 1 pusher to automobile sales growths for the first time in 2009. Statistics provided by the State Information Center show that sales in Tier 2 and 3 cities grew by 41 and 51 percent respectively in the first three quarters of 2009, contributing 40 and 34 percent of total passenger vehicle sales. In the meantime, sales in Tier 1 markets grew only by 34 percent and contributed 26 percent to passenger vehicle sales growth.

Sales outburst in Tier 2 and 3 cities is a result of government stimulus policies such as sales tax cuts and “automobiles to the countryside” program which allocates ¥5 billion ($735 million) to encourage rural residents to scrape low-speed farm vehicles and purchase microvans and light trucks. These efforts have substantially lowered vehicle prices and gave a strong boost to vehicle sales last year.

Currently, every 1,000 persons in Tier 1 cities in coastal areas own 60-100 vehicles. However, the number in Tier 2 and 3 cities is only 20-30 units. Statistics also find that 2 million more households with annual income of over ¥50,000 emerge in Tier 2 and 3 cities every year in China.

Industry analysts believe that consumers in China’s Tier 1 cities created the first “Golden Decade” (1998-2007) for the automobile market. The more populated and vast Tier 2, 3 and 4 markets will contribute to the emergence of a second “Golden Decade” starting from 2009.

A number of JV and homegrown automakers, such as GAC-Toyota, FAW-Toyota, Beijing-Hyundai, Dongfeng-Nissan, Chery and Chang’an, agree that Tier 2 and 3 markets are their top priority in 2010.

However, most industry experts agree that the Chinese auto market may maintain a mild growth rate of 10-15 percent in 2010; some even predict declines in the second half of the year as the stimulating effect of government policies begins to diminish. Pushing into the burgeoning Tier 2 and 3 markets seems a safe choice for ambitious automakers to ensure continuous growth over the next decade.

Leave a Reply