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Urban restrictions to further slow demand

The city of Guangzhou, capital of China’s southern Guangdong Province, became the fourth Chinese city  on July 1 to put a cap on vehicle sales.

The measures being taken are similar to those in Beijing and Guiyang, Guizhou Province, where people have to enter a lottery system and “win” one of a fixed number of license plate quotas each month. In Guangzhou’s case, that number is capped at 10,000 per month applicable to passenger vehicles/buses with 20 seats or less over a one-year trial period.

Shanghai, on the other hand, has had for nearly two decades a monthly license plate auction system where people bid for one of a fixed number of license plate quotas at a cost of at least  ¥40,000 ($6,300).

The move by the municipal government of Guangzhou, a major production hub for Japanese automakers Toyota, Honda and Nissan, adds to speculation that major cities in China would follow suit and take similar measures to curb rising vehicle population.

 

Surprise move

The announcement by the Guangzhou municipal government came unexpectedly late in the evening of June 30 and the news soon circulated wildly on Chinese twitters. A mad scramble ensued thereafter as customers, who had merely three hours to beat the midnight deadline, rushed into dealerships across the city to make a purchase. One dealership reportedly sold more than 150 cars while another made a record sales transaction every 10 minutes. Citywide vehicle sales that evening were estimated to have reached a monthly sales level.

Aimed at “improving traffic conditions and air quality,” Guangzhou’s move essentially reduces the city’s annual vehicle registration by 60 percent from 300,000 units. The city believes that if unrestricted, its vehicle population, which stood at more than 2.4 million units by the end of May and ranked fifth nationally, would more than double to Beijing’s existing level of 5 million in five years.

The announcement was quite shocking to the general public because city officials had said just a few months back that limiting vehicle registration was not a choice in fighting traffic congestion. Local citizens question the validity of the move since the decision was made without any public hearings. People doubt about the effectiveness of the measures since those in Beijing and Shanghai have not proven to be effective in improving traffic congestion.

Guangzhou’s cap on vehicle sales is another jolt to China’s slowing automobile market. It is expected to see single digit growth for the second year in a row, something that has not happened since the late 1990s. “The ‘Golden Decade’ of China’s auto industry is now history,” micro-blogged one reporter. “The market is giving in to a planned economy a decade after the country’s entry into the WTO.”

 

Impact on market

The immediate and short-term impact is the reshuffling of the dealer landscape in Guangzhou, especially those that are already in survival mode impacted by the market slowdown. And just like what has happened in Beijing, dealers of independent brands may take the heaviest blow now that license plates are hard to come by. People will be inclined to choose more reputable and higher-priced foreign brands. As sales decline drastically, urban dealers may close shops and their sales people lose jobs. Used vehicle brokers will also face a similar fate.

Some point out that Guangzhou’s restrictive measures could inadvertently stimulate people in other cities to speed up their vehicle purchase decisions for fear that their cities would also impose restriction. If true this may lead to a short-term spike in sales but it may in turn exacerbate traffic gridlocks leading to restrictive measures.

If Guangzhou’s move opens the floodgates for other cities to follow suit, China’s automobile industry will be impacted. OEMs will have to rethink their long-term capacity and dealership expansion plans, suppliers will face mounting pricing pressures and dealers will have to find ways to survive. Dealer consolidation will be followed by OEM and supplier consolidation.

Urban vehicle registration restriction epitomizes the paradox of China’s automobile market. The laurel of the world’s largest new vehicle sales market comes at the expense of the world’s worst urban congestion, air quality, depletion of natural and social resources and rising social inequity.

It begs to ponder if China’s automobile market may have already reached a saturation point at 20 million units instead of much predicted 30 million by 2020. It calls into question both the recent wave of capacity and dealer expansion by multinational automakers and efforts by local independent brands to maintain market shares.  

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