Autos Lead the Way

As an unprecedented 1,500 foreign and domestic automakers and parts suppliers gather in Shanghai for China’s annual auto expo, China stands out as the only bright spot in an otherwise gloomy global auto industry.

China’s auto sales hit a monthly record of 1.11 million vehicles in March, exceeding U.S. sales for the third month in a row, and were up 5 percent from last year, according to the National Bureau of Statistics. Even after a slow start to the year, unit sales are up 3.8 percent year to date.

Why is China’s auto industry performing so well compared to those in other auto producing countries? Credit a recovering economy and effective government policies that are giving the industry a much-needed boost after the fall-off in last year’s fourth quarter.

In order to cool a red-hot Chinese economy that was growing at an annual rate of 13 percent, China slammed the door on new loans in late 2007. Loan caps continued through 2008 and had the desired effect of slowing China’s growth rate.

No one, of course, could have predicted the global economic crisis and the impact it would have. When it hit, though, one of the measures China immediately took was to remove restrictions on new loans. As much as anything, the surge in new loans beginning in January is aiding the recovery of the Chinese economy. The impact of the 4 trillion yuan ($588 billion) stimulus package that was announced last November is not expected to be felt until the second quarter.

Along with a recovering economy, China’s auto industry is being helped by other policy actions. As part of the stimulus package, farmers are being given 13 percent subsidies when they substitute more conventional trucks or cars for heavily polluting agricultural vehicles. Also, consumption taxes for cars with engines under 1.6 liters have been reduced, boosting sales of smaller, more energy efficient vehicles.

And finally, China adopted a new energy policy at the beginning of this year. In January, we reported on this reform in our article China Reforms Fuel Pricing.

With one stroke of the pen … China was able to reduce the price that motorists pay for gasoline, eliminate six categories of road toll and administration fees and put in place a hefty consumption tax on fuel. Beginning January 1, ex-factory prices for both gasoline and diesel were reduced by 35 percent…After the new consumption tax of 1 yuan per liter… and value added tax … are added, the new retail price is … 15.3 percent lower than the amount paid by the motorist before the reforms. Taking into account the road toll and maintenance fees that were eliminated, Kate Zhu, executive director of research at Morgan Stanley, estimates that annual end-user vehicle maintenance costs will be reduced by 13.5 percent for family cars, 22.3 percent for large buses and 27.5 percent for heavy-duty trucks.

It should be noted that, even with January’s price reduction, retail gasoline prices in China are the equivalent of $2.80 per gallon, considerably higher that the $1.89 per gallon I pay at the Quick Chek near my farm in New Jersey.

What’s in store for China’s auto industry for the balance of the year?

China fell short of its goal of producing 10 million vehicles in 2008 due to the global economic crisis. It appears as though the 10 million mark will be hit this year, however. Many industry forecasts predict that China will produce 10.2 million vehicles in 2009, a 9 percent increase from the 9.3 million vehicles produced last year.

Also, look for further advances in technology. Miao Yu, Vice Minister of Industry and Information Technology, said that the Chinese government will allocate 10 billion yuan ($1.46 billion) to boost technology innovation in the domestic automobile industry, which is part of a comprehensive plan to enlarge new-energy auto production. According to the plan, China will have annual production capacity of 500,000 new-energy vehicles by 2011, which means 5 percent of new vehicles should be powered by new energy.

One Response to “Autos Lead the Way”

  1. Hi Jack — I was wondering what your thoughts were on a Project Better Place (http://www.betterplace.com/) model for coastal China? I hate to release it here for someone to pirate — though I’m sure some local’s been around to an international trade show and already pilfered the IP for all of the Middle Kingdom…hope the PBP honchos have it covered…still curious to know your thoughts…