After a year of strong growth led by a government stimulus package, opinions differ on whether China’s automotive boom can maintain momentum in 2010. CSM Worldwide analyst Jerry Huang looks at the issues.
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The Chinese economy has been affected since 3Q 2008 by the global financial crisis. The economy relies heavily on exports, causing many plants to close as demand in developed countries contracted. Consumer confidence fell in response to the gloomy economic situation and threat of layoffs. China’s automotive market stagnated in the last quarter of 2008.
Unexpectedly, the market rallied in 1Q 2009 in response to the government’s incentive policy. Passenger vehicle (sedan, MPV and SUV) output in the first nine months of 2009 surpassed 2008’s total volume. Full-year production is expected to have surpassed 8.4 million units, up 47% year-over-year. This dramatic hike will make 2009 a banner year for China’s auto industry.
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The 5% purchase tax cut on cars with engines of 1.6L or less, with other incentives and subsidies from the government, improved consumer sentiment and successfully spurred private consumer demand for mini, small and compact cars as well as mini buses. Price-sensitive consumers in these segments benefited from the unprecedented subsidies and incentives. The market share of cars with engines of 1.6L or less in China’s passenger vehicle market expanded to 62% in the first nine months.
A high savings ratio and natural rise in demand from small and mid-size cities helped bolster the market as well. High household savings ratio meant potential customers and helped free the market from the credit crunch. Potential consumers in small and mid-size cities had savings for their first cars, and were less affected by the global financial crisis. These cities also have comparatively low vehicle penetration. Main consumer groups in these cities include government employees, public service agencies and state-owned enterprises.
2009’s policy loosened credit and contributed to market growth despite vehicle financing still being in its infancy. Unlike other countries, Chinese consumers prefer buying vehicles with cash. In 2008, over 90% of customers purchased vehicles without financing. Many intend to purchase their first cars with financing.
Mini buses were stars of the commercial vehicle sector during 2009. Segment volume skyrocketed 70% in the first three quarters of the year, reaching 1.4 million units. Mini bus consumers, consisting of small business owners and farmers with limited budgets, benefited from the 10% MSRP price government subsidy. The financial crisis dampened global demand for products made in China, leading to reductions in plant labor. Laid-off workers returned to their hometowns and purchased mini buses with the subsidy to start their own businesses as merchants.
China was the largest automotive sales market and production country in 2009. Concerns are growing over whether the growth is sustainable, citing the downside known as “later sales vacuum” or the pulling ahead of future sales to lure potential customers.
China’s market outlook remains optimistic, but repeating the astonishing growth seen in 2009 will be difficult despite that the government has announced the extension of incentive policy through 2010.
The market is expected to grow as demand naturally increases, and is expected to maintain its momentum next year based on the growing demand from small and mid-size cities, strong replacement demand from large cities and emerging demand from customers in the countryside to upgrade from motorcycles to vehicles.
Jerry Huang can be reached via email at zheruihuang@csmauto.com
