In true Chinese fashion, 2001 has been touted a hot year for car consumption. Beijing has pledged to introduce various measures to help private individuals buy cars. Domestic carmakers have launched numerous new models while setting higher sales targets and the state-controlled media is playing to the tune of the Central government’s push.
Beneath the fanfare and driving the government’s intentions is the aim of shaking up a chaotic and unprofitable car industry. But it may be a rough ride for all parties.
Look at the roads in China’s biggest cities. The majority of cars are company-owned, or taxis and there is a limit to the size of these sectors, including those for replacements.
The private car sector, on the other hand, promises vast potential for growth, with car ownership expected to surge nearly 2.5 times to 720,000 vehicles this year, according to official estimates.
At present, only a small percentage of China’s estimated 300 million urban dwellers own cars, and that’s not including the remaining two-thirds of the 1.3 billion people living in the countryside.
Meeting the demand
The urban statistics alone, if taken literally, are staggering enough for Chinese carmakers such as Hong Kong-listed Brilliance China Automotive Holdings [1114] and Denway Motors [203]. Both are on the buy lists of many Hong Kong-based analysts.
Brilliance China, traditionally a minibus maker, last month rolled out what it terms the first all-Chinese car, put together with Italian design, Japanese engine and German suspension and electronics.
Denway holds 51% of Guangzhou Honda Motors, a joint venture with Japan’s Honda Motor Co [HMC] to make Accord sedans, which have boasted strong sales since the cars were launched in March 1999.
Promising? Yes, but at the moment, only a few can afford to cheer. Most Chinese carmakers (including joint ventures) have lost money year after year and will continue to do so. Dongfeng-Citroen, jointly owned by France’s PSA Peugeot-Citroen SA [PEUGY], started making a profit in September 1999, after seven years of losses.
Most Chinese carmakers (including joint ventures) have lost money year after year and will continue to do so. |
Consumer affordability is the crux. The most basic car costs RMB100,000 ($94,339), or 14.3 times a worker’s 2000 per capita income of $849. Nor is there a sizeable middle class to support car buying. Ironically, accelerating economic growth in the country isn’t raising income levels across the board, but widening the gap between rich and poor.
Urban Chinese who can afford a car are reluctant and waiting for cheaper imports after China joins the World Trade Organization (WTO). Domestically produced sedans, often with dated foreign technology, are twice the price of similar models in the West, no thanks to the inefficient plants that they roll out from.
The tax effect
High car prices are partly because of a 3%-8% consumption tax the government levies on carmakers. Consumers are also hit with countless national and arbitrary local taxes and fees, from “information fees” in Guangzhou to “safety management fees” in Kunming. In Shanghai, consumers have to bid for a license, which costs at least RMB20,000, in order to own a car.
The industry’s problems are a carry-over from the planned economy policy of protecting state-owned carmakers, which has severely crimped their competitiveness. They will face an even harder task after China’s WTO accession. The whooping 80% tariff on imported cars will be cut to 25% by 2006, assuming China joins this year.
The industry's problems are a carry-over from the planned economy policy of protecting state-owned carmakers, which has severely crimped their competitiveness. |
Currently, China is stuck with a stockpile of some 70,180 cars, even though most of the 112 manufacturers are small-sized local players that do not produce more than 20,000 vehicles annually and cannot compete nationally.
The bigger manufacturers are almost all joint ventures, with the biggest international names - General Motors [GM], Toyota Motor Corp [TM] and Volkswagen AG [VKW] - jostling with one another for a larger slice of potentially the world’s biggest car market.
To date, Volkswagen has probably scored the biggest success among foreign automakers, helped by its early entry into the market. Together with Shanghai Automotive Industry Corp, the company produces the Santana sedan, China’s most popular car. Volkswagen also has ventures in the northeast with First Automotive Works, China’s biggest automaker, to produce Jetta sedans, Boras and Audi cars.
Are Chinese ready to buy cars?
As 2006 looms, carmakers are being pressed to offer more choices and to slash prices on older models to secure and raise market share. This year, at least six new models of family cars with engine capacities of between 1.3 litres and 1.9 litres will be launched.
Perhaps no other carmakers have been as aggressive as the Japanese manufacturers. Toyota, via subsidiary Daihatsu, has upgraded its Charade sedans jointly manufactured with Tianjin Motor (Group) Co. It also plans to produce two compact models – Vitz and Platz – from 2002, while Mazda Motor Co is planning to build minivans.
In the coming months, Beijing will introduce various measures to help car buyers, including scrapping random taxes and fees. Toll road fees charged by local governments to pay off construction loans will also be replaced by a long-delayed fuel tax that is likely to increase petrol prices considerably. This could possibly result in a no-win situation. Banks have also been offering car loans, yet the flip side really suggests that with current disposable income levels, the Chinese aren’t ready to buy cars.
A rule of thumb is that there should be 200 cars to every 1000 people before cars are popularized. China still has a long way to go with approximately 4 million cars now on the roads. Chinese critics point out that the car will not reach popularization by 2005 when per capita income is expected to hit $2,500, as that income level would not reflect the vast majority, but simply the more prosperous citizens of the coastal cities.
Copyright: StockHouse Media Corporation
