Opinion
Government policies pivotal in historic 2009 car market
By John Bonnell (China Daily)
Updated: 2010-01-25 08:03
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At the beginning of 2009, it looked from our vantage point that difficult economic conditions would finally stall the development of China's automotive industry. Falling exports, rising unemployment and global turmoil were combining to dampen consumer confidence and reduce vehicle demand.
Vehicle sales fell in four of the last five months in 2008, and would fall again in January 2009.
Seemingly unshaken, Chinese policymakers then announced a determined plan to achieve, among other targets, 7 percent growth - sales of 10 million units - for the year.
They overachieved in spectacular fashion.
Subsidies for light commercial vehicles, reduced taxes on small cars and an enormous economic stimulus plan worked to lift the spirits of consumers and boost light vehicle demand by a staggering 48 percent.
China added 4.3 million light vehicles - passenger vehicles and commercial vehicles under 6 tons - above the 8.6 million units delivered in 2008 for a total just under 13 million units.
The explosion in vehicle demand, coupled with the decline of the US market, made China the largest, arguably most important, automotive market in the world in 2009.
According to our projections at JD Power Asia Pacific, we expect China to remain the world's largest automotive market in 2011 and 2012, though a recovery in the US economy and automotive demand will likely return the US to the No 1 spot in 2013. Consistent growth and a leveling off of the recovery in the US will ensure China captures the top rank for good by 2015.
Smaller vehicles
Besides igniting demand, government actions in 2009 moved buyers into smaller vehicles. Compacts, sub-compacts and minibuses accounted for more that 68 percent of the growth in China's light vehicle demand.
Government policy was instrumental in shaping the trend. A reduction in the sales tax on vehicles equipped with engine displacement below 1.6 liters boosted small car demand, while subsidies across inland markets supported minibus sales.
This trend will continue in 2010 as policymakers take aim at environmental concerns and a rising dependence on imported oil.
It is increasingly accepted that demand grew fastest last year in new markets, the so-called second- and third-tier cities. Development of rural areas is a longstanding objective of government policy.
It is hard to find more than anecdotal evidence supporting this conviction. But the anecdotal evidence is compelling. The subsidies for commercial vehicles were available only in rural areas. Many manufacturers report good sales from expansion of dealer networks in rural areas. And government infrastructure investment was strongest in newly developing regions.
With government support, rural consumption may continue to add to the country's total, but it's hard for us to accept that these areas will displace traditional wealth centers as the key drivers of new vehicle demand in China in 2010 and beyond.
Domestic brands
The hottest brand in China for 2009 was BYD Auto. Building on good momentum established in 2008, and great publicity surrounding its expertise in electric vehicles, BYD Auto expanded its sales by 161 percent in 2009. The F3 compact became the top-selling model in China with 280,000 delivered for the year. In the US market, only the Toyota Camry sold more than 280,000 units in 2009.
We expect gravity to catch up with BYD Auto in 2010 and bring its growth in line with the overall market.
Lead by the success of BYD Auto, Chinese brands reversed a downward trend in share of the passenger vehicle market. In the aggregate, Chinese brands grew by 61 percent last year, 13 basis points faster than the market.
While the aggregate data suggests growing competitiveness among Chinese companies, a closer look tells a different story. Most of the growth for Chinese passenger cars came as a result of new brand and new model introductions - pointing to increasing market fragmentation and likely decreased competitiveness in an industry defined by scale.
The concern is that growing sales are only the result of a rising tide, not improved competitiveness. For a measure of competitiveness in this environment look for existing models conquering share from established competitors.
Industry consolidation
Progress in this merger will tell us a lot about the potential of the vision. A measure of success to watch for is the degree of integration in operations and simplification of brand structure
In 2009, China also looked abroad for merger and acquisition targets. Beijing Automotive Industry Corp acquired SAAB's assets from General Motors. Geely Auto gained the inside track on acquiring the Volvo brand from Ford Motor. It also acquired a transmission company from Australia.
Of all the merger and acquisition activity in China in 2009, the most significant may have been the smallest. Shanghai Automotive Industries Corp added a 1 percent stake in Shanghai General Motors to the 50 percent stake it already owned. The additional share gives SAIC majority control over the future of Shanghai GM in China.
In hindsight, 2009 confirmed one thing: The automotive industry is a pillar industry for China, today and in the future. Progress might come in fits and starts, but policymakers will take every measure to meet the stated targets.
John Bonnell is the senior director of JD Power Asia Pacific Forecasting
