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China's auto industry races toward spring

By Sun Dajun (chinadaily.com.cn)
Updated: 2009-06-04 10:17

A mid- and long-term projection and analysis of the 2009 Chinese passenger car market

China's auto industry, after several years of rapid growth, faced a turning point in 2008, sliding into a bleak winter.

Just as Liu Chuanzhi, one of the founders of Lenovo, said, it is unclear whether it is the winter of Harbin, Beijing or even the Arctic.

Related readings:  World auto industry reshuffles amid crisis  Global Auto Industry Woes  Transfusions don't stop auto industry's bleeding  China's auto industry faces pay cut and layoff in 2009

Much to the surprise of most people, the winter didn't last long. As 2009 continues, China's auto industry may race towards a promising springtime. The research of Ipsos, a survey-based market research company, shows that although hit by the global economic crisis, China's passenger car market will maintain steady growth, predictably at a rate of 11.12 percent. According to Ipsos, due to the recovery of the global economy, the incentive policies introduced by the government, and the buildup of consumer's confidence, starting in 2010, China's passenger car market will witness a new round of growth, and reach a peak in 2012.

The year 2011 will see a new wave of rapid growth

Using a plethora of resources, Ipsos builds a demand model of China's auto market to predict car sales and give auto enterprises an insight into the future market. The above graph is concluded based on this model. The potential variables of this model include four factors that affect the auto market, namely, the macroeconomic performance, purchasing power, energy and raw materials, and transportation infrastructure. Varying amounts of observed variables are assigned to each potential variable as indexes.

The fluctuation and decline of the auto industry in 2008 was largely due to the macro regulation and the international economic volatility, which resulted in the capital shortage of auto enterprises. Potential car buyers' concerns about the future and the expected rapid income decline persuaded them to put off or even give up their car purchasing plan.

Ipsos believes these adverse impacts are being gradually eliminated. First, the impact of the ongoing financial crisis on China's real economy is limited, leaving the export industry hardest hit. Since the export business of China's auto industry started relatively late and accounts for a small part the auto industry's profit, the auto industry is affected very little by the global crisis.

Second, the plan for revitalizing the auto industry, launched by the Chinese government, covers more than ten areas, including policy incentives for new energy cars, subsidized car purchasing in the rural areas, "old-car-for-new-car" scheme, government car procurement, merger and restructuring as well as car loans. The attention paid to the auto industry, shown by the government's rational policy guidance, will effectively stimulate auto consumption.

Taking all these factors into account, starting in 2010, China's passenger car market will see a new round of rapid growth, although it is unlikely to reach the same levels witnessed from 2005 to 2007. As the global economy slowly recovers, China's GDP is expected grow at an average annual rate of 8 to 9 percent. The increase in peoples' income will naturally increase demand for cars.

Independent innovation, a recipe for staging a comeback

In retrospect, great changes were born out of great difficulties. Some people are eliminated in adversity, while others emerge out of it successful and even stronger. The difference between the two groups of people is whether they could find opportunities for survival in times of crisis and create optimal conditions on which to grow out of it. What are the opportunities for auto enterprises?

Ipsos believes that in the short term, policies of the auto industry will focus on independent research and development as well as independent branding. Currently, China lacks independent branding in the auto industry, particularly, passenger cars. If there is no independent branding, there will be no core competitiveness. It is predicted that during the eleventh five-year plan China will encourage auto enterprises to forge a development strategy around independent branding, strengthening research and development, and increasing the market share of independent brands. To this end, specific measures are expected to be introduced, for example, favorable taxation policies and fiscal subsidies, which will benefit companies engaged in independent R&D and branding.

In the meantime, this policy will also be conducive to independent R&D of auto parts as well as the integration of auto parts enterprises. One of the major reasons for the finished car industry's lack of independent brands is the lack of independent brands in the auto parts industry. Without research and innovation, it is difficult for the latter to achieve synchronized development with the former. The major auto parts of some joint-ventured finished car factories are imported or made by foreign-funded enterprises in China. Ipsos believes that while encouraging the independent innovation of finished car enterprises during the eleventh five-year plan, China will also give policy support to auto parts enterprises that boast an independent brand, R&D advantage, and scale advantage.

The cost of car use becomes the deciding factor in car purchasing

After identifying the orientation towards independent R&D and independent branding, the next question facing China's auto industry is on what products to focus its R&D. During the eleventh five-year plan, China will encourage the development of energy-saving products. Auto industry-related consumption policies are expected to be introduced. Safety, oil saving, and environmental friendliness will guide the R&D of auto enterprises and the consumption of car users.

On the supply side, car manufacturers should shift their strategy during the eleventh five-year plan towards R&D in low-emission and energy saving automobiles. For example, Shanghai Automotive Industry Corporation Group says it will develop microcars and do R&D in hybrid power cars. On the demand side, policies like the consumption tax and fuel tax will be adopted to encourage the purchase of low-emission cars. With the maturing of consumption psychology, car consumption will be more rational, and the cost of car use will become one of the deciding factors in car purchases. Fuel tax is only one of the major costs of car use. Parking fees, traffic conditions and other factors will also have direct and noticeable impacts.

At the same time, to save energy, China will phase in the use of diesel in automobiles. For instance, Dongfeng Cummins specializes in middle and heavy-duty truck engines. The Quanshun light buses of Jiangling Motors are equipped with diesel engines. These companies will benefit from the campaign to phase in the use of diesel.

The author is research director of Ipsos Auto