Next year, up a gear?

It's compact, it has a tax break too

Walk into most car showrooms in major Chinese cities these days, and you would be forgiven for forgetting that the global automobile industry is suffering from a downturn that has crippled cities like Detroit.

Many car dealers are believed to have already reached their sales target for the full year. Models, particularly those with smaller engines, are in such high demand that customers are waiting for as long as three months before they can get behind the wheel.

Much of the demand is down to government incentives that have made China’s auto market a bright spot in a struggling global industry. Car sales are expected to exceed those in the US for the full year, reaching 13 million units (compared to 9.34 million in 2008).

Industry players have been advocating an extension of the incentives, which will expire at the end of December. They include lower consumption taxes on vehicles with 1.6 litre engines or below, and subsidies of as much as Rmb5,000 for rural residents trading in old vehicles.

No formal decision has been announced by the government. But recent policy statements suggest that the incentives are pretty likely to be rolled over into next year. Vice Commerce Minister Jiang Zengwei was quoted by Xinhua as saying the expansion of schemes that give consumers a discount when trading in older cars (and household appliances) would provide a fresh impetus to rural and urban consumption. Meanwhile, Shanghai Securities News said in an unsourced report that the Ministry of Finance and NDRC have agreed to carry on with the cuts in car sales tax. The goal is to continue promoting cars with lower fuel emissions, it added.

Some believe that sales could still level out, especially after such huge growth this year. “The impact of the stimulus package for the car industry will decelerate even if the government continues to execute these measures,” warned Yale Zhang, of consulting firm CSM Worldwide. “The strong effects have been mostly reflected this year.”

Others think that there are enough new car buyers entering the market to overcome any ‘front-loading’ of demand this year. Bill Russo, president at Synergistics Limited, says that the number of families with enough discretionary income to purchase a car (a figure estimated at $4,400) is growing fast. Car ownership rates also remain much lower than mature markets, at about 10 units per 1,000 people.

Auto executives interviewed by Reuters at the Guangzhou Auto Show last week certainly expected robust economic growth to push up sales by at least 10% in 2010. Korean carmaker, Hyundai Motors is even more bullish: it forecasts it will sell 1 million cars in China next year, up 25% from this year.

Despite this, Chinese carmakers aren’t likely to restrict themselves to their home market in the long run.

“Trends in the motor industry are changing,” Eric Apode, a vice-president of the Peugeot-Citroen China Technology Centre in Shanghai, told the South China Morning Post. “In the past, the Japanese dominated world vehicle markets, but China will soon take over this position.”

Li Shufu of Geely would certainly agree. Apart from the recent news that he has lined up financing from local banks – such as Bank of China – for the acquisition of Volvo, he has made it patently clear that he wants both the quality and reputation of his vehicles to be as good as – if not better – than foreign cars.

To this end he established Geely University in 2003 – with the goal of improving his firm’s research and development. The university’s director, Wang Shuyi says the institution has been a success, with its students building prototype models, such as a racing car called Geely Star and a solar-powered-petrol hybrid vehicle named Noah. Wang told the media this week that the university plans to double its student intake to 10,000 and grow its faculty from 128 to 300 teaching staff.

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