China’s Auto Market May Suffer from Setbacks in 2011

　　In the year of 2010, China's auto market achieved the sales of more than 18 million units, which is a record in history.

　　When people are cheering for the fact that China has become the largest new car market in the world, China's auto industry is not feeling optimistic about the situation in the year of 2011. A large number of factors may lead to the significant decline of overall auto market in 2011. The growth rate may be zero.

　　After surging development in two consecutive years, it seems that the growth momentum of China's auto industry has reached an end. The tax concessions for small displacement vehicles have been cancelled. Subsidies for consumers in countryside and scrappage scheme and other administrative means have reached the end as well. The oil prices are rising and the problem of traffic congestion is becoming more serious. Government has issued some policies to limit the purchase of new vehicles. At the same time, the parking fees and taxes are surging. China's auto market is going to embrace an unprecedented tough period.

　　During the past two years, the growth rate in China's auto market was above 40%, which is an extraordinary speed. There are two reasons. The first reason is that according to The Automobile Industry Restructuring and Revitalization Plan, China took a number of measures such as reducing the purchase tax for small-displacement vehicles. In addition to scrappage scheme, China also offered subsidies for consumers living in countryside. Yellow-label vehicles were forced to exit from market. Secondly, in China's small cities and rural areas, a large number of residents bought passenger vehicles as taxi cars.

　　At the beginning of 2009, in order to protect China's auto industry amid the global financial crisis, Chinese government took a series of rescue measures. The pillar industry avoided risks. According to the revitalization plan, the production and consumption of vehicles should increase by 10% each year based on the sales in 2008-9.32 million units. In 2009, the sales should reach up to ten million units. In 2011, the sales should total 12.4 million vehicles. The plan was introduced at the beginning of 2009. However, in 2009, the annual sales reached 13.69 million units, far exceeding the target of 2011. Due to the four trillion government's capital investment, China's heavy truck market also embraced an extraordinary growth in 2010. The sales reached one million units, accounting for 50% of global sales. '

　　In the past two year, there is another factor which contributed to the substantial increase of vehicles in China. In cities and rural areas there are more and more unregistered cabs. Since the prices of vehicles have declined and Chinese government also offers subsidies, some residents in suburbs found that it is an ideal choice to provide unregistered-car service. In China's urban-rural junction areas, it is inconvenient to use public transportation means. Therefore unregistered cabs can provide door-to-door service and the price is much lower than that of formal cabs. Therefore unregistered cabs provide convenience for a large number of residents. Though most buyers do not have enough funds to purchase vehicles, they can easily borrow some money from relatives to buy a small-displacement car. In addition, Chinese government has offered tax concessions and subsidies. For example, in a city in Sichuan Province, the ratio between unregistered cabs and registered ones is five to one. There are more than 6,000 unregistered cabs in that city. We can estimate that there are at least 2.2 million unregistered cabs in China.

　　The facts proved that if the government's decision-makers had anticipated the growth of auto market prior to the introduction of revitalization plan, they should not have issued any stimulus policy. In the 2008, though the growth of car sales dropped to the single digit, the rate was still more than 6%. It seems that the rapid growth in 2009 and 2010 mainly resulted from the driving force offered by revitalization plan. The revitalization plan and the four trillion infrastructure investment have come to an end. In 2011, China's auto market may face the fact that the sales will plunge.

　　Along with the high-speed increase of vehicles, China is facing serious social problems including energy security, air pollution, traffic congestion and etc. The governments have to cope with these problems. The traffic congestion has become very serious in Beijing and the car ownership reaches nearly five million units. Therefore the municipal government has introduced some polices to curb the purchase of new vehicles. In 2011, the monthly quota for license plates is 20,000 units. At the same time, Beijing also took other policies to limit the purchase of vehicles. Currently, the annual sales in Beijing's auto market are 700,000 to 800,000 units. Due to the policies, the sales will be reduced by two thirds. Other major and coastal cities are also suffering from the problem of traffic congestion. If they follow the same route to take similar policies, the annual sales in 2011 will be greatly impacted.

　　With the rapid development of China's economy, there are rigid demands in China's auto market in 2011 and beyond. The stable macroeconomic environment will provide supports for the expansion of auto market. Nowadays the GDP per capita is rising and the car ownership for one thousand people is less than 50 units. However, China also faces some tough problems including energy shortage, environmental pollution, land scarcity, population density, urban congestion and etc. Therefore, China's auto market cannot follow the route of North America. Although domestic and foreign analysts predicted that the demand for cars would total up to 35 million units by the year of 2020. This figure is likely to include the low-speed electric vehicles and low-speed trucks as well as tricycles. In 2020, China's cities and rural areas cannot stand the annual sales of 35 million passenger cars and commercial vehicles. It is impossible for China to endure 200 million vehicles.

　　A number of advisory bodies have lowered their expectations about China's auto sales in 2011. Roland Berger predicted that in 2011 the growth of China's auto market would be 15%. Deutsche Bank forecasted that the growth rate would be 11%. IHS Global Insight believed that China's heavy truck market reached the peak in 2010 and in the next five years the market would decline. China Automotive News believed that the growth of China's auto market would even become zero in 2011. China's auto market would maintain the same level regarding the production and sales of vehicles.

　　After nearly ten years of high-speed development, China's auto market has reached a critical moment for adjustment. Without adjustment, China's auto market could not return to a rational stage with sustainable and stable development. One of the three goals of restructuring and revitalization plan is to promote the mergers and acquisitions in China's auto industry. In terms of this point, the policy proved to be a failure. With the help of stimulus policies, all the automakers achieved great profits and no one would like to engage in mergers and acquisitions. The mergers and acquisitions should not be decided by Chinese government. Through the fierce competition in the market, the fittest automakers will finally survive.

　　Perhaps 2011 will become the first year for structural adjustment and as well as mergers and acquisitions in China's auto market. (Translator: Qinghua/Hanxin)

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