Due to its export-reliant economy, China cannot stay immune from the global financial crisis. The slowdown of economic growth is impacting the Chinese auto industry, which is now one of the pillar industry sectors there. In these hard times, to boost the auto industry as well as consumer confidence in the world's second-largest auto market, the China State Council passed an auto industry revival plan on 14 January 2009.
This large stimulus package covers the entire value chain of the automotive industry from research and design to retail, benefiting OEMs, suppliers, dealers and consumers.
There are five key elements and eight corresponding goals in this package.
Five Elements
Eight Goals
Officially released 20 March 2009
The five elements support various branches of the automotive industry, aimed at bolstering a short-term rebound and shoring up long-term development.
Among the five elements above, the purchase tax cut is the first key incentive measure for end consumers and helped boost the market in January and February despite the global automotive industry gloom. The purchase tax cut, which cuts the tax in half, will save customers 4.27% on models with engines of 1.6L or less. In China, vehicles with engines of 1.6L or less accounted for 55% of the market in 2008. This is expected to rise in 2009 because of this new incentive. Local OEMs have enjoyed a small boom as many have entry-level small/compact car models. Consumers of these entry-level small/compact cars are more cost-sensitive; therefore, the tax cut will greatly benefit them.
The mini bus segment has also benefited from the auto industry revival plan. Consumers who purchase new mini buses will be offered subsidies of 10% of the Manufacturer's Suggested Retail Price or up to 5,000 RMB. The huge mini bus consumer group, which is mainly made up of farmers or small business owners with quite limited budgets, will benefit a great deal from this policy due to the 10% subsidy. On the other hand, the skyrocketing growth of the mini bus segment has something to do with the global financial crisis, which has dampened global demand for products made in China and has led to many layoffs at plants in the country. Most laid-off migrant workers have to return to their hometowns, and many of them intend to buy mini buses to start their own businesses.
So far the revival plan has spurred demand for vehicles. More detailed measures, proposed by different departments and agencies of the government, have not all been released yet. They are expected to be approved and implemented gradually throughout the year.
Thanks to the economic stimulus package and the auto industry revival plan, consumer sentiment has improved since late January. Encouraged by the policy incentives and positive feedback from the market, most OEMs in China have revised their pessimistic 2009 production plans made at the end of last year. Increased production plans reflect OEMs' confidence in this market and in the revival plan. The domestic market is forecast to gain some momentum in the short term.
This swift auto industry revival plan covers more than what has been hit in this industry by the global financial crisis since the second half of 2008. This plan can be regarded as a milestone that shows the government's determination to build a motorized country as the auto industry is an economic pillar in China. Furthermore, this revival plan can be seen as a development strategy which comprises stimulus packages for the short term and policy encouraging development of China's domestic brands, hybrids and electric vehicles for the long term. However, without a real recovery of domestic auto demand, it will be difficult for all the local OEMs to grow as the planned. The progress of this plan depends heavily on how China's economy grows in the future. Once the plan is seriously implemented, we will see more competition among global OEMs, private automakers and the big state-owned groups, which are expected to acquire some small state-owned automakers and speed up their own business with the support of the revival plan in the forthcoming years.
Jerry Huang may be reached via email at jerryhuang@csmauto.com.
