Monday, November 30, 2009

China Continues to Ride the Tiger

Analysts are predicting a significant drop in European auto sales in 2010, possibly by as much as 10.4 percent according to J.D. Power. The drop, however, will not come because Europeans have lost interest in cars, or because the economy is expected to further worsen. It will come because of incentive schemes that pumped up 2009 sales. (Financial Times, "Carmakers Plan for Slow Year as Incentives End".)

While we can debate the merits of incentivizing major consumer purchases as a tool for jumpstarting an economy in recession, many auto analysts feel that such tools only amount to a shell game in the auto industry. An auto analyst with whom I met in Shanghai earlier this year tells me that these kinds of incentives (such as tax cuts and "cash for clunkers" schemes) only pull future planned purchases into the current period. The inevitable result will be a dip in future sales.

While it appears the Europeans are prepared to stop robbing Peter to pay Paul, the Chinese are preparing to double down. According to a report from Reuters, China's Vice Minister of Commerce announced yesterday a continuation of one of the schemes that provided a boost to 2009 sales. These schemes provide a rebate to consumers who trade in old cars and household appliances for new ones.

In addition, the Finance Ministry and National Development and Reform Commission have apparently agreed to extend this year's 50 percent sales tax cut on vehicles with 1.6 liter and smaller engines.

But that's not all! According to this report in Automotive News China (free sub. required), the tax cuts will be extended to ALL passenger cars in 2010.

Rather than take the chance of a significant slowdown, China is apparently counting on the size of its auto market to continue expanding so rapidly as to wash out any potential future drop in sales.

More info on whether analysts find this plausible as I find it...


Well, we have an explanation from one of China's top auto industry experts already! Please see Bill Russo's comments below. As I suspected, there seems to be the hope that the rapid pace at which China's auto market is growing will largely make up for the eventual drop in sales that would occur when (if) incentives are removed.

(Thanks for the comments, Bill!)


  1. Hi Greg,

    A key difference is that the other markets are mature, i.e. the pie is not growing - in fact recently the pie has been shrinking. Incentives in Europe and America are intended to buy time as the companies reallocate their product mix and global footprint. The "pull ahead" of demand is a real consequence in a market where the pie is not growing. See my recent comments to Xinhua on the issue of incentives:

    U.S. auto makers expect gradual recovery in 2010 but challenges remain: expert

    The incentives in the China context are different in the sense that the pie is getting bigger, and new consumers are entering the auto market. China. In this sense, tax incentives are designed to accelerate the rate of expansion - its not a zero sum game as the market will expand anyway, they are just front-loading the timing of China's inexorable expansion.

    My fear is that it masks the problem of lack of scale for a highly fragmented sector - and prolongs the life of otherwise marginal regional players.

    Bill Russo

  2. Thanks, Bill, for your comments. I edited the original post encouraging readers to see your comments for the rest of the story. :)


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