Among the major targets included in this plan was for an increase in market share of China's home-grown auto brands (also known as 自主品牌). One of the targets was for Chinese-branded passenger cars (轿车, aka, sedans) to increase domestic market share to 30 percent in three years' time (by the end of 2011). (Up from about 26 percent at the end of 2008.)
China's auto industry enjoyed robust sales growth of 48 percent in that very year, giving the Chinese brands a 29.7 percent market share by the end of 2009. And just in case the leaders weren't satisfied with rounding up to 30, Chinese brands achieved a 30.9 percent market share by the end of 2010.
Unfortunately, the tide turned against manufacturers of Chinese-branded cars in 2011, causing them to lose market share for the first time. Though the absolute number of Chinese-branded cars sold increased, foreign-branded car sales grew at a faster rate, dropping the domestic brands to a 29.1 percent market share -- just in time to miss the target that had been set out for them three years earlier.
And this came in a year during which luxury automakers enjoyed enviable sales growth in China: Audi-37%, BMW-37%, JaguarLandRover 61%, Cadillac-73%.
Why did Chinese cars suddenly lose market share to the foreign brands?
Did quality decline? Not at all! In fact, Chinese brands have been closing the quality perception gap with the foreign automakers.
What happened was that another provision in the "Adjustment and Stimulus Plan" of 2009 distorted sales growth in 2009 and 2010. The plan included a 50 percent cut in auto sales taxes for vehicles with engine sizes of 1.6 liters or less -- in other words, small cars.
The stimulus really worked! In 2009 sales of cars in the 1.6 liter and below segment grew 71 percent while sales in all other passenger car segments grew by "only" 23 percent. And the beauty of this stimulus plan was that, at the time of its introduction, fully 85 percent of the market for 1.6 liter and under cars was occupied by Chinese brands. This was none other than a plan to stimulate sales of Chinese brands.
The stimulus also worked in 2010, but it was later halved to only a 25 percent sales tax cut, and then, by the end of 2010, the stimulus was lifted completely -- resulting in disappointing performance in 2011.
Of course, we can't blame it all on lifting of the stimulus because, once the stimulus was enacted in 2009, foreign automakers scrambled to enter the 1.6 liter and below segment as quickly as possible.
Still, this does illustrate well the distorting effects of government schemes on markets. And it is somewhat ironic that the same plan that brought such growth in 2009, took it away once the stimulus provision was allowed to expire.