The turmoil of the global financial crisis has impacted the Chinese economy since 3Q 2008. The economy relies heavily on exports, and this caused many plants to close when demand in developed countries contracted. Consumer confidence also fell due to the gloomy economic situation and the threat of layoffs. Subsequently, China's automotive market stagnated in the last quarter of 2008.
Unexpectedly, the market rallied in 1Q 2009 due to the government's incentive policy, jumping surprisingly in the second and third quarters. Passenger vehicle (sedan, MPV and SUV) output in the first nine months of 2009 surpassed 2008's total volume. Full-year production is expected to surpass 8.0 million units, up 40% year-over-year. Such a dramatic hike will make 2009 a banner year for China's auto industry.
What has driven such torrid growth? Governmental policy played a partial role. The 5% purchase tax cut on cars with engines of 1.6L or less, coupled with other incentives and subsidies from the government, did improve consumer sentiment and successfully spurred private consumer demand for mini, small and compact cars as well as mini buses. Price-sensitive consumers in these segments benefited from the unprecedented subsidies and incentives. The market share of cars with engines of 1.6L or less in China's passenger vehicle market expanded to 62% in the first nine months of the year from 55% in 2008. However, the 5% tax cut alone could not achieve the 40% in growth. The high savings ratio and the natural rise in demand from small and mid-size cities helped bolster the market. The high household savings ratio meant plenty of potential customers and helped to free the Chinese auto market from the impact of the credit crunch. Many potential consumers had enough savings for their first cars, particularly in small and mid-size cities; these cities have been less impacted by the global financial crisis and car penetration is comparatively low. The main consumer groups in these cities are government employees, public service agencies and state-owned enterprises.
Additionally, in 2009 the policy has loosened credit and has contributed to market growth despite vehicle financing still being in its infancy in China. Unlike other countries, Chinese consumers prefer buying vehicles with cash. In 2008, over 90% of customers purchased vehicles without financing. Car loans can help young families purchase vehicles sooner, and many now intend to purchase their first cars with financing.
The mini bus was the star of the commercial vehicle sector during 2009. This segment's volume skyrocketed by 70% in the first three quarters of the year, reaching 1.4 million units. Mini bus consumers benefited from the 10% MSRP price subsidy, as these mainly consist of small business owners and farmers with limited budgets. Growth in the mini bus segment was also affected by the global financial crisis, which dampened global demand for products made in China and led to plant labor. Laid-off migrant workers have returned to their undeveloped hometowns, where buying a mini bus with a government subsidy to start their own business as a merchant turns out well.
China is on track to be the largest automotive sales market and production country with the gain in 2009. Concerns are growing over whether the growth is sustainable. The stimulus policy may have a downside known as a alater sales vacuum.a This pulls future sales forward, luring many potential customers.
In general, CSM is optimistic regarding China's market outlook. However, it will be hard to repeat the growth seen in 2009. CSM expects the market to grow as demand naturally increases. Due to less pent-up demand in the short term, growth will normalize, leaving less room for a government incentive policy (an extension to 2010 is still pending). CSM does not believe that the possible discontinuation of the incentive policy will entail a risk of a sharp decline in incentive-covered segments. The market is expected to maintain its momentum next year based on the burgeoning demand from small and mid-size cities, strong replacement demand from large cities and emerging demand from customers in the countryside who want to upgrade from motorcycles to vehicles.
Demand in small and mid-size cities is rising quickly this year and has contributed the most to incremental volume. Concerns remain that cash reserves of first-time buyers may soon dry up if economic conditions remain weak. CSM believes that these cities will grow at a slower pace after next year, but the momentum will not disappear due to the high savings ratio and the extensive customer base of 287 cities in China, 118 with populations of one million or more. Thanks to the economic and income disparities among regions, cities and people, the country provides enough potential customers who will emerge in the auto market in the years ahead. Automakers will benefit from the cash reserves of first-time buyers in the midterm.
The Chinese market has been picking up since the beginning of the new millennium. Aggregate passenger vehicle sales in the last decade reached about 34 million units. 2009 saw the first round of private car replacement beginning to increase due to the quick development of the used car market and the increase of new model launches. Most second-time buyers in big cities will upgrade their vehicles, typically to mid-size cars or SUVs, while affluent customers will upgrade to luxury brands.
While China is considered the world's largest motorcycle market, with 2008 domestic sales reaching 17 million units, due to increasing bans on motorcycles in cities, falling prices of low-end vehicles and ongoing urbanization, demand is expected to shift to the entry-level vehicle market, beefing up local brands.
Based on 2009's prosperity and the solid future customer base, CSM has raised the forecast for China, though the risk of market fluctuation will not disappear. The continuously growing economy is expected to boost demand across China, where people are increasingly keen to improve their individual mobility.
Jerry Huang can be reached via e-mail at zheruihuang@csmauto.com .
