While the U.S. has been debating how to bail out GM and Chrysler during
the worst auto industry slump in decades, China has been scrambling to come
up with its own rescue plan for its ailing carmakers. But unlike Washington,
which is providing billions of dollars to prop up the balance sheets of the
Detroit giants, China is taking a different route: it's trying to get
consumers to buy more cars through a sales tax break and targeted subsidies
for rural buyers.
On Jan. 20, the Beijing government slashed the sales tax on cars with
engines of up to 1.6 liters from 10% to 5%. The measure, designed to get
Chinese to buy smaller, more fuel-efficient vehicles, has had an immediate
impact. January sales of small cars jumped 19% compared with the previous
month,
according to the China Association of Automobile Manufacturers. Also
boosting buyer interest: Lower road taxes and fuel prices, which are set by
the government. (
See TIME's picks of the 50 worst cars of all time.)
The surge in small-car sales helped China pass a milestone. For the first
time ever, more cars were sold in China (735,000 vehicles) in a month than
were sold in the U.S. (657,000). In January at least, China was the world's
largest car market. "The tax reduction was an obvious
help to our sales," says a sales manager surnamed Feng at the biggest
Hyundai dealer in
Beijing. "Since the new policy started, sales of our three
models with 1.6 liter engines or below have gone up by 30% compared to
the same period last year."
Ultimately Chinese carmakers, not foreign manufacturers like Hyundai,
are expected to benefit most from Beijing's moves. "Domestic manufacturers
mostly focus on the production of automobiles with smaller engine
power, and they benefit the most from the tax reduction policy," says
Yao Jie, deputy secretary general of China Association of Automobile
Manufacturers. While domestic brands accounted for 26% of the market last
year, their share climbed to 30% in January, Yao says. Chery Automobile Co,
the highest-selling Chinese automaker and manufacturer of the popular QQ
compact, says it expects to increase sales by 18% this
year.
The tax cuts are part of China's efforts to revive its economy, which is
suffering from dramatic drops in exports and investment, through a wide
range of stimulus measures. In November Beijing announced
it will spend $586
billion this year to promote growth. While few details of the stimulus plan
have been made public, the government says it will use tax cuts and loans to
aid 10 key industries including machinery manufacturing, steel, textiles,
oil, shipbuilding and electronics. (
See 10 things to do in Beijing.)
China's stimulus plans "could have an enormous difference in whether
or not people want to buy cars," says Ben Simpfendorfer, chief China
economist for the Royal Bank of Scotland. "What's unusual about this
cycle is that China faces the same problems as everywhere else in the
world. The big question is how to spur consumer spending. Strong auto
sales will help China, just like they'll help America or Europe."
No one is saying China's carmakers have turned the corner. Despite stimulus
measures, the country's overall car in January were down 14% compared with
the same period a year ago (U.S. sales fell 37%). The government has
targeted a 10% expansion this year. But Michael Dunne, a Shanghai-based
analyst with research firm JD Power, estimates that
based on January figures, the mainland's auto market this year will
shrink for the first time in 20 years.
Beijing has signaled that it intends to use this slowdown to
consolidate the country's sprawling auto industry. China has more than 100
carmakers. Chinese media outlets are reporting that the government hopes to
reduce 14 major carmakers to 10 this
year. At the same time Beijing's economic planners would like to
contain the industry's production capacity, which expanded
greatly in recent boom years. "So far China has gotten away with that
growth," says Dunne, but the slowdown puts "unprecedented pressure on
weaker makers. Everybody looked good when you were growing at 20%."
Beijing is also trying to prop up the healthiest companies by encouraging
car sales in China's rural provinces, where there are hundreds
of millions who have yet to adopt the freer spending patterns of consumers
in richer coastal cities. Beginning in March the
government will offer $730 million in subsidies to help rural residents
replace their
outdated three-wheeled vehicles, which are ubiquitous in farming
communities, with small trucks or
minivans with engine capacities of up to 1.3 liters. Qualified individuals
will be entitled to a maximum of $725 under the program.
Several domestic
manufacturers are developing small trucks and minivans to suit the
government program, while expanding
sales and service networks into the countryside. This year Chang'an,
manufacturer of China's
leading minivan, plans to add 1,000 sales and service outlets to its
existing 1,260. But its unclear if poor rural consumers can be convinced to
spend. "Where's the money?" says Dunne. "The Chinese market has proven
pretty stubbornly resistant" to efforts to get rural Chinese to open their
wallets.
Still, the recession could help Beijing push through changes to
help the car industry grow more steadily in the long run. That, says
Simpfendorfer, is one of the key differences between
industry rescue efforts in the U.S. and China. "The
Chinese auto sector is not as well entrenched as the
interests in the auto sector in the U.S.," he says. "In the U.S. it's a
century old [industry]; In China it's not even decades old but a decade
old." China has "a greater tolerance to pain" that will allow the country
"to push ahead with industrial restructuring that hurts but will ultimately
produce a much healthier auto sector."
— With reporting by Lin
Yang / Beijing
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