Can the Government Stimulus Really Prevent an Auto Market...

Can the Government Stimulus Really Prevent anAuto Market Slump in China?

John ZengSenior Market Analyst

Copyright © 2009 IHS Global Insight. All Rights Reserved. GLOBAL AUTOMOTIVE CONFERENCE

Presentation Outline

• China Automotive Market and Policy

• Regional Development

• Summary


China: 2008 Auto Sales Growth Hits 10-Year Low

1,896 2,1702,486

3,464

4,551

5,2645,920

7,333

8,8269,419

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Thou

sand

s

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%Domestic Sales (After adjustment of exports and imports)

Sales (LHS)Growth Rate (RHS)


China Issued Series of Policies to Support Auto Industry from End of 2008

Reducing Vehicle Ownership Cost• Cutting fuel price on Dec19, 2008 by as much

as 18% (current retail price of 93 gasoline: US$0.76/L).

• Cancellation of road maintenance fee (RMB 120 or US$17.5 per month for passenger car, RMB 200 or US$29.3 per month per ton for truck).

• Implementation of fuel tax on Jan 2009 while keeping the retail fuel price unchanged.

Incentives to Encourage Small Vehicles• Vehicle purchase tax for all passenger vehicles of

1.6 litre or below cut from 10% to 5% during the period of Jan 20 – Dec 31, 2009.

• Provide RMB 5 billion ($732 million) from Mar 1 until Dec 31 on one-time subsidies to farmers opting to replace their high-emission vehicles, three-wheeled vehicles or outdated trucks with mini truck/bus under 1.3-litre.

Subsidize for Clean Auto• Allocate RMB 10bn ($1.46bn) in the next 3

years to support technical innovation and reform, development of new energy vehicles and auto parts.

• Arrange subsidies to support the demonstration and popularization of energy efficient and new energy vehicles in public sectors in major cities.

Encourage Auto Industry Consolidation• Promote the restructuring of the auto industry and

support large auto groups in merger and restructuring. Target to cut the number of major auto groups from 14 to 10.

• Support the major auto groups to develop their own auto brands.


New Consumption Tax Aims to “Prohibit” Large Cars

20%>4.0 litres15%3.0–4.0 litres12%2.5–3.0 litres9%2.0–2.5 litres5%1.5–2.0 litre3%<1.5 litre

Consumption Tax RatePassenger Cars

40%>4.0 litres25%3.0–4.0 litres12%2.5–3.0 litres9%2.0–2.5 litres5%1.5–2.0 litres3%1.0–1.5 litres1%=<1.0 litre

Consumption Tax RatePassenger CarsSituation Pre-September 2008Situation Post-September 2008

There will be some negative effects on models with engines rated between 3.0 litres and 4.0 litres. Luxury car buyers are less price-sensitive and so increases of 10% should not have a huge effect on the market where there is still a downward trend in prices.

The most significant increases are on sedans/SUVs with large engine displacements (over 4.0 litres). Imported SUVs with large-displacement engines will be more affected. Retail price of models such as Porsche CAYENNE has increased by as much as 450K yuan(US$65,885) after Oct 2008.


“Converted” Chinese Fuel Consumption Standards vs U.S.: Loose on Light, Tight on Heavy Models

Source: Feng An/China Experience with Fuel Efficiency

About half of U.S. models are heavier than 3500 lb; would “fail” China phase I, most SUVs would “fail” phase II

(Converted to approximate U.S. equiv. CAFE ratings)


Extra Taxes and Penalties Are Being Planned…Tighten Regulation Ahead

NDRC designated organizationhandle the testing report

Models in production(new models)

NDRC will revoke permits for

models not complying with the standard

For local assembled models:

For imported models: no applicable policies. The planning next step:

Levy extra consumptiontax or purchase tax

Models not complying with the standard

Importation and salesare permitted after

tax is levied

Although required by regulators, import passenger vehicles are not penalized due to impracticalities for premium models.

Applicable policies for taxes are still being formulated by the Ministry of Finance, the State Administration of Taxation and NDRC is likely to make the announcement in October 2009.

Phase III is being discussed. A new evaluation standard is likely to replace current fuel efficiency standards.


Motorcycles Are Now Banned in More and More Cities…Bike Owners’ Upgrades Also Drive Compact Cars Sales

Heilongjiang

Hunan

Shanxi

Shaanxi)

Xinjiang

Gansu

Liaoning

Taiwan

Tibet

Sichuan

YunnanGuangxi Guangdong

Fujian

Hubei

Jiangxi

Hainan

Inner Mongolia

Qinghai

Hebei

Henan

Anhui

Zhejiang

Jiangsu

Guizhou

Shanghai

Beijing

Ningxia

Jilin

Shandong

Tianjin

• Guangzhou completely banned motorcycle from Jan 2007. Over 790,000 bikes owners were affected. 140,000 (17.7%) of them chose to upgrade to compact cars.

• Recent examples include Dongguan (Guangdong) from Jan 2009, Changsha (Hunan) and Taiyuan (Shanxi) from May 2009.

• As of end of 2008, over 168 large- or medium-sized cities in China have banned motorcycles and this means 4~5 million units lost in motorcycle sales.*

• A simple estimation of extra car demands based on Guangzhou experience:

• 5 million X 17.7% = 885,000 units• The lower car ownerships and purchase tax cut also

help shift the demand from motorcycles to compact cars

* Estimation by Motorcycle Industry Association under CAAM

Cities with motorcycle ban


A Weak Start in 2009… Signs of Recovery Under Government Stimulus Plan

Monthly Sales Trend (Passenger Cars, SUVs, MPVs)

100

200

300

400

500

600

700

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thou

sand

s

2005 2006 2007 2008 2009

Cars with engine displacement under 1.6 liter accountfor 63% of total car sales in first 4 months of 2009


72319

760188

367556

174117769539

112278

295098

886084

85786

1781

133513

8369

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

≤1L 1L-1.6L 1.6L-2.0L 2.0L-2.5L 2.5L-3.0L 3.0L-4.0L Above4.0L

-100%

-80%

-60%

-40%

-20%

0%

20%

40%1Q 2009 LHS 1Q 2008 LHSGrowth %RHS

Car/Mini Bus Sales By Engine Displacement

New Incentive Schemes Driving SegmentTowards Smaller Cars

(Source: China National Statistics Bureau)

Comparing to the strong growth of small cars, combined sales of large cars (segment D and E) have dropped by nearly 13% in the first quarter of 2009.As a result, combined profits for major automakers fell by over 48% from a year earlier in 1Q of 2009.


Production Growth by Segment

A B C1 C2CDV D1 D2 E1 E2HVAN

MICMPVMVAN

PUPSUV

T Q1 2008 Q1 2009

600

500

400

300

200

100

Thousands


Passenger Car Wholesales Growths By OEMs… Local OEMs The Main Beneficiaries

Sales Growth%, Jan-April

-50

0

50

100

150

200

FAW

TO

YO

TA

GZ

TOY

OTA

FAW

VW

CH

ER

Y

SH

GM

FAW

TIA

NJI

N

CA

FO

RD

MA

ZDA

DF

KIA

GZ

HO

ND

A

SH

VW

DP

CA

GE

ELY

DF

HO

ND

A

FAW

CA

R

LIFA

N

BR

ILLI

AN

CE

DF

NIS

SA

N

JAC

GR

EA

T W

ALL

BJ

HY

UN

DA

I

BY

D

More rely on coastal region or standard/large car sales

Impact by the sharp decline of car export

Strong sales on compact/small cars


Demands in coastal regions still remain weak. Some even recorded negative growth

Inner Provinces Now Providing More Support to Auto Demand

• Henan, Shanxi, Hubei, Hunan, Anhui, Jiangxi, Sichuan and Shaanxi already accounted for over 50% of the passenger car sales growth in 1Q 2009.

• 10 provinces from Central/Western recorded over 40% growth in passenger car sales.

• Demands in coastal regions remain weak. 1Q sales in Guangdong declined by 20%. Sales in Shanghai in the first 4 months also dropped by over 6%.

Inner provinces first time became the main growth engine for passenger car market

Hainan

Heilongjiang

Hunan

Ningxia ShanxiShaanxi)

Xinjiang

Gansu

Jilin

Liaoning

Taiwan

TibetSichuan


Fujian

Shandong

Hubei

Jiangxi

Inner Mongolia

Qinghai

Hebei

Henan

Anhui

Zhejiang

Jiangsu

Guizhou

Tianjin

Shanghai

Beijing


Financial Crisis

Global Recession

Cool-down of ChinaExport Sector

Impact on Coastal Regions

Spread to Inner Provinces

Impact on Vehicle Demands

Conductive Path

Conductive Path

The Financial Crisis Is Hurting China’s Economy…But Impact to Inner Provinces is Minimum

So far the impact to inner provinces is minimum…. Government incentive schemes are working well in these regions.

FDI in costal regions play key roles in local economy: many of them import raw materials and then export the finished goods (account for 78% of exports from FDI companies in China). Recovery of these regions will depend on external demands.


More Impacts on Eastern/Southern China as Higher Dependence on Export

91%90%

60%57%

52%

41%40%

22%

9% 9%

24%

13%

6%9% 9% 8% 7%

5% 4%

25%

9% 8% 8% 7% 7% 7% 6% 5% 4% 4% 4%

Guangdon

gShan

ghai

Jiangsh

uTian

jinZheji

ang

Fujian

Beijing

Shandon

gHeb

eiHain

anLiao

ning

Heilongji

ang

Jilin

Anhui

Shanxi

Jiangxi

Hubei

Hunan

Henan

Xinjiang

NingxiaChon

gqingYunnan

TibetGua

ngxiShaa

nxiSichu

anGan

shuGuiz

houQing

hai

Inner Mongo

lia

(Source: China State Information Center)

2007: Percentage of Total Export in GDP

East/South

Northeast

Central

West


Sales Growth Diffusing Away from Mega-Cities

Heilongjiang

Hunan

NingxiaShanxi

Shaanxi)

Xinjiang

Gansu

Jilin

Liaoning

Taiwan

TibetSichuan


Fujian

Shandong

Hubei

Jiangxi

Hainan

Inner Mongolia

QinghaiHebei

Henan

Anhui

Zhejiang

Jiangsu

Guizhou

Tianjin

Shanghai

Beijing

-15

-10

-5

0

5

10

15

20

25

30

Guang

dong

Shang

hai

Zhejia

ngJia

ngsh

uSha

nxi

Ningxia

Qingha

iGan

suAnh

ui

Car sales growth shows regional discrepancy:• In 2008, markets in Guangdong, Zhejiang, and Jiangshu (top 3 provinces for car sales in China) declined by 11.1%, 1.3% and 3.5% respectively.• The two major engines for economic growth “Yangtze River Delta” and “Pearl River Delta” lost momentum.

Passenger Car (Incl. Mini Bus) Sales Growth Rate by Province(2008)

Above Average National Average 6.5%

Below Average

Demand in south-eastern provinces are now slowing down, and the growth in car sales are being sustained mainly by the development of motorisation in central provinces. Combined market shares of Guangdong, Zhejiang, and Jiangshu dropped from 35% in 2007 to 25% in 2008.

Passenger Car/ Mini Bus Sales Growth Rate (2008)

National Average 6.5%

(Percent)

(Source: Vehicle Registration, Ministry of Public Security)


Sales Growth Diffusing Away From Mega-Cities

15.8%

9.3%

-12.70%-8.10%

14.7%13.8%

-8.40%

2.80%

19.0%

27.2%

-1.60%

13%

Tier 1 Tier 2 Tier 3/4

Q1 Q2 Q3 Q4

Heilongjiang

Hunan

NingxiaShanxi

Shaanxi)

Xinjiang

Gansu

Jilin

Liaoning

Taiwan

Tibet

Sichuan


Fujian

Shandong

Hubei

Jiangxi

Hainan

Inner Mongolia

Qinghai

Hebei

Henan

Anhui

Zhejiang

Jiangsu

Guizhou

Tianjin

Shanghai

Beijing

Per Capita GDPin US$(2006)

Car Ownership Per ‘000 people

Tier 1

Tier 2

Tier 3

Tier 4

50>5000

2500 - 5000

1500 - 2500

<1500

18

5

<5

30% of the population,over 50% of the GDP,60% of the car market

4% of the population,10% of the GDP,

15% of the car market

2008 Quarterly Sales Growth by Region

(Source: IHS Global Insight/Vehicle Registration, Ministry of Public Security)


The Massive Investment Plans More Focus on Inner Provinces

Hainan

Heilongjiang

Hunan

NingxiaShanxi

Shaanxi)

Xinjiang

Gansu

Jilin

Liaoning

Taiwan

Tibet

Sichuan


Fujian

Shandong

Hubei

Jiangxi

Inner Mongolia

QinghaiHebei

Henan

Anhui

Zhejiang

Jiangsu

Guizhou

Tianjin

Shanghai

Beijing

Fixed Asset Investment Growth Rate By Region(1~3, 2009)

Above Average National Average 28.6%

Below Average


Strong Investment Growth in 1Q 2009… More Growth from Northeast and Inner Provinces

45%45%41%

24%

19%

12%12%10%

1%

-12%

73%

64%

35%

44%

36%35%33%

30%

21%

54%54%53%53%51%51%48%48%

42%41%

36%32%

Tianjin

Hannan

Hebei

Jiangsh

uShan

dong

Fujian

Zhejian

gGua

ngdong

Shangha

iBeij

ingHeil

ongjian

gLiao

ning

Jilin

Jiangxi

Hunan

Anhui

Hubei

Henan

Shanxi

TibetNingxiaShaa

nxiQing

haiYunnanSichu

anGuiz

hou

Inner Mongo

liaGan

shuGua

ngxiXinjia

ngChon

gqing

Investment Growth By Region (1Q 2009)East/South: 17.7%

Northeast: 58.9%

Central:33.7%

West: 46.1%

East/South: 17.7%

Northeast: 58.9%

Central:33.7%

West: 46.1%

Source: China National Statistics Bureau


Industry Output Growth Still Weak in Coastal Regions

20%

11%

8%7%

4%

1% 1%

-3%

-6%

-10%

11%10%

19%18%

16%15%

3%

-22%

19%18%

16%16%

9% 9% 8%7%

5%

1%

-2%-3%

4%

Tianjin

Jiangsh

uHeb

eiShan

dong

Fujian

Guangdon

gHan

nanBeij

ingZheji

ang

Shangha

iLiao

ning

Jilin

Heilongji

ang

Hunan

Anhui

Hubei

Jiangxi

Henan

Shanxi

Inner Mongo

liaSichu

anGuiz

houGua

ngxiChon

gqingQing

haiTibet

Shaanxi

Xinjiang

YunnanGan

shuNingxia

Industry Output Growth By Region (1Q 2009)

East/South

Northeast

Central

West

Source: China National Statistics Bureau

National Average: 5.1%


9

10

11

12

13

14

15

16

2007 2008 2009

RMB Appreciation Quick Against Major Currencies

6.0

7.0

8.0

2007 2008 2009

8.0

9.0

10.0

11.0

2007 2008 2009

5

6

7

8

2007 2008 2009

British Pound

(Source: People’s Bank of China)

Euro

Japanese Yen U.S. Dollar


Chinese Export Has Been Dragged Down By the Global Recession

-30

-20

-10

0

10

20

30

40

2000 2001 2007 2008 1Q 2009

Total Asia Europe U.S.

(Chinese export growth by major markets, percent)

Source: China Custom

2001 tech sector crash

2001 tech sector crash

subprime crisis recession

subprime crisis recession


China Macro-Eco Indicator Still Running in Red Light

OECD CLI

Bank Loans

Government Expenditure

Finished Goods Inventory of the Industrial

Enterprise

Throughput in Major Costal Ports

New Floor Space Started in Commercial House

Pig Iron/Crude Steel Production

China Mac-Eco Leading Indicator

-0.7 (Jan-Feb 2009)

4.58 trillion RMB in Q1

34.8%

-7.2%

-16.2%

4.3%/2.8%

Indicator:Q1 Change

Source: China National Statistics Bureau/OECD/ State Information Center


Incentive Schemes:Governments to the Rescue?

China

Germany

Country

Reduction of purchase tax on smaller cars plus cash incentives for rural vehicles (estimated around RMB 23bn).Cancellation of road maintenance fee, fuel consumption tax implemented while retail fuel price unchanged (estimated around RMB 50bn per year for passenger car).Result: 31% Y-O-Y sales growth for passenger car in April and 8.7% growth in the first 4 months of 2009.

1 or 2 year exemption from annual road tax for cars registered until July ’09.Scrapping incentive scheme worth €2,500 for 2009 (boosted to €5bn).Result: Nearly 40% Y-O-Y sales growth for passenger car in March 2009.

Summary Details

3

4

2006 2007 2008 2009 2010 2011 2012 2013 2014

Mill

ions Up Scenario (5bn DEU scheme) Base (Known schemes Mar '09)

Scrapping incentives limit downside but also sap strength from potential near-term recovery –classic payback effect.

4

5

6

7

8

9

10

2006 2007 2008 2009 2010 2011 2012 2013 2014

Mill

ions Up Scenario Base (Jan '09)

Passenger Car Production


Passenger Car Demand Outlook

6.6%

9.6%

5.3%

9.2%

7.1%

0

1000

2000

3000

4000

5000

6000

7000

8000

2008 2009 2010 2011 2012

Thou

sand

s

0%

2%

4%

6%

8%

10%

12%

• Incentive scheme has helped the car market to bottom out . Total passenger car sales is expected to grow by over 9% to 5.95 million in 2009• Some pack back effects expected in 2010 but the car market is likely to hold up given that China is still a first-time buyer dominated market and the government has committed to support the auto industry in its industry reviving plan.

Domestic car sales (after adjustment of exports, excluding imports)


To Summarize…

• Government stimulus policies have successfully prevented the market slump and the major beneficiaries are those small car manufacturers, particular for many local Chinese OEMs.

• The new incentive schemes, together with the new consumption tax plan and the possible penalty for those vehicles that can’t meet Phase II fuel consumption standard, will help to drive the segment development away from the “gas guzzlers”.

• Auto sector’s profits will continue under pressure. Cost control ability will therefore be crucial for success in the Chinese market for both car makers and suppliers.

• Motorization in inner provinces will accelerate faster and it has become the main growth engine in recent strong recovery, but it remains to be seen how much benefit the stimulus plan will have on the overall market for the rest of the year. As worldwide recession has not hit bottom yet, coastal regions’ export-driven economy could be further damaged and therefore bring some risks for vehicle market on down side.

• Gearing up dealer networks and increasing after sales service capabilities in inner provinces, should be a priority for car makers in the coming years.

Thank You!

John ZengSenior Market Analyst

[email protected]

Can the Government Stimulus Really Prevent an Auto Market...

Documents

Transcript of Can the Government Stimulus Really Prevent an Auto Market...