How much stimulus does China's auto market need?
- Source: Gasgoo.com
- [16:03 September 04 2009]
- Comments
In my last column I have talked about the central government's fiscal policy to support growth in the China car market, in particular the reduction of purchase tax for low displacement vehicles, and the remarkable success of this measure, both in boosting sales as well as strengthening consumer confidence.
Today, I want to focus on two additional incentive programs and their presumed impact on the development of the domestic auto market: foremost the “old for new” trade-in program as well as the subsidy program for buying alternative energy vehicles.
The trade-in program, also known as “cash for clunkers” has been a successful initiative in Germany and the US to bring consumers back into vehicle dealerships amid the economic downturn by offering to them quite considerable cash incentives (3,500 Euros respectively $2,500) for scrapping their old car and purchasing a new one.
In China, this program was initially introduced in rural areas to encourage farmers to buy minivans and light buses, and subsequently enhanced to consumers in Tier 1 cities and several provinces along the coastal line.
This move was less motivated by the desire to increase new car sales – at the time of its enhancement in June 2009 it was already clear that the passenger vehicle market has picked up – but rather to “clean up” the market and eliminate the most polluting cars on the road, i.e. those registered before 2003.
The idea to modernize the vehicle parc is most laudable, as it makes way for penetrating more quickly State IV technology into the market. And for several reasons it seems to make sense to concentrate on the most developed areas first – consumer affluence, availability of high quality fuels, etc. – and to spare the inland. So far so good!
The Chinese trade-in program for cars exerts considerable influence on the vehicle market structure, though, which potentially affects the sound development of the auto service industry.
Older cars require more repairs, and while in China the 4S dealerships remain a preferred service point in the post-warranty period (after 2 years ownership), independent workshops become increasingly popular with growing car age.
A considerable part of their target group risks to vanishing with the trade-in. Also, the passenger vehicle market on the mainland is comparably young, with a length of average vehicle ownership of more or less 5 years.
We have come to a point in time where the replacement of these (sort of) “first generation” passenger cars will considerably fuel the development of the used car market. If the trade-in program succeeds, a non-negligible number of vehicles destined for a second hand usage (mostly in the inland) may be deprived of their next usage purpose.
Yet, they may enter the used car market nevertheless, as it seems that the average 5,000 RMB that consumers can get as a scrapping incentive are far below the amount receivable for selling the car into the second-hand market.
Another potentially market shaping initiative is the introduction of subsidies for purchasing alternative energy cars. Again, this measure helps to curb environmental problems caused by automobiles, but it may also pave the way to promote hybrid- and electric cars to Chinese consumers.
