Dynamics of big car mania in China

[HenryTo]

Okay, these cars are still "underpowered" compared to what we drive here in Texas but this is something interesting anyway. In the meantime, car demand is expected to continue to grow - even more so if China raises its official fuel prices (which is about 20% lower than international prices). Why? Places like Guandong are currently facing a fuel shortage since some companies are diverting their fuels to overseas markets instead of serving the domestic market.
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Dynamics of big car mania

Monday, September 05, 2005

Spiraling international oil prices appear to be about to lead China's fledgling automobile industry into a thorough restructuring that could be healthy, but is certainly going to be painful.

In a demonstration of the law of unintended consequences, Zhu Rongji made China's fledgling auto industry a so-called "pillar industry" after the 1997 Asian financial crisis, as a means to drive up gross domestic product. In the years that followed, passenger car plants mushroomed across China.

And, because the manufacture and sales of cars with big engines contributed more to local GDP than small ones, local government leaders - their success traditionally tied closely to GDP growth - loved them, to the extent that they began freezing out small cars.

To ensure that the sales of increasingly high-powered cars continued, at least 84 Chinese cities imposed regulations to restrict underpowered passenger cars from major streets or superhighways. These cities include Beijing, Shanghai, Guangzhou and almost all provincial capitals.

For instance, in Beijing, cars with 1,000cc engines are forbidden from Chang'an Street in front of Tiananmen. Cars with 1,500cc engines or smaller must also drive in the slow-speed lanes of Beijing's superhighways.

Shanghai forbids cars with 1,200cc engines or smaller from driving on overpasses.

From 2001, Guangzhou ceased issuing number licenses to cars with engines of 1,000cc or smaller.

The major "reason" cited for such bans is that small cars may cause traffic congestion and pollution, although this is not grounded in experience anywhere. In fact, it is just an excuse - the real reason is to boost production and sales of big cars. Suspiciously, many Chinese "auto specialists" have also commented publicly that small- engine cars are inefficient. And, since cars are durable goods, they say it's better to spend a little more to buy one at least with a 2,000cc engine.

Chinese culture plays a vital role, as well. Customers are also increasingly addicted to big cars because, for many, private car ownership has been a lifetime dream. As long as they can afford it, they do not mind spending more. Chinese customers also like to compare themselves with others. If the neighbors have a big car, it is humble to have to drive a smaller one.

There has emerged, at least in Beijing, the peculiar business of helping customers "upgrade" their cars by simply replacing the model sign on the car back with a faked one.

For instance, for 10 yuan (HK$9.60), it is possible to "upgrade" a Chery 0.8 (800cc) to a Chery 1.1 (1,100cc). This satisfies the vanity of small-car owners who can't afford to buy bigger ones, as well as helping them beat the traffic regulations.

For all these reasons, big-engine passenger cars have been in favor over smaller ones. For instance, mainland customers have given pretty much a cold shoulder to Japanese auto giant Toyota's most popular model, Corolla, because it isn't big enough or prestigious enough.

Toyota has since adjusted its strategy to speed up production of its higher- powered Camry and Crown models. These market patterns are only sustainable as long as fuel prices remain low and stable. Over the past several years, the Chinese government has indeed managed to do that, and to keep people buying the gas-guzzlers.

According to official statistics, China's production and sales of motor vehicles in 2004 exceeded five million, half of which were passenger cars. By the end of 2004, there were more than 27 million motor vehicles on the road across the mainland, nearly half of them privately owned, putting more than 13 million mainlanders in their own cars.

Inevitably, fuel consumption has continued to soar. Last year, China consumed 130 million tons of refined oil products, of which more than 60 million tons went into motor vehicles.

As a result, China is being forced to increase its oil imports. In 2004, crude imports accounted for 40-plus percent of what China consumed. This year, the percentage is expected to grow to more than 42 percent.

As China relies increasingly on imported oil, it will become increasingly difficult for Beijing to control prices. With rising prices, the government will either have to let fuel prices float or offer subsidies to keep prices low. The latter alternative seems out of the question, since Beijing is already operating on deficit finance.

Chinese customers are also learning their lesson from the moderate fuel price increases this year. Reacting to gasoline price increases, mainland customers have begun to pay more attention to small-engine cars, and sales of such vehicles from Chang'an Auto, Tianjin Xiali and Chery are picking up.

In a State Council meeting last month, Premier Wen Jiabao called for scrapping "irrational restrictions" to encourage the use of small cars.

But none of the 84 cities has made a move to do so, apparently in fear that doing so would slow local GDP growth.

However, while local officials may resist or get around Beijing's policies, as they always seem to do, they may eventually find it a lot harder to go against market forces.