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Auto makers tap China’s middle class as car sales set to slow

Motorists’ rising affluence and increasing demand for bigger, more expensive cars is music to the ears of manufacturers

PUBLISHED : Friday, 21 April, 2017, 10:54pm
UPDATED : Friday, 21 April, 2017, 11:12pm

With car sales widely expected to lose their momentum in China this year, manufacturers have decided the middle class’s growing appetite for SUVs and clean-energy vehicles is their best bet.

Following a robust 15 per cent growth in 2016, sales of passenger vehicles are likely to increase at a much slower pace this year, with the China Association of Automobile Manufacturers (CAAM) forecasting a 5 per cent year-on-year rise.

Among the likely reasons for the projected decline is a decision by Beijing to roll back a tax incentive it introduced last year to bolster sales of smaller cars. The purchase tax for cars with engines of 1.6 litres capacity or lower was raised to 7.5 per cent this year from 5 per cent in 2016, and will return to its standard 10 per cent in 2018.

We can still drive sales growth with a shift of focus to bigger vehicles such as SUVs
Leon Liu, chief executive, Qoros Auto

“The tax policy will have a negative impact on the sales of small cars,” said Leon Liu, chief executive of Qoros Auto, a 50-50 joint venture between Chery Automobile and Israel’s Kenon Holdings. “But we can still drive sales growth with a shift of focus to bigger vehicles such as SUVs.”

Speaking to the South China Morning Post at the Auto Shanghai 2017 exhibition, Liu said Qoros will launch three new models including a sport-utility vehicle and an electric sedan this year with a plan to nearly double the number of dealerships to 200.

“The tax issue is not a decisive factor,” he added. “By moving up to make and sell large and clean-energy vehicles, we are bullish about our businesses this year.”

The rollback of the tax cut translates into an additional expense of 2,500 yuan for the purchase of a car worth 100,000 yuan. The preferential policy helped push sales of 1.6-litre engine cars and smaller to 17.6 million units last year, up 21.4 per cent from 2015.

For the first car I bought five years ago, I was able to earmark only about 100,000 yuan as my budget. But I am willing to spend 300,000 yuan now for the second car in my life
Jiang Zhongyu, motorist

“The tax policy did have a big weighting in my decision-making process,” said Chen Junjie, a Shanghai-based clerk who earns about 10,000 yuan a month. “I chose to buy last year to avoid the extra tax payment.”

China is the world’s largest auto market and almost all big-name global brands have gravitated here in recent years to try for a slice of the pie.

Economists are mindful that a slowdown in passenger car sales on the mainland is likely to weigh on growth of the world’s second-largest economy.

The weak sales projection will exacerbate head-on competition among the major players in the market where 24.4 million passenger cars were sold last year.

Coupled with the aggressive capacity expansion planned by many car manufacturers, it could seriously squeeze their profit margins.

But a slowdown in terms of units sold may not give the full picture of the mainland’s auto market.

People’s rising affluence and their increasing demand for better, larger and multi-purpose vehicles are becoming music to the ears of manufacturers.

“For the first car I bought five years ago, I was able to earmark only about 100,000 yuan as my budget,” said Jiang Zhongyu, a Shanghai-based state-owned company employee in his early 30s. “But I am willing to spend 300,000 yuan now for the second car in my life.”

Global and domestic manufacturers, salivating over the long-term sanguine outlook, have been investing in China, adding more production lines and extending their geographic reaches.

“Relatively speaking, China is still a high-growth market, and it has the potential,” said UBS analyst Hou Yankun. “It’s not time to scale back yet.”

For the first three months of this year, vehicle sales grew 7 per cent, according to the latest figures from the CAAM.

Ford has forecast flat sales for the industry in 2017 but is optimistic about its growth over the next five years as China’s growing wealth spreads beyond cities like Beijing and Shanghai into lower-tier metropolises.

“Our industry call for this year is 27.2 million units for cars and trucks combined,” said David Schoch, president of Ford Asia Pacific and chairman and CEO of Ford China. “Last year, it was 27.5 million.”

Peter Fleet, vice president of marketing, sales and service, Ford Asia Pacific, added: “We see the growth disproportionally coming from lower-tier cities, but there’s still growth to come in higher-tier cities as well.”

Combined sales for Ford and its Lincoln brand totalled 255,261 vehicles in the first quarter in China, down 19 per cent from a year ago. But Lincoln alone has seen sizzling growth as sales have more than doubled to nearly 12,000 in the period, making it the brand’s best ever quarter since its entry into China.

General Motors forecasts that the whole industry will witness single-digit growth for the year despite lacklustre first-quarter sales.

“For the full year, we remain confident that it’s going to be in that range of growth,” said Matt Tsien, president of GM China. “We expect sales to pick up in the fourth quarter.”

Japan’s Honda Motor enjoyed astonishing sales growth in China last year, thanks to fast-growing demand for its SUVs and sedans.

Although the company expects to sell more vehicles this year, its outlook for the Chinese market appears conservative.

“We were worried about the impact of the sales tax rise at the beginning of the year, but our sales during January to March remained robust,” said Atsushi Fujimoto, president of Dongfeng Honda Automobile. “Our forecast for the Chinese market this year is in line with the economic growth forecast, which is around 6.5 per cent.”

Last year, vehicle sales by Honda jumped 24 per cent to 1.25 million. Its first quarter sales this year rose 16.6 per cent to 305,269.