Disincentives: Chinese Car Sales Growth Plummets When Government Ends Support

No one ever believed it was a free market, but the extent to which Chinese car sales declined when the government removed purchase incentives is still noteworthy. This raises a number of important questions about the strength of the market, the growth of the Chinese middle class, the uses of automobiles vs the desire to own them, and, if such incentives are necessary, what happend if the government decides that public transportation is a greater national good than auto ownership? Western manufacturers and their Chinese competitors will need to readjust their growth estimates and do a better job of understanding the underlying drivers of demand.

Bloomberg News reports:

"China’s passenger-car sales growth in February fell to the slowest in more than two years after the government ended vehicle-buying incentives and a week-long national holiday stymied demand.

Wholesales of passenger cars including multipurpose and sport-utility vehicles increased 2.6 percent from a year earlier to 967,200 units last month, the China Association of Automobile Manufacturers said today in a statement. This is the slowest pace of growth since January 2009, when car purchases fell 7.8 percent.

Automakers including General Motors Co. (GM), Toyota Motor Corp., and Honda Motor Co. have seen their deliveries slow this month after China reinstated a 10 percent sales-tax rate on small cars this year and phased out subsidies for vehicle trade- ins in rural areas. Last year, overall auto sales surged 32 percent to a record 18.06 million, helping China stay the world’s largest vehicle market for the second year running.

The reduced incentives and timing of China’s Lunar New Year holidays contributed to the slowdown, according to industry analysts at Booz & Co. and Nomura Holdings Inc.

“‘Car buying peaks just before the holiday, as Chinese consumers like to show off their shiny new autos to their families over the holiday,’’ said Bill Russo, a Beijing-based senior adviser at Booz. The holidays began on Feb. 3 this year, primarily boosting January sales, compared with Feb. 14 in 2010, which aided that month’s sales, he said.

Total vehicle sales gained 4.6 percent in February to 1.27 million, the auto association said.

Government Incentives
The removal of government buying incentives in January has weakened demand in 2011 as customers brought forward purchases to the end of last year, said Yankun Hou, an analyst at Nomura in Hong Kong. Hou has forecast passenger vehicle sales growth of about 13 percent this year.

GM, China’s largest foreign automaker, reported slower sales growth last month in the country as deliveries by its local minivan venture declined, the company said March 2. The Detroit-based automaker sold 184,498 vehicles in February, an increase of 6 percent, it said in an e-mailed statement. That was down from 22 percent in January.

Honda’s China vehicle sales fell 6.5 percent last month from a year earlier to 41,348 units, the automaker, Japan’s third largest, said this week.

Auto sales will expand between 10 percent and 15 percent this year, the manufacturer’s association estimated in January. China’s economy grew 10.3 percent in 2010, the fastest pace in three years, as industrial production and retail sales picked up, the statistics bureau said Jan 20. The country has grown at an average 11.4 percent pace over the past five years.

BYD Co., the Chinese automaker backed by Warren Buffett, said March 4 that its sales slumped 22 percent during February to 26,521 vehicles.