China revs up the car industry

The US government is not the only one that is looking to bail out its domestic car industry. Not surprisingly, and a lot more easily, China is following suit.

The reason is jobs but also to ensure the survival of local car manufacturers who with this support may survive where overseas competitors fail leaving a greater market share for the survivors if and when the global economy picks up again.

As with the US the importance of the car industry strategically and economically is not to be underestimated. The loss of domestic car makers can dent national pride although the UK is an excellent example of the benefits of letting the domestic car makers die. The UK has one of the most productive car manufacturing sectors in the world at the moment. The reason is that it is mainly German and Japanese owned. However, the jobs still exist and I suspect many of the shareholders of the parent companies are UK pension funds so what is the problem?

The US especially could learn from the UK. China should also be careful not to prop up inefficient loss makers. The fact that there are 45 domestic car makers suggests consolidation is essential - the fact 45 have survived so long is indicative of inefficiencies in the system whether it is related to government red tape or bad management.

I agree with the comments below - despite Chinese government support car sales could still contract dramatically. There is still a long way to go in this global recession.

China in push to prop up local carmakers [FT]

The Chinese government plans to support the car industry, the second-largest in the world, with the aim of ensuring sales growth of about 10 per cent in 2009.

The move is part of the continuing effort to stimulate the economy and shield the country from the effects of the global economic crisis.

The State Council, China’s cabinet, is expected soon to announce cuts in car purchase taxes and incentives for the development of clean fuel cars, to help support the flagging local car market, according to the official Shanghai Securities Journal.

After years of double-digit growth, Chinese passenger car sales fell 12 per cent year on year in November as consumer worries about economic growth sapped demand. Figures for December are expected next week.

The proposed sales tax cut on smaller vehicles could help carmakers such as Geely, one of the largest Chinese car companies. Geely said Monday it expects to boost sales 25 per cent this year as it introduces new models.

Government bodies will be required to buy cars developed by domestic carmakers when making fleet purchases, and Beijing will encourage further consolidation in the domestic car industry, the newspaper said. China has 45 carmakers compared with 15 in the US, the world’s largest car market.

Premier Wen Jiabao said last week that Beijing had developed plans to help the automobile and steel sectors.

Yao Hongguang, Shenzhen-based analyst at United Securities, said: “With such a basket of stimulus policies, sales growth in the car market this year can reach 10 per cent, still much lower than the compound growth rate of 15-20 per cent over the past five years.”

But JD Power, the leading automotive consultancy, said it was still predicting flat or slightly lower passenger car sales in 2009, at 5.8m units.

This is based on the assumption that the global economy will stabilise in the first quarter of this year, and that China’s economic stimulus policies offset negative pressures from overseas – neither of which are guaranteed to happen.

JD Power said in a December report that there was a 40 per cent chance the Chinese market could fall by 10 to 12 per cent, in spite of government efforts to support the market.

Beijing also took steps to support the local metals industry, announcing that it will allow tax-free imports of copper, nickel and cobalt concentrate, provided the finished products are exported, according to a statement on the Ministry of Commerce website.

“This is a stimulus initiative to help local smelters survive the financial winter,” said Wang Feng of Everbright Securities in Shanghai.

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