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Many factors affect car sales
By Yang Li (China Daily)
Updated: 2004-08-04 11:26
Although a dozen reasons can be cited to explain the continued decline of
automobile sales in the Chinese market in recent months, some fundamental
factors need to be considered more seriously.
Those factors include dualistic consumer structure, the imbalance of regional
development, and largely irrational decision-making when it comes to investment
in this sector.
According to statistics from the China Association of Automobile
Manufacturers, domestic sales slipped by 7.1 per cent from May to June - the
third straight monthly decline. Car sales for June totalled 164,852 units, an
increase of 2.2 per cent over June 2003 but still the slowest growth in years.
Industry experts blame the government's current macroeconomic adjustment
policies for tightening lending to automakers. Others attribute the decline to
higher oil prices, price cuts, and poor urban traffic conditions.
All of these sound plausible, yet they are either partially or wholly derived
from the aforementioned fundamental factors.
One of the basic factors explaining declining car sales is China's dualistic
consumer structure, which makes a vast population unable to purchase cars.
According to economist Shi Xiaomin, vice-president of the China Society of
Economic Reform, consumers capable of car purchases account for 9 to 10 per cent
of the country's population - or roughly 100-130 million people.
The proportion of the potential car buyers can hardly be changed because of
China's dualistic economic and consumer structure, which leaves huge population
- about 800 million - in poor countryside.
Theoretically, the low end of the estimate of car buyers is enough to consume
the annual output of about 3 million cars. But when other factors are counted,
the actual number of car buyers among those 100 million residents is drastically
reduced.
One reason is the nation's imbalanced regional development, which
concentrates high-income earners in big coastal cities rather than distributing
them nationwide. In cities like Beijing, Shanghai and Guangzhou, the relatively
rich become car owners and the number of automobiles increases overnight. The
rapid growth of the number of car owners far outpaces the speed of road
construction and parking areas.
A common phenomenon in these big cities is that during rush hour, traffic
jams are everywhere and tens of thousands of drivers are forced to find a place
to park. By comparison, most of China's hinterland cities have far fewer cars
and their roads are not so crowded.
The situation, which is unlikely to change any time soon, is compounded by
the fact most high-income earners purchase housing before they consider buying a
car. It is widely believed that China's housing prices in big cities are too
steep even for high-income earners. For example, the per capita income of
Beijing residents was 13,882 yuan (US$1,676) in 2003, while the average urban
housing price was 6,396 yuan (US$772) per square metre. It is unlikely many
salary earners can afford to purchase a house and car simultaneously.
Other burdens like medical care, education fees and the cost of supporting
parents also dampen people's enthusiasm for car-buying.
But what about the social elite who have high incomes and less burden to deal
with housing, medical expenditures and children's education?
Most of them already have cars. For example, by this April, Beijing had a
total of 1.4 million private automobiles, mainly cars, which means one tenth of
the capital's 14 million residents owned private automobiles. Accounting for
families with an average of 3.5 members in the capital city, it means 35 per
cent of families have an auto.
Although the factual number of car consumers, influenced by the
aforementioned factors, might not be as large as car manufacturers expected, car
production in China has attracted the biggest investment in recent years.
In addition to joint ventures with Volkswagen, Ford, Toyota and General
Motors, more and more State-owned and private investors are rushing into the
field from industries like mobile phones, home appliances and wineries. It is
estimated that several hundred billion yuan was invested in automaking last
year.
It is natural for investors to pour their money into the highly profitable
automaking sector, where the profit rate is said to be more than 24 per cent.
But it is abnormal for such huge capital to be invested over such a short period
in a sector already dominated by several leading players.
The investment rush in the car sector is a result of low efficiency of
domestic capital and the irrational investment decision structure in which local
governments play a major role.
The low efficiency of domestic capital use is reflected by the fact the
average profit rate of most of China's manufacturing industries is extremely low
- often less than 5 per cent. The low average profit rate in other sectors -
which is also partially a result of China's unbalancing development that makes
production capacity grow much faster than people's incomes - makes people eager
to invest in the highly profitable automaking sector.
The irrational investment decision structure means many investments are
decided by local government officials who are lured by current high returns
instead of long-term profitability and who are not responsible for their
possible investment failures.
As a result, production capacity is greatly enlarged over a very short
period, causing repeated "price wars" and leaving some consumers to delay their
purchase decisions in the hope of further price cuts.
This results in the growth of manufacturing outpacing consumption. The second
quarter's poor car sales are therefore fully understandable. It can also be
predicted the trend of a slower growth rate in car sales will continue.
Improvement in China's car market is related to the improving situation of
China's macroeconomy, a more reasonable consumer structure and a more rational
investment decision system.
Any estimation of the number of potential car purchasers should not only be
based on people's statistical income, but also on interactive factors.
Any investment in the sector should be highly cautious no matter how
promising or profitable the current situation might be.
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