China has issued a raft of measures aimed at moulding its auto industry to meet both the challenges posed by the global economic crisis and possibly even use the crisis to achieve long held strategic government goals. The short term goal appears to be to boost domestic consumption of cars and thereby stimulate the economy. The longer term goals have been previously enunciated in NDRC auto policy, namely consolidate the industry, build some national auto champions and build quality “green” cars. According to The New York Times, China is aiming to become a global leader in manufacturing electric cars.
The flagship policy recently announced is the Planning on Restructuring and Revitalization of Auto Industry which was issued by the State Council on March 20 (the “Auto Industry Planning”). Following the Auto Industry Planning, MOFCOM, the Ministry of Industry and Information, Ministry of Public Security, Ministry of Finance, State Tax Administration, State Administration for Industry and Commerce, CBRC and CIRC jointly issued the Opinion on Promoting Auto Consumption (the “Opinion”) on March 30, 2009. The Auto Industry Planning and Opinion clearly state their goals to be (i) kick-start domestic automobile demand, (ii) encourage the consolidation led by domestic auto giants, (iii) develop high-tech and environmentally friendly cars and (iv) again stressing the economic imperative, boosting auto consumption by a variety of means.
Highlights of the Auto Industry Planning on Restructuring and Revitalization of Auto Industry
The Auto Industry Planning covers a period of three years from 2009 to 2011. It reinforces that the auto industry is the key composition in Chinese economy and the Auto Industry Planning is issued to ensure the sustainable, healthy, stable and comprehensive development of the auto industry.
The Auto Industry Planning sets the following objectives for the next three years:
1. Promote the consumption of autos
The Auto Industry Planning sets a sales volume target for 2009 which exceeds 10 million units and an average rate of increase in the following three years of at least 10 percent. The Auto Industry Planning sets out Beijing’s toolbox it intends to use to achieve these ambitious goals, including: (i) building up a comprehensive legal system to promote the purchase of cars, (ii) adopt a reasonable taxation system, (iii) eliminate rules which impede the development of small engine vehicles (e.g. 1.6 litre or below), and (iv) further develop the support systems for auto consumption, including the auto financing and the second-hand auto sales.
2. Consolidation and Restructuring of Auto Manufacturers
The Auto Industry Planning wishes to steer consumption patterns and also strongly encourages the consolidation of auto manufacturers.
From a market structure perspective it foresees that in the commercial vehicle sector heavy duty trucks will account for 25% or more of truck sales, while in the passenger vehicle sector, vehicles with 1.5 litre engines or smaller will account for 40% or more of sales with 15% being passenger vehicles with less than 1.0 litre.
In respect of consolidation the Auto Industry Planning plans a mix of national champion manufacturers. In particular the Auto Industry Planning foresees the establishment of 2 to 3 auto super national champions which will have an annual production volume of more than 2 million vehicles. In addition to these giants there will likely be a further 4 or 5 auto giants with an annual production volume of more than 1 million vehicles.
The Auto Industry Planning clearly states that this result will be achieved through consolidation and restructuring. If everything goes to plan the PRC auto market will be more concentrated with less than 10 manufacturers controlling 90% of the market shares (currently the 90% of the PRC market share is spread among 14 auto manufacturers). The PRC authorities are not reticent about naming names and to this end the Auto Industry Planning explicitly encourages FAW, Dong Feng, Shanghai Automotive and Changan Automotive to merge and acquire smaller rivals across the country, whereas BAIC, Guangzhou Automobile, Chery and CNHTC are encouraged to conduct M&A activities on a regional basis. The Auto Industry Planning further requires that establishing new manufacturing entities or setting up new branches in places other than the registered address will need to be on the basis of merging in already established manufacturers.
3. Development of R&D Activities of Auto Manufacturers
The Auto Industry Planning continues the trend of encouraging PRC auto manufacturers to build up their own R&D capability. In particular, energy saving and environmentally friendly technologies are stressed. As mentioned above there are clear indications that China believes a major part of its automotive manufacturing future lies with electric battery operated cars. This is underscored by a number of policy decisions including subsidies to taxi fleets and local government agencies for purchasing hybrid or all-electric vehicles as well as directions to state electricity grids to establish electric car charging stations in Beijing, Shanghai and Tianjin.
Although electric cars may be the future, the present intention of the regulations is clearly to stimulate the economy. In this regard the Auto Industry Planning sets very specific measures to boost demand, including exempting tax for purchases of small engine vehicles from January 20, 2009 to December 31, 3009, 5 billion RMB worth of subsidies for farmers to purchase 1.3 litre or smaller minivans¬, cancelling limits on auto consumption (e.g. limitation on license plate numbers, models, administration fees, etc.). We understand that NDRC is drafting more detailed implementation rules which are expected to be issued in the near future.
Following the promulgation of the Auto Industry Planning, several ministry level bodies jointly issued the Opinion on Promoting Auto Consumption which focuses on the auto consumption. As with the Auto Industry Planning, the Opinion provides general objectives and principles aimed at stimulating auto consumption. The measures foreseen include improving the auto sales market environment, developing second-hand automobile market and strengthening the auto financing system.
In addition to these general principles the Opinion does include a specific, and potentially important, change in respect of Branded Auto Sales Rules.
The Opinion, clearly states that the Branded Auto Sales Rules will need to be modified in the near future. At present auto sales are made through the manufacturer (or general distributor) or brand dealers who are restricted to single brands. There had been concerns that this model gave far too much power to manufacturers and general distributors and was likely to fall foul of the PRC Anti-monopoly Law. The likely revisions will include encouraging various sales models, balancing the overwhelming market power of the auto suppliers (manufactures and general distributors) so as to establish a more level playing field in the auto sales market, particularly for the brand dealers who are now in a weak position when dealing with auto suppliers, etc.
These new regulations are a mix of government short term and longer term policy. Short term the clear intent is to boost sales and thereby stimulate the economy in these difficult economic times. However, longer term the PRC authorities seem to clearly have greater ambitions and these are to consolidate a fragmented industry and focus efforts on becoming a world leader in manufacturing hi-tech, electric powered cars. Whether China will succeed in these short and longer term goals will largely depend upon the actual implementation of these generally worded policies and the detailed regulations awaited from NDRC and other bodies. Given the importance of stimulating the economy these rules are expected to be issued in the near future.