Will the Chinese Market Save the Auto Industry?

Posted by Reading Time: 3 minutes

By Joyce Roque

SHANGHAI, Apr. 22 – If the ongoing 2009 Auto Show in Shanghai is any indication, automakers all over the world are hoping that Chinese demand will sustain them during these tough times.

Porsche introduced its entry to the luxury sedan market during the eve of the auto show. It was the first time the company debuted a new segment model outside the traditional U.S. and European car show venues. German automaker, Mercedes-Benz brought in a stable of 35 models including a record number of new models for the Chinese market.

All this attention from big name automakers indicate the industry’s hope on the Chinese market. Auto sales in China have overtaken U.S. sales for the third month in a row in March. Mercedes-Benz sales in the country posted its highest number at more than 11,000 units sold during the first quarter.

U.S. car maker, General Motors, facing severe conditions back home has remained bullish on the growth of the Chinese market as well.  The company brought in 37 vehicles and concept cars to the Shanghai auto show and said it it would increase sales by as much as double to 2 million units within five years. During the first quarter of the year, it sold 363,701 vehicles in the country thus posting an increase of 16.8 percent from last year.

Honda is also enthusiastic saying that sales in China would grow by 10 percent to 520,000 units.

Since the beginning of this year, Beijing implemented reforms that would encourage more people to buy cars as part of its economic stimulus package. Sales taxes were slashed and incentives given to companies that produce fuel-efficient and low-emission vehicles.

Beijing announced that it would provide RMB10 billion  for automakers upgrading technology and designing alternative energy vehicles. The China Association of Automobile Manufacturers predicts that sales will reach 10.2 million units by the end of the year, an increase of close to 9 percent.

With all the enthusiasm for the Chinese market, will demand be enough to fuel the global auto industry as a whole? The likely answer is no. It is too big a role that China is still unprepared to take. Chinese demand for automobiles is rising true and it is the most visible market now where growth remains promising. Moreover, unlike other countries, China is better equipped to deal with the slowdown because of its huge foreign reserves and state-controlled banking system where no sweeping reform is needed compared to the United States.

However, since domestic auto demand is spurred by government subsidies now it is still unsure whether this will be a stable trend. Until when will the subsidies last? The economy still has not made the painful transition from an export-based economy to a domestic-based one. China is one of the biggest economies in the world but because of the breadth and scale of its population, per capita GDP is still well below standard rates compared to developed nations.

And what to make of the types of cars being imported to China? Will they also be the same inefficient gas guzzlers that led to the troubles of GM, Ford and Chrysler? If Beijing’s efforts to push for more environmentally sound vehicles is sincere it will be interesting to see how the domestic automakers compete in that segment of the market with foreign brands.

Of course, in the end, Beijing wants its people to spend and to do that it must revamp its social welfare and health care systems. Recent economic figures have been positive; fueling speculation that the economy may be bottoming out and that the stimulus plan is finally working.