Markets Wait for Choice of Economical Vehicles

For most Chinese, owning an automobile is a dream. But this is a dream most people want to make real.

Recognizing this, foreign auto giants have invested vast sums in China, a market which they claim is unmatched in potential.

However, despite the potential, owning car will remain a remote dream and unlikely be realized in the near future because cars built in the country are priced up to twice that of those in the West.

How to get the Chinese car market out of doldrums? Many say the key is the price structure.

"The price weighs most heavily on the frugal consumers in China," said Chen Huai, deputy director with the Market Economy Institute under the Development and Research Centre of the State Council.

Surveys conducted by Chen's institute indicate that more than one-fifth of families with an annual per capita income of over 7,500 yuan (US$903) can afford a car.

But under the "umbrella" of the Chinese Government, current prices of the domestically made cars are much higher than those on the world market.

For example, the price of an Accord car, manufactured by the Guangzhou Honda Automobile Co in South China's Guangdong Province, is nearly three times that of an Accord on the world market.

Chen said prices must be cut after the country's accession to the World Trade Organization (WTO).

But an inert car market has frustrated most domestic carmakers and is like holding a wolf by the ears when it comes to price cuts.

Chinese consumers are still holding back until after the country's WTO accession, when they hope that prices will come down.

A price alliance among domestic carmakers has also caved in.

Although domestic carmakers prefer to call their price cuts "promotion", a new price war is looming, sparked by Shanghai Volkswagen Automobile Co which slashed the price of its Santana 2000 cars by around 10,000 yuan (US$1,200) on the average in late July.

The Dongfeng-Citroen Automobile Co cut prices of three models of its Fukang brand car by 6,000 yuan (US$723) to 15,200 yuan (US$1,831.30).

Last week, the Tianjin Motor (Group) Corp also began to slash prices of its Xiali cars by 2,500 yuan (US$301) to 8,000 yuan (US$963).

The Tianjin corporation said its price cuts will continue until the end of September.

"The recent price cuts between market rivals are normal," Chen said.

PRICE WAR

The first half of the year witnessed several price cuts on the domestic car market.

But the car market has not seen a robust increase in sales after the price cuts and many consumers are still waiting in the wings.

According to sources with the China Association of Automobile Manufacturers, demand for cars on the home market amounted to 272,465 units during the first six months of this year, an increase of only 4.76 per cent from the same period last year.

Sales of the Shanghai Volkswagen Co and the Tianjin Xiali Automobile Co shrank by more than 12 and 26 per cent.

"I have postponed buying a car for the second half of next year because I'm sure cars will become cheaper after the WTO accession," said Liu Chuanmin, a resident of the Chaoyang District in Beijing. "Maybe I will choose an imported car by then."

China will cut its tariffs on auto imports from the current 80 to 100 per cent level to 25 per cent by mid-2006, with the largest cuts in the first two year after its WTO accession - widely tipped for the end of this year or the beginning of next year.

Many predict that China's inefficient vehicle manufacturers would be the biggest loser after the country joins the Geneva-based world trade club, with output set to slide 15 per cent within five years as imports double.

"I can afford to pay more than 150,000 yuan (US$18,072) for a car but I'm unwilling to waste my hard-earned money," Liu said.

Jia Xinguang, a senior analyst with the China National Automobile Industry Consulting and Development Corp, called on domestic carmakers to bring prices in line with the world level soon to meet the global challenge.

From a long-term perspective, high prices do a "fat lot of good" for domestic carmakers as Jia described.

"Price cuts are unavoidable for domestic carmakers after the WTO accession," Jia said. "It is impossible for them to enjoy a high profit margin."

Profit margin of the world carmakers is becoming thinner due to an oversupply on the world auto market and fierce competition.

The world auto industry has a production capacity surplus of approximately 18 million units per year.

Jia said that the tug-of-war between carmakers and consumers will get more intense and the market had barely turned around during the second half of the year.

"But we cannot pin the current high price levels exclusively on carmakers," Chen said.

Domestic carmakers do not have a large-enough production scale to lower costs and cut prices by a bigger margin, Chen said.

"The government should play a role in helping cut prices and invigorate the dull market," Chen told Chinadaily.

In late July, the State Development Planning Commission (SDPC), which has controlled car prices for many years, declared that it does not object to flexible price stratagems among domestic carmakers.

Analysts say the declaration is a strong signal that the central government will liberalize prices in the domestic car market.

The government can do more to improve car sales, Chen said.

An adverse consumption environment is a damper for car buyers, especially private buyers, Chen said.

The high taxes and fees imposed on cars make buyers more reluctant.

A long-awaited policy to stimulate private car consumption is still in formulation.

The central government levies a consumption tax ranging from 3 to 8 per cent on carmakers, a carry-over from the planned economy era when vehicles were viewed as luxury items.

Carmakers have to shift the burden to consumers by pricing their products at a high level.

Official statistics show that arbitrary central and local government charges and fees imposed on car purchase and use account for 15 to 40 per cent of car prices.

Many private consumers complain that they can afford to buy a car but can not afford to use it.

Jia urged governments at all level to abolish all the random charges and fees as early as possible.

POLICY SUPPORT

Domestic automakers also appeal the government to do this to stimulate demand for cars.

Fortunately, things are getting better. There are indications that the central government will heed this appeal.

According to a notice issued by the Ministry of Finance and the State Development Planning Commission, 238 administrative fees on auto consumers have been cancelled from the beginning of last month.

The move is expected to save auto consumers 14.5 billion yuan (US$1.75 billion) per year, which Jia said is encouraging but insufficient.

The ministry and the State Administration of Taxation also announced a 30 per cent decrease in the consumption tax recently for vehicles that satisfy the European II emission standard.

The announcement demonstrates that the central government's commitment to promoting production and consumption of environmentally friendly vehicles.

Du Fangci, an official from the State Administration of Machine-Building Industry, said the announcement will significantly benefit the sustainable development of China's fledgling auto industry.

Du said the industry must commit itself to produce more clean cars to meet increasingly strict emission regulations.

The government requires all vehicles running in the country to meet the European I emission standard by the end of this year and Euro II around 2005, said sources with the State Environmental Protection Administration.

The announcement came about four months after 16 domestic automakers, including the First Automotive Works (FAW) in Northeast China's Jilin Province, Shanghai Automotive Industry Corp and the Dongfeng Motor (Group) Corp in central China's Hubei Province, jointly proposed that the government cut the consumption tax added to vehicles by half this year and to annul it by 2001.

Although the 30 per cent tax decrease is a step in the right direction, Jia said it is just "a drop in the bucket", when compared with the current high prices, and will not considerably help reduce prices.

The government should also intensify its efforts in traffic construction and management, particularly in big cities plagued by serious traffic jams, Jia said.

"I'm afraid that traffic will be paralyzed if more cars appear on roads," said a Beijing taxi driver Zhang Mingliang. "The surging fuel prices also put a squeeze on us and other private car owners," Zhang said.

In Beijing, the price of 93-octane gasoline, the most commonly used fuel in China, has surpassed 3 yuan (US$0.36) per litre from about 2.40 yuan (US$0.29) at the beginning of this year.

The central government has increased fuel prices four times this year because of oil price hikes on the world market.

Analysts forecast that fuel prices will continue to climb as the fuel tax is expected to come out this year.

Chen said more funds are badly needed for car distribution to reverse the prolonged direct trading between carmakers and consumers.

"Establishment of an integral car distribution system will expedite price cuts," Chen said. "But it is a job for financial institutions instead of carmakers."

If so, domestic carmakers will be able to concentrate more of their funds in production expansion and development of new models, Chen said.

Chinese consumers now have few choices and are waiting for more types of economical cars.

"Luxury models, such as BMW, Mercedes-Benz, Ferrari and Lexus are a distant dream for us," said Li Liangdong and Zhou Yue, a Beijing couple. "We plans to choose an economical car priced at around 100,000 yuan (US$12,000)."

According to Su Hui, general manager of the Beijing Asian Games Village Automotive Exchange, a shortage of economical models on the domestic market also dampens consumers' buying enthusiasm.

Sales of Su's auto exchange decreased to 1,422 cars last month from 1,624 units in June.

"Local carmakers have to develop more categories of economical cars," Su said.

Although some luxury models, such as Audi A6, Honda Accord and Passat, sell relatively better, most of them are purchased by government officials.

Audi A6, the luxury model manufactured in China by FAW Volkswagen, has reported sales of approximately 8,900 units since it came into market at the beginning the year.

With the country's market-economy reform deepening and an improvement in living standards, more private consumers, instead of government officials, are expected to buy cars, said Zhou Yongjiang, vice-president of the FAW Volkswagen.

Private buyers will be the main focus of the country's car market, but they now represent only less than one-third of the total number of buyers.

Economical cars will be very popular in the country. Foreign carmakers understand the tremendous potentials of economical cars in China, which now is the seventh largest auto market in the world.

Analysts say fierce competition for a segment in the economical car market in China is imminent among foreign carmakers.

Toyota, the biggest Japanese car maker, will begin to produce its two compact models - Vitz and Platz - from 2002 in its newly-established joint venture in North China's Tianjin.

Toyota said the two compacts will be targeted at Chinese families.

People's Daily Online --- http://www.peopledaily.com.cn/english/