November 22, 2009 / 4:06 AM / 10 years ago

Buoyant China auto market eager for more stimulus

SHANGHAI/HONG KONG (Reuters) - Will Beijing go the extra mile to keep its car industry humming?

That question will be center stage at the Guangzhou Auto show this week, as car makers hope Beijing will renew strong economic incentives that propelled China’s car sales to record levels this year even in the face of the global downturn.

After a turbo-charged year in 2009, China’s auto market, which this year passed the United States to become the world’s largest, could return to more normal growth next year if incentives aren’t renewed, industry watchers said.

“The market can grow roughly 10 percent on its own next year. It’s a pretty solid growth as the comparative base has become impossibly high,” said John Zeng, analyst at IHS Global Insight.

Automakers are hoping Beijing will continue its generosity that boosted the market by 45 percent in the year through October, making China a rare bright spot for beleaguered global giants like General Motors GM.UL and Volkswagen (VOWG.DE).

Passenger car sales in the country jumped 76 percent in October alone to 946,400 units, after topping the 1 million level in September for the first time ever.

GM Chief Executive Fritz Henderson said last month he expected auto sales in China, where the U.S. automaker has hit a string of monthly sales records since January, will continue to grow at a “significant” pace.

GM China chief Kevin Wale said he believed Beijing will take additional steps to support its auto industry after the year-end expiration of current incentives, which include aggressive cuts in sales taxes on small cars and subsidies for buyers in rural areas.

Wale could be right as several Chinese officials, including Zhu Hongren, a spokesman for Ministry of Industry and Information Technology, were quoted by local media as saying lately that Beijing may extend the incentives to prop up the industry, a major contributor to its economy.

“The government has played its hand. With property prices at record levels, automobile is the only big-ticket item they can count on to lift consumption,” said Zeng.

For a GRAPHIC on China's automarket, click here


The stakes are high for major players such as GM and Volkswagen, as well as rising stars like Hyundai Motor (005380.KS) and Nissan Motor (7201.T), which increasingly rely on China as a major growth engine, analysts said.

Toyota Motor (7203.T) and Honda Motor, which lagged the market this year due to limited offerings of small cars eligible for low sales tax, may regain momentum if they adjust their portfolio, they said.

Many automakers are betting big that China’s growth will continue and have recently unveiled massive expansion plans.

Volkswagen plans to invest 4 billion euros ($5.96 billion) in China through 2011, while Ford Motor (F.N) and BMW (BMWG.DE) are also moving ahead with new plants after years of contemplation.

While some worry the flurry of activity could lead to overcapacity, others said few automakers, many still licking their wounds from a steep downturn in North America, would rush into blind expansion at home or overseas.

“They have to come up with big investment plans as China is now a market too important to lose. But I think they will be playing safe and do it step by step,” said a senior executive with a major Chinese auto group.

Next year could also see some consolidation among a domestic sector crowded with more than 100 players.

Last week, the state parent of Chongqing Changan Automobile Co (000625.SZ) sealed a deal to take over core auto assets from aircraft maker AVIC, including the China ventures of Suzuki Motor Corp (7269.T) and Mitsubishi Motors Corp (7211.T).

Consolidation would continue into next year as Beijing pushes forward with its goal of cutting the number of Chinese auto groups to 10 or fewer from 14, analysts and executives said.

“There is little question that consolidation is the way to go. But it takes time as there are still lot of hard nuts out there,” said Boni Sa, an analyst with industry consultancy CSM Worldwide.

Editing by Doug Young and Lincoln Feast

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