China Should Clarify Auto Incentive Policies for 2011

Uncertainty About Next Year's Tax Policy Makes it Hard for Automakers and Consumers to Plan Ahead

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SHANGHAI ( -- What's going to happen to China's red-hot car market next year? No one knows, unfortunately, because the government is keeping quiet about whether it will end tax incentives for buying passenger cars next year.

The government cut a 10% tax on car sales to 5% in 2009, and then raised the rate to 7.5% this year. That policy, along with sales subsidies in rural areas and incentives to trade in older models, will expire at the end of this month. The government hasn't indicated yet whether tax incentives, part of a nationwide stimulus program to promote domestic spending, will be reduced or cut entirely.

Yang Jian
Yang Jian
As a result, auto manufacturers have no idea how much auto sales will grow in China. Sales are estimated to reach a record 18 million units this year, up 31% over 2009.

The government needs to clarify its subsidy policies for next year, not just for the sake of market forecasters, but for the good of the industry as well.

In 2008, market analysts and auto company executives widely predicted the market would grow no more than 10% in 2009. But they were wrong. Why? Few expected the government to halve its purchase tax for vehicles with engine sizes of 1.6 liters and smaller to 5% beginning in January 2009.

The tax incentive was so powerful that the market soared 46% last year. In 2010, after the government raised the purchase tax to 7.5%, the market grew 35% in the first 10 months of this year.

Planning for manufacturing, distribution and sales in an uncertain environment is tough and now, with the new year right around the corner, anyone brave enough to predict 2011 sales will face the same difficulty as in 2008. While it is widely expected that the government will restore its sales tax for small vehicles to 10% next year, we simply don't have a clear idea what the government's subsidy policy will be.

Moreover, the auto industry must wrestle with two additional uncertainties. First, nobody knows whether the government will extend the RMB 3,000 ($455) subsidy for the purchase of "energy-saving vehicles" that started in June.

The government defines energy-saving vehicles as those with a small engine (1.6 liters or less), that also meet the government's energy efficiency standards.

Second, we aren't sure how long Beijing's cash-for-clunkers program will last. Under the program, car buyers who trade in their old cars or commercial vehicles are eligible for subsidies ranging from RMB 5,000 ($751) to RMB 18,000 ($2,703). The program launched in June 2009, andwas renewed for 2010. In the first 11 months of this year, 347,000 vehicles were sold under the program, but we still don't know whether the subsidy will be extended after it expires at the end of 2010.

Uncertainty over these policies makes it virtually impossible for auto executives or dealers to plan ahead. A case in point: Chinese consumers are scrambling to buy small vehicles before the end of the year because they fear the government will end current incentives.

Passenger-car deliveries to dealers rose to a monthly record of 1.3 million units in November, according to statistics released by the association in Beijing. And in Beijing alone, November auto sales reached a record high of 96,000 units.

"Consumers who expect the stimulus policies to be discontinued next year are bringing forward purchases before time runs out," said Yu Bing, an auto analyst at Ping An Securities Co. in Shanghai. "There is little reason to support the extension of the tax rebate and vehicle trade-in policies, given robust industry growth."

Dealers can't meet unexpectedly strong demand. And they may face a slack first quarter-- traditionally a hot season for car sales--after the consumer rush abates.

--Yang Jian is managing editor of Automotive News China, a publication of Crain Communications, which first published this article.

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