Navigant Research Blog

Chinese Auto Market Whipsawed by Conflicting Policies

John Gartner — August 30, 2012

After several years of rapid expansion, China’s automotive market growth has slowed substantially, partly due to local regulations limiting vehicle sales in cities.  According to ChinaDaily.com, auto sales grew in China by 2.9% in the first half of 2012, up slightly from the prior year’s 2.5%.  While many automakers would be happy with stable expansion, China saw 32% annual growth during the prior decade.

The government has been very aggressive in promoting vehicle sales, particularly “New Energy Vehicles” (NEVs), a term it uses to describe hybrids, plug-in vehicles, and other
fuel-efficient vehicles.  The government wants to see NEV sales reach 500,000 units annually by 2015.  Last year less than 9,000 NEVs were sold, a far cry from the government’s original plan.

Vehicle sales are stalled because four cities have established caps on annual vehicle sales due to traffic congestion and concerns about air quality.  For example, Guangzhou city is reducing license plate registrations by nearly two-thirds in 2012, and has set up a lottery system for more than half of the 120,000 tags for all vehicles.  NEVs are required to make up 10% of that amount, which should encourage sales, but also limits the potential of the market.  An auction is used for 40% of license plate sales in Guangzhou, which will further skew vehicle sales to more wealthy inhabitants.

Imposing limits on vehicle sales in major cities may make the cities safer and cleaner, but it goes against the national goal of growing the vehicle market, as nearly a quarter of China’s more than 1,300 auto and motorcycle manufacturers are on the verge of bankruptcy due to surplus capacity.  The Chinese government is considering shutting down automakers that can’t sell a minimum number of vehicles each year.  The manufacturing capacity in China is expected to be 50% above demand by 2015, according to the National Development and Reform Commission.

The Chinese government continues to offer financial incentives totaling $4 billion for purchasing NEVs, but consumers have been slow to adopt the technology, as outlined in Pike Research’s recently published Electric Vehicles in China report.

Less than 10,000 plug-in electric vehicles (PEVs) are expected to be sold in the country in 2012, which is a fraction of the government’s original goal for the year.  As shown below, Pike Research forecasts that sales of plug-in hybrid and battery electric vehicles in China will grow to 152,000 units by 2017, still less than 1% of the total light duty market.

PEV Sales by Segment in China: 2012-2017

(Source: Pike Research)

PEV growth in China is expected to be bolstered by the many joint ventures with Western automakers such as GM, Ford, Coda Automotive, and others, who will be bringing PEVs to China.

The cost of PEV batteries in China is expected to drop by 60% during the next decade, according to Pike Research’s report.  Quality should also increase as China gets access to lithium ion battery technology from the U.S., including companies such as Boston Power and A123 Systems, which recently received substantial investments from China.

FAW Motor is one of many struggling automakers that have reduced their planned production of NEVs.  FAW recently cut its investment in NEV manufacturing by more than half, to less than $700 million.  China is proving that even in markets where the government has a much stronger hand in guiding the economy, it’s hard to force consumers to transition to new technologies such as plug-in electric vehicles.

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