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March 15, 2011

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Home » Business » Autotalk Special

Beijing plate curbs spell trouble

By Yale Zhang | March 15, 2011, Tuesday | Print Edition


In September 2010, as a Beijing native living in Shanghai, I heard rumors from media friends about Beijing's forthcoming policy to ease traffic jams. At first, I did not treat it seriously, assuming this would be another version of driving restrictions based on car plate numbers and alternating week days. But in the week before the policy was issued, it became clear that this was something more. The new measure would directly control car sales.

The policy fixes new car sales at 240,000 units a year - 20 percent allocated to fleet sales and the remainder to individuals. All individuals must apply for a license and then go through a "lottery" system in hopes of winning a plate. The chances of "luck" can range between one in six to one in 10.

Some of my Beijing friends living in Shanghai swiftly urged parents or dealer friends in Beijing to order cars. The city's car market was turning into a messy bazaar where people were seizing at anything to buy before the limits were imposed on December 23. Many tardy consumers found inventories sold out. One pair of reckless brothers stormed into a showroom and smashed a car window. One told the stunned salesman, "Now, I'll take this car!"

Two days after the new policy was implemented, I called a dealer friend. His voice was hollow. He said he hadn't slept for two days. I urged him to get some rest, but he laughed bitterly, replying, "Yes, I will have all of 2011 to rest."

Before the new policy, the Beijing's annual auto sales totaled 800,000-900,000 units in the previous three years. Not only will that number be slashed to 240,000, but plates will also be restricted to Beijing citizens or those with permanent residence cards who must produce five consecutive years of income tax returns. My friend was right. Auto dealers will have a good rest this year. It will be especially tough on newer dealers who don't yet have a client base for maintenance. Some may have to close.

To make matters worse, the booming used car market is doomed because even used cars will fall under the 240,000 plate quota. One assumes anyone lucky enough to win a "lottery" plate will probably buy a new car, not a used one.

There will also be serious repercussions on the competitive environment. Since Beijing newcomers can't buy vehicles, the industry's low-end will be hurt most. Those authorized for a license plate will tend to buy higher-end vehicles. That may hurt domestic auto makers selling their own developed brands, which tend to be lower-end. As Beijing car owners start to upgrade their vehicles, foreign brands may have the advantage because they still dominate the top of the market.

Used-car fleets will have to be sold outside Beijing. For historical reasons, foreign brand used cars, such as the Jetta, account for up to 70 to 80 percent of fleet units. In the future, half a million used cars in Beijing will be sold to smaller cities, directly competing with home-grown, lower-end domestic models. If larger cities follow Beijing's lead, the domestic industry car faces deep trouble.

Still, we should not overestimate the influence of Beijing's policies on the overall national market. City vehicle sales accounted for only 4.5 percent of the 18 million vehicle sales in 2010. Lower sales in Beijing would normally mean sales growth in inland areas and smaller cities.

Some coastal cities are talking about restrictions, such as increased parking fees and charges to enter congested downtown areas. But no other big cities, such as Guangzhou, have yet indicated they would follow Beijing's draconian steps. Therefore, it's too early to be pessimistic about the total car market.

There are encouraging past lessons to be learned. In January 1999, Beijing started to apply Euro I emission-control standards. Since no mini-buses then met the standards, all original equipment manufacturers (OEMs) had to quit Beijing. At the time, Beijing accounted for 25 percent of China's mini-bus segment, and most manufacturers were very pessimistic.

However, by the end of 1999, the industry still reported healthy sales growth, thanks to efforts to penetrate distribution channels in smaller cities.

China's auto industry growth is subject to central government monetary policy, economic growth, gasoline prices, consumer prices and consumption confidence, and the withdrawal of automotive stimulus measures. Even if there is no growth in 2011, it's not the end of the world. Instead, the industry can take a break and prepare for healthier and more sustainable growth.

Now is the time for passenger car OEMs to seek global market opportunities and to further penetrate the domestic market. Compared with mini-bus OEMs' several thousand dealers nationwide, car manufacturers still have a long way to go.

Beijing's new limits don't shutter all hopes for all sectors. There's the rental business. People who can't buy may well lease instead.

Everyone is talking about the new policy, but talking does not solve problems or generate sales. The government has spoken, it's time to take up the challenge and start working!

Autotalk Special


 

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