On all fronts, China's auto industry had a somber 2012. Inventories built up, sales slowed, the Japanese were knocked off their perch as king of the mountain and the government's green-car promotions lay in tatters. Will 2013 be a turning point or will the industry continue spinning its wheels?

Editor's note:

China's economy has been regaining some steam in recent months after growth was hit by weak external demand and domestic tightening in the previous three quarters. As we embrace 2013, Shanghai Daily runs a year-end series to track policy and market changes as well as their influence on different sectors for next year.

Shanghai Daily reporter Lu Nengneng takes a close look at the domestic auto industry, whose growth was dented by weaker demand. In 2013, automakers are gearing up to tap a potential recovery in buyers' appetite but challenges lie ahead.

Industry in overdrive sputters in go-slow zone

One word that may best sum up 2012 for China's auto market is "struggle."

Automakers struggled with ramped-up production capacity amid cooling demand. Car dealers struggled to meet high sales targets by relentless discounting. And car buyers struggled to figure out whether to purchase now or wait to see if prices dropped further.

In retrospect, the industry was asking for trouble when it tried to punch down the accelerator in a go-slow zone.

After years of government incentive-fueled, double-digit sales, the world's largest auto market by sales entered what analysts say is a natural cycle of consolidation. Attempts to reverse the trend proved futile.

Despite deep price cuts of up to hundreds of thousands of yuan on a car, sales in the first 11 months of this year increased only 4 percent - nowhere near the 8 percent growth predictions but somewhat better than the 2.5 percent increase in 2011, according to China Association of Automobile Manufacturers.

There's no sign that the price war in the auto market will abate going into 2013. Discounts have become so commonplace that everyone expects them. Unless the whole industry calls a truce, no one is game to take the first step in stabilizing prices.

Automakers, for their part, have been happy to pass their inventory pressures down to dealerships instead of ratcheting down production.

That means dealerships in the Chinese market will have to continue bearing the brunt of slim margins and even losses, at least for some time.

Unlike dealerships in mature car markets, where 70 percent of revenue comes from selling new cars and providing value-added services, China's car sellers largely count on sales-based annual bonuses from automakers to keep their businesses afloat.

In extreme cases, year-end rewards can make up half of their annual earnings.

A number of cash-strapped dealerships have gone belly-up. Those left in the game are seeking supplementary sources of revenue, such as used-car sales and car leasing.

Domestic car brands still dogged by 'cheapie' stigma

If Chinese domestic-brand carmakers face their problems squarely, there is still a chance for them to slip back into the driver's seat of China's auto market.

Sales of local passenger car brands in China in the first 11 months of this year rose 5 percent to almost 6 million units, trailing the 7.1 percent increase in that segment a year earlier.

Domestic brands saw their market share drop 2.37 percentage points to a near three-year low of 40.3 percent in the January-August period. A mild rebound occurred in the aftermath of the nationalistic fervor of the Diaoyu Islands dispute with Japan, which turned consumer sentiment against Japanese cars.

The performance of domestic brands is disappointing but hardly surprising. Their below-average score in the 2012 China Automobile Customer Satisfaction Index survey highlighted the gap with foreign competitors in quality and image.

While the market for domestic brands languished, overseas sales of Made in China cars surged 40 percent to 60.7 million units in the first 11 months of the year. That trend has prompted more Chinese carmakers to localize their manufacturing operations abroad, especially in emerging markets like Southeast Asia and South America.

This month alone, China's SAIC signed a joint venture deal to produce cars in Thailand, and BYD inked an agreement for manufacturing in Bulgaria.

Chinese carmakers have been advised not to get too carried away by their overseas performances. Their success has rested largely on lower prices that probably can't be sustained as costs of labor and materials rise.

At the same time, international giants are making inroads in the low-end car segment, offering better product quality and services than Chinese brands can provide.

Domestic car brands still suffer from the reputation of being "cheap" beyond price.

That perception is hard to change, but domestic automakers can't climb up the value chain easily with that stigma hanging around their necks.

The fundamental solution is for domestic carmakers to lift their game - to learn and create instead of just muddling along.

After producing and selling joint venture cars for a couple of decades, Chinese automakers have grown lazy in their pursuit of profit, forgetting that the whole point of joint ventures was to introduce advance technology from abroad to develop the domestic industry.

It is true that many foreign partners have been zealous in protecting their technology from prying Chinese eyes. Domestic automakers don't seem to understand that knowledge is not given; it has to be taken.

Vigorous development of independent joint-venture car brands this year is just a new form of the old self-delusion that foreign partners will be happy to share their intellectual properties.

Four such brands have been launched so far, and at least another four are in the pipeline. The projects are largely led by foreign carmakers, which are said to base most of the new products on their existing platforms.

Chinese parentage of these co-owned brands may be nothing if not ironic.

Surveillance over defective autos and recalls tightens

Most industry observers think the Chinese government will continue its hands-off policy and let the marketplace decide the shape and size of the nation's auto industry. Gone are the massive subsidies for auto purchases - part of an overall economic stimulus program begun in 2008 - that tended to disrupt smooth development of the industry.

However, one area where the government is keen to intervene is quality control.

Starting in 2013, carmakers will face tougher penalties if they violate newly amended auto recall rules, which have been elevated in enforcement status from department policy to administrative regulation.

Fines for manufacturers and dealers failing to recall faulty cars or inform motorists of defects will be between 2 percent and 20 percent of the value of affected cars. That's stiffer than the 10,000 yuan-30,000 yuan (US$1,605-US$4,815) penalties of the past.

Attempts to cover up problems or refusal to recall could even lead to revocation of licenses, according to the new regulations.

Making recalls mandatory is seen as essentially to addressing public concern about car safety and consumer rights.

Since provisions were enacted to standardize car recalls in 2004, more than 400 recalls involving about nine million cars have been logged.

Most of them were voluntary recalls, but one in four occurred under the dictates of the General Administration of Quality Supervision, Inspection and Quarantine.

Since that administration is responsible for quality control over hundreds of thousands of products, some have questioned whether it is too generalized an agency to handle defective vehicles.

Statistics show that only 10 percent of car problems are easily diagnosed by routine quality standards, while the remainder involve complexities that take time and expertise to identify and evaluate. The administration is now setting up its own national-level engineering testing lab for defective cars.

No matter who does the monitoring, China's carmakers know they are under tighter watch. Additionally, foreign car brands won't be able to exploit information asymmetry to set double standards for recalls in China and abroad. Under the new rules, carmakers operating in China are obligated to register their overseas recall records with the authority. The data can be used in domestic investigations, especially those involving imported cars.

Japanese strive to recover ground lost in island dispute

For foreign carmakers, developing joint-venture brands is the latest ploy to keep an upper hand in their China game.

That was especially true for Japanese brands, whose monthly sales almost halved in China after the Japanese government's illegal purchase of the Diaoyu Islands.

Following calls for boycotts of Japanese goods in response to the Diaoyu Islands issue, the market share of Japanese carmakers in China's passenger car segment dropped in October below 10 percent for the first time to 7.6 percent.

At the Guangzhou Auto Show held in South China last month, the Japanese voiced their determination to get back on the top of their game, with product launches and new development plans. One strategy is the joint-venture independent brand.

Toyota said it will co-establish brands with its Chinese partners FAW group and GAC Group next year. Everus, a marque introduced by GAC Honda last year, added a 1.5MT version to its first car, the S1 subcompact. Venucia E30, a car developed by Dongfeng Nissan under its China-only brand, is being touted as its first electric vehicle to be mass-produced by 2015.

Besides strengthening research and development in China, Japanese carmakers are localizing key components production here. For example, Nissan is building a new engine plant in the Henan Province city of Zhengzhou, while Toyota said it is aiming to produce CTV gearboxes in Changshu, Jiangsu Province, starting in 2014.

The biggest carmaker in Asia has even changed the unofficial name of its local company from Toyota China to China Toyota to show its commitment to the Chinese market.

"Think in terms of China's viewpoint when making difficult decision," Akiyo Toyota, president of Toyota, is said to have told Hiroji Onishi when he became head of the company's Chinese business last April.

For Japanese carmakers, the issue is not only how to enhance their partnerships with the Chinese but also how to look after the interest of their customers.

Toyota and its Japanese peers are now providing free trade-ins, repairs or compensation for people whose Japanese vehicles were damaged or destroyed during violent anti-Japanese protests this year. Dongfeng Nissan has even given its customers a long-term safety guarantee against similar malicious assaults in the future.

But at the end of the day, it all comes down to product. For the past five years, there was almost nothing new about Japanese cars in China except upgrades and facelifts. Next year, the Japanese are expected to accelerate the introduction of new cars, especially electric and hybrid cars for which their engineering is renown. Toyota, Honda and Nissan all have plans to produce electric cars in China, but can they really find a market here?



Consumers give green cars the red light

The Chinese government is sparing no effort in its campaign to promote the popular use of electric vehicles, but consumers are still given green cars the cold shoulder.

That has prompted some people to suggest that China needs to rethink its green-car strategy.

In the first three quarters of this year, only 3,009 green cars were sold in China, and most of them - both electric and hybrid models - were bought by taxi and public bus fleets.

Despite generous subsidies and license incentives, the average motorist has steered clear of going green.

In six Chinese pilot cities, the central government is providing a maximum 60,000 yuan (US$9,630) subsidy for each green car bought by private consumers. Many local governments have sweetened the deal with their own additional subsidies. In Shanghai, that can be as high as 40,000 yuan for each car.

Cities like Beijing and Guangzhou that have slapped restrictions on car ownership to try to reduce pollution and traffic gridlock have set aside special quotas for new energy cars.

Last month, Guangzhou offered the public 960 license plates for new energy cars, but only 169 applications were received.

There are only about 20,000 electric cars running on China's roads now. Given such sluggish sales performance, how can China meet its ambitious target to lift that number to 5 million by 2020?

Electric cars require charging infrastructure and a change in driving habits. Both take time to build.

More importantly, as some industrial experts have noted, the current capabilities of electric cars - be it mileage, cost or recharging time - just aren't attractive enough to catapult the vehicles into widespread use.

As the green car campaign sputters, China needs to look for other ways to cut emissions and fuel consumption. The government is expected to continue its subsidies on purchases of energy-saving cars with engines of 1.6 liters or less and fuel consumption of no more than 6.3 liters per kilometer.

Some are suggesting the government should increase its rebate on the vehicle purchase tax to promote green cars. The tax comprises 10 percent of a car's retail price.

China's carmakers are also trying to make a difference with increasingly mature turbocharger technologies, which enable them to downsize the engine displacement without compromising the vehicle's performance too much.

Because turbo-charged engines have driven the sales of many car models this year even amid a general market slowdown, the technology offers a telltale message to China's auto industry as it stands on the threshold of a new year.

It is always better to remain realistic about the market, no matter what state it's in.