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Many Factors Affect Car Sales

Although a dozen reasons can be cited to explain the continued decline of automobile sales in the Chinese market in recent months, some fundamental factors need to be considered more seriously.

Those factors include dualistic consumer structure, the imbalance of regional development, and largely irrational decision-making when it comes to investment in this sector.

According to statistics from the China Association of Automobile Manufacturers, domestic sales slipped by 7.1 percent from May to June - the third straight monthly decline. Car sales for June totaled 164,852 units, an increase of 2.2 percent over June 2003 but still the slowest growth in years.

Industry experts blame the government's current macroeconomic adjustment policies for tightening lending to automakers. Others attribute the decline to higher oil prices, price cuts, and poor urban traffic conditions.

All of these sound plausible, yet they are either partially or wholly derived from the aforementioned fundamental factors.

One of the basic factors explaining declining car sales is China's dualistic consumer structure, which makes a vast population unable to purchase cars.

According to economist Shi Xiaomin, vice-president of the China Society of Economic Reform, consumers capable of car purchases account for 9 to 10 percent of the country's population - or roughly 100-130 million people.

The proportion of the potential car buyers can hardly be changed because of China's dualistic economic and consumer structure, which leaves huge population - about 800 million - in poor countryside.

Theoretically, the low end of the estimate of car buyers is enough to consume the annual output of about 3 million cars. But when other factors are counted, the actual number of car buyers among those 100 million residents is drastically reduced.

One reason is the nation's imbalanced regional development, which concentrates high-income earners in big coastal cities rather than distributing them nationwide. In cities like Beijing, Shanghai and Guangzhou, the relatively rich become car owners and the number of automobiles increases overnight. The rapid growth of the number of car owners far outpaces the speed of road construction and parking areas.

A common phenomenon in these big cities is that during rush hour, traffic jams are everywhere and tens of thousands of drivers are forced to find a place to park. By comparison, most of China's hinterland cities have far fewer cars and their roads are not so crowded.

The situation, which is unlikely to change any time soon, is compounded by the fact most high-income earners purchase housing before they consider buying a car. It is widely believed that China's housing prices in big cities are too steep even for high-income earners. For example, the per capita income of Beijing residents was 13,882 yuan (US$1,676) in 2003, while the average urban housing price was 6,396 yuan (US$772) per square meter. It is unlikely many salary earners can afford to purchase a house and car simultaneously.

Other burdens like medical care, education fees and the cost of supporting parents also dampen people's enthusiasm for carbuying.

But what about the social elite who have high incomes and less burden to deal with housing, medical expenditures and children's education?

Most of them already have cars. For example, by this April, Beijing had a total of 1.4 million private automobiles, mainly cars, which means one tenth of the capital's 14 million residents owned private automobiles. Accounting for families with an average of 3.5 members in the capital city, it means 35 percent of families have an auto.

Although the factual number of car consumers, influenced by the aforementioned factors, might not be as large as car manufacturers expected, car production in China has attracted the biggest investment in recent years.

In addition to joint ventures with Volkswagen, Ford, Toyota and General Motors, more and more State-owned and private investors are rushing into the field from industries like mobile phones, home appliances and wineries. It is estimated that several hundred billion yuan was invested in automaking last year.

It is natural for investors to pour their money into the highly profitable automaking sector, where the profit rate is said to be more than 24 percent. But it is abnormal for such huge capital to be invested over such a short period in a sector already dominated by several leading players.

The investment rush in the car sector is a result of low efficiency of domestic capital and the irrational investment decision structure in which local governments play a major role.

The low efficiency of domestic capital use is reflected by the fact the average profit rate of most of China's manufacturing industries is extremely low - often less than 5 percent. The low average profit rate in other sectors - which is also partially a result of China's unbalancing development that makes production capacity grow much faster than people's incomes - makes people eager to invest in the highly profitable automaking sector.

The irrational investment decision structure means many investments are decided by local government officials who are lured by current high returns instead of long-term profitability and who are not responsible for their possible investment failures.

As a result, production capacity is greatly enlarged over a very short period, causing repeated "price wars" and leaving some consumers to delay their purchase decisions in the hope of further price cuts.

This results in the growth of manufacturing outpacing consumption. The second quarter's poor car sales are therefore fully understandable. It can also be predicted the trend of a slower growth rate in car sales will continue.

Improvement in China's car market is related to the improving situation of China's macroeconomy, a more reasonable consumer structure and a more rational investment decision system.

Any estimation of the number of potential car purchasers should not only be based on people's statistical income, but also on interactive factors.

Any investment in the sector should be highly cautious no matter how promising or profitable the current situation might be.

(China Daily August 4, 2004)

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