Auto sales on the right road again

Tax cuts, other incentives lure potential buyers back to showrooms

The vehicle market in China was badly hit in April, with sales falling by nearly 50 percent year-on-year to 1.2 million units due to factory stoppages and significantly reduced showroom trade caused by COVID-19 outbreaks.

The sharp fall led to fears that the world's largest vehicle market since 2009 might shrink this year, but such sentiment has been dispelled by rosy prospects for production and purchases after the worst April in a decade for the industry.

More than 1.86 million vehicles were sold last month, according to the China Association of Automobile Manufacturers－a 12.6 percent fall from the same month last year, but a 57.6 percent rise on the figure for April.

The association's statistics were provided by domestic and international carmakers with operations in China, who are stepping up production and whose dealers are starting to see an influx of showroom visitors as the COVID-19 outbreaks are brought under control.

Analysts at Soochow Securities expect the rising trend in production and sales to accelerate in coming months.

"The growth rate will average more than 20 percent year-on-year from June to the end of the year," the analysts predicted in a research note.

Their estimate is based on efforts to bring COVID-19 under control, and more important, the series of measures introduced by governments, including halved vehicle purchase tax, the issuance of additional license plates, and the "going to the countryside" campaign for new energy vehicles.

On June 1, purchase tax, which was typically 10 percent of a vehicle's retail price, was reduced to 5 percent for cars costing a maximum of 300,000 yuan ($45,000) and having 2-liter or smaller engines, according to the Ministry of Finance. The tax cut is in effect until the end of this year.

Wang Chen, a 30-year-old information technology engineer in Tianjin, said the tax reduction made him think seriously about buying a Volkswagen Lavida.

"To be frank, I can either purchase the vehicle now or later, because I don't need it that urgently, but the tax cut can save me about 7,000 yuan, which is almost my monthly salary," Wang said.

According to a plan announced last month by the State Council, China's Cabinet, vehicle purchase tax cuts nationwide will total 60 billion yuan by the end of this year.

According to an estimate by Ping An Securities, the tax reductions will account for 17 percent of vehicle purchase taxes levied last year.

In 2009 and 2015, China introduced measures to halve the purchase tax on passenger vehicles with engines no bigger than 1.6 liters. On both occasions, the tax reductions revitalized the car market.

This year, more vehicles are subject to the reductions. According to data from Huafu Securities, more than 90 percent of gasoline-powered car models are eligible for the tax cut, compared with some 65 percent in past years. This means that most popular brands, including Volkswagen, Toyota, Geely and Great Wall Motors, are benefiting from the favorable tax policy.

Cui Dongshu, secretary-general of the China Passenger Car Association, described the tax reduction as "a super big bonus" for the auto industry.

In April, the association estimated that passenger vehicle sales nationwide would struggle to total 19 million this year. "Thanks to the new policy, we now expect retail sales to reach 21 million this year, up by 4 percent from 2021," Cui said.

Additional sales

Chen Shihua, deputy secretary-general of the China Association of Automobile Manufacturers, or CAAM, agreed that the tax cut would generate additional sales of about 2 million vehicles, or purchases worth more than 300 billion yuan.

If upstream and downstream industries such as auto parts, raw materials and insurance were factored in, the figure would total 500 billion yuan, Chen said.

Carmakers, many of whom were badly affected by plunging business in April, are seizing the opportunity to revive sales by offering discounts.

Sino-German joint venture SAIC Volkswagen said buyers of some of its Volkswagen-branded models only pay 25 percent purchase tax, while its remaining models do not attract such a levy.

Jetour, the high-end marque launched by Chinese carmaker Chery Holding, said it will pay purchase tax on all its models for customers, while rural buyers will receive a subsidy of 5,000 yuan.

In addition to the reduced purchase tax, Swedish carmaker Volvo is offering lifelong maintenance and subsidies of 5,000 yuan for some of its models.

Local governments are also stepping up efforts to boost consumption.

In total, 20-plus provinces and municipalities have introduced financial incentives for car buyers as part of a package of measures to stabilize economic performance.

In Shandong province, buyers placing car orders last month and this month are entitled to coupons worth up to 6,000 yuan, while in Hubei province, those buying vehicles in the second half of this year are eligible for subsidies of up to 8,000 yuan.

On June 2, the government in Nanjing, capital of Jiangsu province, said in a notice that buyers of new electric cars or plug-in hybrids would receive a subsidy of 12,000 yuan this year.

Three days later, the authorities in Shenyang, capital of Liaoning province, said they would organize five car exhibitions and offer car purchase subsidies totaling 100 million yuan this year.

Besides subsidies, most major cities that restrict vehicle purchases to curb air pollution are issuing additional license plates.

Han Tong, a middle-school teacher in Tianjin, said: "This is more attractive for me than government subsidies. I have taken part in the 'license plate lottery' for years, but luck has eluded me so far. If I can get a license this time, I will place an order for a car immediately."

On May 31, the authorities in Tianjin decided to offer an additional 35,000 license plates in the second half of this year.

In Guangdong, the authorities in Shenzhen and Guangzhou, the provincial capital, said last month they would offer another 20,000 and 30,000 license plates, respectively, this year.

In Shanghai, where life had recently been disrupted by COVID-19 restrictions, the municipal government said it was issuing another 40,000 license plates for passenger vehicles this year, while early this month, the authorities in Hangzhou, capital of Zhejiang province, offered an extra 40,000 license plates.

Earlier this year, the State Council said local governments should not introduce new measures to curb vehicle purchases, and those that had done so should gradually increase license plate quotas.

Ning Xiang, an independent analyst in Beijing, said increased license plate quotas would have a more direct effect on sales. "Even subsidies of 20,000 yuan will not necessarily lead to purchases, but license plates in big cities surely will," he said.

Market highlight

New energy vehicles, or NEVs, which include electric cars and plug-in hybrids, have been a highlight of the Chinese vehicle market.

Even in April, 300,000 such vehicles were sold, a 44.6 percent year-on-year rise. NEVs have been exempt from purchase tax since 2014.

The introduction of cutting-edge models and increased charging facilities have made these vehicles a serious alternative to gasoline-powered cars in large cities.

The authorities are now targeting potential buyers in smaller towns. Four ministries, including the Ministry of Industry and Information Technology, have launched this year's "going to the countryside" campaign for NEVs.

A total of 26 Chinese and international carmakers have joined the annual campaign, offering more than 70 models for car buyers in rural areas.

The manufacturers are organizing car shows in smaller cities and towns in up to 10 provinces, ranging from Zhejiang in the east of the country to Gansu in the northwest.

Last year, about 1.07 million NEVs were sold as a result of the campaign, a year-on-year rise of nearly 170 percent, according to CAAM.

Analysts at Huaxi Securities said there is considerable potential for NEVs in rural areas. Statistics from the company show that vehicles sold in cities at tier-three level or below accounted for 44 percent of China's total vehicle sales last year, while the comparable proportion for NEVs was 32 percent.

The analysts estimate that this year's "going to the countryside "campaign will propel NEV sales to 5.3 million, up from 3.5 million last year.

In the first four months of this year, 1.56 million NEVs were delivered in China, a rise of 110 percent from the same period last year, according to CAAM.

Manufacturers of NEVs saw robust performances last month, despite a 12.6 percent year-on-year fall in sales in the overall vehicle market.

BYD, which is backed by United States businessman and investor Warren Buffet, sold 114,183 NEVs last month, a rise of nearly 153 percent from May last year.

Startups also performed well, with four of them delivering more than 10,000 NEVs last month. Three of these startups saw their May sales double year-on-year.

This trend is expected to continue as startups produce new models. BYD said it received more than 20,000 orders within two weeks of presales for its Denza electric multipurpose vehicle, or MPV, starting last month.

Nasdaq-listed Li Auto is due to unveil its second model, a full-sized sport utility vehicle, later this month, while New York-listed Nio is poised to deliver three new models this year, including the ET7 sedan, which is positioned to take on BMW's 7 Series.

Chen, the CAAM deputy secretary-general, said the NEV segment is a sign of recovery in the auto sector, which is increasing production and launching new models to attract buyers, who are also motivated by financial incentives.

At a news conference late last month, Vice-Minister of Commerce Sheng Qiuping said that with the implementation of recent and upcoming policies, the auto industry is set to witness a new round of restorative growth to help underpin steady development of the broader economy.

The industry is one of the pillars of the Chinese economy. Last year, retail sales in the sector totaled 4.4 trillion yuan, a 7.6 percent year-on-year rise, accounting for 9.9 percent of retail sales nationwide, according to the National Bureau of Statistics.

In the first quarter of this year, despite retaining the 9.9 percent nationwide share, auto industry retail sales fell by 0.3 percent year-on-year to 1.07 trillion yuan.

Chen said, "With policies now in place, we are confident that the auto sector will reach this year's growth goal and make its contribution to China's macroeconomic expansion."

Earlier this year, vehicle sales were estimated by CAAM to rise to 27.5 million, up by 5 percent from last year.