`Vehicle sales already at 4.69 million units by October-end should close 2005 at 5.8 million units, making China the world's second biggest automobile market.'

Our Bureau

New Delhi, Dec. 8

THE Chinese market, for some time now the growth engine of the global automobile industry, is poised to enter that critical phase identified with sustained long-term growth in the traditional development cycle of automobile markets, a senior economist from that country's State Information Centre has said.

His comments came against the backdrop of the recent slowdown in Chinese automobile sales after a period of intense growth in 2002 and 2003.

From 1.45 million vehicles sold in 1996, the market size zoomed to 5.20 million units in 2004.

Growth factors: The growth was powered by lower car prices following China's entry into the WTO (the price of a prominent model, the Century Star, fell from 271,800 yuan in 2001 to 186,900 yuan by 2003), rise in disbursement of automobile loans (it went up from 40 billion yuan in 2001 to 140 billion yuan by 2002) and the economy itself moving into a bullish phase.

However, sales correction began to set in by 2004, largely due to state policy that shifted the thrust in macro economic growth from a rapid pace to a more sustained one.

Alongside were the issues of irregular price drops and cancellation of vehicle import quotas, plus a tighter flow of bank credit for vehicle purchases.

These measures had started to bite by July 2004 bringing with it a lower growth rate in vehicle sales and a preference for smaller cars.

Despite this, Mr Xu Changming, Director & Senior Economist (Business Consulting Centre), State Information Centre, said vehicle sales already at 4.69 million units by October-end should close 2005 at 5.8 million units, making China the world's second biggest automobile market.

Over 2000-2005 the market would thus have grown at an average of 22 per cent against the 9.5 per cent it enjoyed during 1996-2000.

Sale of passenger vehicle (sedans, SUVs and MPVs) for January-October 2005 was pegged at 2.53 million.

Mr Changming was speaking at the Tenth Asia Pacific Automotive Industry Roundtable organised by Economist Conferences.

R-value: His estimation was that passenger vehicle growth rate should be 1.5 to 2 times that of GDP growth rate and for the next five years China's GDP growth rate was projected to be 8-9 per cent.

But a more relevant index and the one cited to calculate the trigger point for automobile sales growth, he said, was `R-value,' which is the outcome of dividing passenger vehicle price by per capital GDP.

Historically the trigger for sales has been an R-value of 2 to 3, which was when large numbers of passenger vehicles usually got bought by families, their popularity gained and the overall market thus moved into a powerful growth phase.

"Japan registered an R-value of 2 in the 60s. Korea reached that stage in the 80s,'' he said. Calculations showed that in the four Chinese regions accounting for the country's highest automobile sales - Shenzen, Beijing, Guangzhou and Shanghai - the R-value was already approaching 3.

This would decline further because vehicle prices would continue to drop while per capita GDP would increase.

Mr Changming believed that R-value for China as a whole, which was 27.2 in 2000 and 15.3 in 2004, would dip to 3 by 2009. But even without the entire country needing to touch that level of R-value, there was a population of 247 million available as market in China's six most developed provinces. "That means, prospects for auto sales should be bright,'' he said.

He said the period of 20 years beginning from five years ahead of China's projected encounter with an R-value of 3 and the 15 years thereafter would be a time of strong and sustained growth for its automobile market.

His forecast for 2010 was a vehicle market size of 8.7 million units, passenger vehicles accounting for 55.9 per cent of that. He did not, however, explore the likely impact to the market from China's tax structure and the accumulated bad debt in its banks.

(This article was published in the Business Line print edition dated December 9, 2005)
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