When China became the world’s largest automobile market in 2009, the news conjured up images of urban roads clogged with Volkswagens, Toyotas and Buicks.
Yet as the country’s car sales shot up 46% year-on-year, it was light commercial vehicles (LCVs) that really lit up the sector, led by the Wuling Sunshine. The unassuming minibus – produced by the three-way joint venture (JV) between Shanghai Automotive Industry Corporation (600104.SH), General Motors and Liuzhou Wuling Motors (SGMW) – sells for just US$4,300. Chinese buyers picked up over 700,000 of them last year.
"Wuling was the real winner," said Klaus Paur, director for Asia at TNS International. "It provided a very attractive model at a very attractive price."
Other players in the LCV segment, notably Foton and Chana, also hit pay dirt. The improvement of the market was far from organic, however; the hand of the government helped to encourage growth.
"The Chinese stimulus package has been a major catalyst to help sustain the market," said Timothy Bowes, president of the industrial and Asia-Pacific division of Michigan-based commercial vehicle parts supplier ArvinMeritor (ARM.NYSE). Encouraged by the potential of the LCV sector, his firm recently invested an additional US$10 million in a commercial vehicle part JV plant in Xuzhou.
According to consultancy JD Power & Associates, the micro- and minibus segment accounted for more than 68% of China’s light vehicle sales growth in 2009. Some of this growth represented a recovery from a dismal 2008. But minibuses still accounted for nearly two million in sales in 2009 and experienced more than 80% year-on-year growth; light and mini trucks experienced around 40% growth.
Paur of TNS attributes the appeal of minibuses to their versatility and utility to small business owners. Most can seat more than six people, but also have enough cargo space to transport goods to market. A report from JD Power predicted continued increased sales for the Sunshine through the next five years.
Sales of the Sunshine and its competitors will be bolstered by Beijing’s emphasis on developing lower-tier markets. "The government has put massive support into [second- and third-tier] regions. They want to motivate consumption there," said Paur.
Beijing instituted a US$732 million stimulus package for the automotive sector at the beginning of 2009 under the name "Cars to the Countryside." Its goal wasn’t just to stimulate consumption, but also to provide support to the automotive sector. "Chinese manufacturers are strongest in these commercial vehicles, so policy played a big role," said John Bonnell, who covers the automotive sector for JD Power Asia Pacific.
The first and most important stimulus halved the purchase tax to 5% on all new vehicles with engine displacements of up to 1.6 liters. This was followed by a 10% discount for farmers purchasing minivans or light-duty trucks. This subsidy, which had a ceiling of RMB5,000 (US$732), helped drive a mass replacement of the three-wheeled vehicles that once typified transport in rural China.
The subsidies laid the groundwork to boost demand for LCVs during a period of reverse migration as coastal factory jobs dried up and migrant farmers returned home. "Most of these farmers did not choose to farm land. Instead, they wanted to buy minivans or commercial vehicles to set up a small business," said Yang Dayong, director of Chana’s commercial vehicles development office.
However, that effect may be temporary: Bonnell does not see rural areas supplanting traditional urban centers of demand. The subsidy programs also pulled demand forward into 2009, which may hurt sales of cars that were initially planned for purchase in 2010.
With stimulus programs now being wound down, Beijing has shifted its focus to getting old vehicles off the road while still maintaining some incentives toward the purchase of a first car. In December, it raised the vehicle purchase tax to 7.5%, and in January, it increased subsidies on trade-in vehicles. The initial US$440-880 range offered under a "cash for clunkers" program has been tripled to a maximum of US$2,640.
The effects of these policies have been widely seen as helping passenger cars, but analysts say that broader government efforts favor commercial vehicles.
"The development of Chinese infrastructure will stimulate the demand for commercial vehicles. Like people say, China is a big construction site right now," said Jia Xinguang, chief analyst at China’s Auto Magazine.
Although this demand may be more directly focused on heavy-duty trucks involved with construction, Jia sees additional benefits for China’s LCVs. Better highway infrastructure will improve rural-to-urban freight transport, helping the small-business owners that comprise the market for LCVs. And LCVs can play a role in infrastructure projects, too.
"Commercial vehicles are the logistics transporters for every big infrastructure project," said Yang at Chana, noting that they are widely used for small but necessary tasks like transporting workers and their meals to construction sites.
Hoping to cash in on LCV growth, other domestic carmakers including Chery plan to develop commercial vehicles. Although the sector delivers lower margins than passenger vehicles, it offers diversification and expanded sales networks. It may also create customer loyalty that can extend into passenger vehicles.
Among the existing players, Chana, the parent of Chang’an Motors (000625.SZ), has already snapped up Hafei and Changhe, giving it the capacity to compete more intensely with market leader SGMW. The prospect of growing competition has pushed SGMW to invest in a small-displacement engine factory. The firm is also looking at other ways to differentiate itself, such as developing more powerful engines and better customer service.
"We try to give our customers the best after-sales service," SGMW told CHINA ECONOMIC REVIEW. "We have already offered field services to more than 100,000 rural customers in 2009."
Although 2010 won’t likely match the outstanding performance of 2009, analysts predict continued strength in the LCV sector for the foreseeable future. Even if the first-tier urban passenger car market appears congested, sustained subsidies and infrastructure spending will create no shortage of demand for LCVs in lower-tier regions.