It’s amazing what a few government incentives and a dollop of positive sentiment can achieve. In August 2008, China experienced its first month-on-month decline in auto sales in three years. The negative sales figures continued to the end of the year, with full-year sales growth coming in at 6.7%, its lowest level in a decade.
Enter Beijing. In January, the purchase tax on new vehicles with engines of 1.6 liters or less was halved. Subsidies were also introduced on a range of consumer items as the government did its best to stimulate the economy.
The auto industry hasn’t looked back since. A total of 1.23 million vehicles hit the roads in October, up 72.5% year-on-year. Spurred on by that growth, car manufacturers are increasingly looking to expand production facilities inland to tap growing second- and third-tier markets, as demand spreads more evenly across the country.
"Car manufacturers are moving inland for the growing local markets and lower labor costs," said Jia Xinguang, an industry consultant and commentator on China’s auto sector. "In addition, local governments are providing some preferential policies in line with the central government’s plans to develop central and western regions," he said.
Klaus Paur, director of automotive research at TNS China, a market research firm, believes these inland markets will grow in importance over the coming years, simply because the current levels of penetration are so low.
Pursuing this trend, FAW and Volkswagen announced earlier in the year that they would jointly invest US$737 million to build a manufacturing plant in Chengdu, Sichuan province. The initial production target is 150,000 units a year. Models available will include a version of Volkswagen’s top-selling Jetta specifically targeted toward inland second- and third-tier cities.
"The needs of consumers in the inland markets are very different from the needs of consumers in first-tier cities," Paur explained.
Using Hyundai as an example, Paur said that other car manufacturers are also taking a two-tier approach to car manufacturing and distribution, even within model ranges. "The old Hyundai Elantra model is moving into the inland markets while the new Elantra is moving into the bigger Eastern cities," he said.
The strategy appears to be paying off. According to the China Association of Automobile Manufacturers, Hyundai sold just over 17,000 Elantras in October, and has raised its full-year sales forecast to 500,000 units from 300,000. The company plans to start work on a third manufacturing facility in 2010.
With other manufacturers, including General Motors, Toyota, Honda and Ford, raising their sales forecasts on strong demand from China, the move inland is likely to gather momentum.