China Capitulates: Another Round of
Auto Stimulus Steve Man and Ji Shi Bloomberg Intelligence analysts

China’s Latest Tax Cut May
Fuel SUV, Local-Branded Auto Sales

Auto sales in China may
rebound next year, helped by a tax cut to 5% from 10% for small vehicles with engines up to 1.6 liters. Local automakers such as Great Wall and Wuling may get the biggest boost, given 83% of their sales are from small cars. Japanese brands, known for economy vehicles, have the lowest mix of small-car sales in China. SUV sales may surge further, with many automakers offering compact SUVs that qualify for the incentive. Growth is unlikely to be as high as in 2009, with the same tax cut.

Chinese Auto Brands May Gain
Market Share After Purchase Tax Cut

Chinese auto brands may keep
capturing market share thanks to the latest government incentive. On Oct. 1, China’s new-vehicle purchase tax falls to 5% from 10% for 1.6-liter engines and smaller. Small vehicles account for the majority of sales for domestic automakers like Wuling, Baojun and Geely. A similar tax cut in 2009 helped local brands bolster their market share to 45% from 40% within a year. Chinese brands accounted for 40% of the nation’s vehicle sales for the year-ended August.

Subsidies to Boost Profits Amid
Decline in Car Prices

The Chinese government’s plans to
extend auto subsidies to rural buyers, on top of the sales-tax cut, will spur new-vehicle sales. That will boost production, lower unit cost and raise profits for carmakers. Passenger-vehicle sales have accelerated since the sales tax was halved to 5% in October. Under the 2009 auto stimulus, rural residents who replaced their vehicles received 3,000-5,000 yuan ($470-$780) . The incentive was raised to as much as 18,000 yuan in 2010.

Great Wall, Wuling Small-Car Lead
May Benefit Most From Tax Cut

More than 90% of Great
Wall and Wuling’s vehicles sold this year were equipped with engines 1.6 liters or smaller. That may allow the nation’s SUV and minivan leaders to benefit most from a tax cut for small cars that took effect on Oct. 1. Guangzhou Auto’s own-brand vehicles may not gain as much from the incentive because 47% of its sales are from vehicles with engines larger than 1.6 liters, mainly Trumpchi SUVs. About 83% of overall domestic-brand sales are small vehicles vs. foreign brands’ 59%.

Honda, Japanese Automakers Are Least
Exposed to Tax Cut in China

Product portfolios of Japanese automakers
in China are the least exposed among all brands to the latest auto tax cut, given that 51% of the vehicles they sold this year were equipped with engines larger than 1.6 liters. Honda, a partner with Dongfeng and Guangzhou Auto in China, only got 20% of sales from small cars that qualify for the tax cut, close to the ratios of luxury carmakers. A wide range of small cars at Volkswagen and Ford may help those companies revive sales and gain market share.

China Auto Tax Cut May
Boost Mercedes, Audi Sales More Than BMW

Luxury marques such as Audi
and Mercedes-Benz may increase sales in China due to the latest government incentive. Beijing-Benz, the venture between Daimler and BAIC, got 14.8% of sales from vehicles with engines up to 1.6 liters, which qualify for a 5 percentage-point tax cut. FAW-VW’s Audi had a similar ratio of 15.4%. The stimulus may have less impact on BMW-Brilliance, as only 5.4% of its vehicles sold were equipped with such engines.

China Autos Unlikely to Repeat
2009 Growth Even With Tax Cut

Auto sales in China are
unlikely to match their 53% surge in 2009, even with a similar tax cut for small vehicles, because of new-vehicle registration limits and higher vehicle density. Auto sales in five large cities, including Beijing and Shenzhen, have been capped since 2011. They accounted for about 13% of nationwide sales in 2009. China’s passenger-vehicle density has tripled since 2008, indicating slower growth potential. Still, auto sales are likely to rebound in the short term.

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