Not only is the car market in China expanding but also the variety to suit buyers' tastes

China has been leading the world in auto production and sales for four consecutive years. Last year, the industry again achieved outstanding results with car sales totaling 19.3 million, an increase of 4.3 percent on 2011.

And with the growth rate 1.9 percentage points higher than at the same point a year ago, it looks likely to maintain the top spot in 2013.

But how will China's car industry evolve thereafter?

In 2012, passenger car sales volume registered 15.5 million units, a record high with a year-on-year growth of 7.1 percent. Commercial vehicle sales dropped 5.49 percent year-on-year to 3.8 million units, although the rate of decline slowed.

Commercial vehicle sales reached their highest point in 2010.

The car industry's position as a pillar industry of the Chinese economy has become more stable. As bulk consumer durables, automobiles now account for 10 percent of total consumption, second after real estate at 16 percent.

Sedan models were still the mainstream choice last year, accounting for nearly 70 percent of sales, while sports-utility vehicles, despite strong growth, accounted for less than 13 percent.

Passenger cars with an engine size of 1.6 liters or under made up 67.2 percent of total sales last year, slightly fewer than in 2011.

The increase in the production and sales of sedans is mainly due to better technology to deal with exhaust emissions - and better marketing strategies to that effect.

SUVs are basically high-emission cars, and greater popularity is bound to result in a big increase in total passenger car emission levels. From an energy conservation point of view, and with improved turbo-charge and intercooling technology, the overall performance of low-emission cars is better than that of high-emission ones.

It is simply not scientific to measure the merits of the performance of a car wholly on the swept volume of the engine.

As a result of current automotive industry policy, joint ventures are the norm in China in car production, and foreign investment has a big say. In 2012, Chinese brands accounted for only 41.9 percent of the passenger car market, down 0.4 percentage points on the previous year.

Among foreign brands, those from Germany took 18.4 percent of the market share; Japan, 16.4 percent; the United States, 11.7 percent; South Korea 8.7 percent; and France, 2.8 percent. Compared with a year earlier, the increase in German models is clear, while sales of Japanese cars, affected by the dispute over the Diaoyu Islands, fell significantly. Other foreign brands all recorded growth.

Preliminary statistics indicate that China's imports of passenger cars exceeded 1.1 million in 2012, accounting for 7 percent of the total domestic demand, but each car on average sold at more than $40,000 (29,640 euros), with sedans and SUVs evenly split at 450,000 units a category and $45,000 per unit.

Most of China's passenger car imports, then, are high-end ones.

Automobiles, especially sedans, were once a status symbol in China. But now, with greater production and lower prices, buying a car is no longer difficult.

As in the global context, cars sold in China can still be divided into three categories: ordinary cars as a means of transport, with the representative brands being Volkswagen's Santana and Jetta and Daihatsu's Charade; high-end official or company cars (such as Audi and Honda's Accord); and luxury cars (Porsche, Ferrari and Maybach).

To demonstrate career success, middle-class Chinese who would usually buy ordinary cars are likely to upgrade to more expensive models. This is partly due to the automotive market constantly creating subdivisions and coming up with a variety of marketing strategies to encourage sales.

Different social groups have their own tastes so there are many different categories for cars and models within them.

The National Bureau of Statistics says that the disposable income per capita of urban residents in China in 2012 grew by 9.6 percent, and that of rural residents by 10.7 percent.

Out of a total population of 1.3 billion, the number of people who can be considered "middle class" in China has been estimated at more than 100 million, although, depending on the criteria used, other measurements claim 30 million to 50 million. But even if the consensus were as low as 10 million, it would be a group with strong consumption power.

And if 10 percent of them are keen on buying and changing cars on a regular basis, and in general, picking high-end models, the demand would surpass 1 million each year.

Annual imports of that number of luxury cars to meet Chinese domestic demand is therefore regarded as fairly reasonable.

China's GDP last year was nearly 52 trillion yuan with a year-on-year growth of 7.8 percent. The growth in the fourth quarter was 7.9 percent, a 0.5 percentage point rebound from the third quarter, which ended the downward trend that had lasted seven quarters in a row.

China aims to double its GDP and income per capita by 2020. If this goal can be achieved, the size of the middle class will increase by more than 50 percent. If 10 percent of those maintain their current car-buying habits, it is very likely that the annual demand for high-end cars will also double.

In view of the automotive industry's capital and technology-intensive characteristics, and the fact that industry policy is unlikely to fundamentally change in the next 10 years, 50-50 joint ventures will still be the norm.

The ratio between commercial and passenger cars should remain one to four, and with car manufacturers continuing as joint ventures, the market share of Chinese brands may shrink from the current 42 percent to less than 40 percent. For passenger cars, the sedans' share could drop from 70 percent today to about 65 percent, while the SUV share may rise from 13 percent to 15 or 18 percent.

For new car brands, it takes a long time to become widely accepted by consumers. Audi, BMW, Mercedes-Benz, Porsche and Ferrari each have nearly a hundred years of history behind them, and so will remain the major players in China's luxury car market.

As for Chinese brands, they may still have a place in official or commercial car sales, but they are not popular among China's middle class - unless, that is, the government makes major changes in tax and opening-up policies.

The author is a senior engineer and researcher at Guotai Junan Securities. The views do not necessarily reflect those of China Daily.

(China Daily 02/08/2013 page7)