In China, Air Pollution Rules Spur Big Car Purchases; Buyers Trade Up Fearing They May Get Just One Shot at a Purchase

August 7, 2013, 4:13 p.m. ET

In China, Air Pollution Rules Spur Big Car Purchases

Buyers Trade Up Fearing They May Get Just One Shot at a Purchase

SHANGHAI—As more Chinese cities propose license-plate lotteries and other ways of limiting the number of cars on the road, consumers are responding by buying more expensive automobiles with bigger engines. In Shanghai, one of four major Chinese cities with policies designed to reduce car purchases to ease pollution and traffic congestion, between 9,000 and 10,000 plates are auctioned monthly, fetching an average of 82,000 yuan ($13,400) so far this year. That steep fee helped convince David Fu, a 26-year-old bank corporate finance manager, to buy an Audi NSU.XE +0.16% A4 in June for 300,000 yuan after looking at a dozen lower-cost models including those made by Volkswagen AGVOW3.XE -0.77% and China’s home grown car makers.“Putting the pricey plate on a more expensive car makes sense,” said Mr. Fu. As scarcer plates raise the cost of owning a car, shoppers can rationalize paying more for their car and believe the restrictions may limit them from trading up later, say auto dealers and analysts.

In addition to Shanghai, Beijing, Guangzhou and Guiyang now have policies aimed at reducing car purchases and as many as eight other cities are likely to follow, say industry executives. The result is first-time car buyers are skipping less expensive models, usually Chinese brands.

“More and more first-time buyers are buying big cars such as sport-utility vehicles and premium cars,” said Yan Jinghui, vice president of Beijing Asian Games Village Automobile Market, a car retail space in Beijing’s northern suburb that is home to around 200 car dealerships.

Data from the semiofficial China Association of Automobile Manufacturers shows in Beijing the average price per car has surged 88% since 2011 and the market share of cars with an engine size of larger than 1.6 liters has grown 17% over the same period.

CAAM has estimated the likely car-purchase restrictive policies in the eight cities could slash nationwide car sales by 400,000 units a year at least, or 2% of the total sales of 2012.

Shijiazhuang, one of China’s most polluted cities, has proposed limiting the number of new vehicle licenses to 100,000 a year from 2013, equivalent to about 60% of added vehicles in the city in 2011, according to estimates by brokerage house CLSA.

Authorities in the eastern city of Hangzhou in June proposed imposing high license-plate fees on households planning to buy second cars, adding they were prepared to allow the license-plate fee to surpass car prices. Hangzhou has more than one million cars on its roads of the major districts, or one car for every three citizens, according to official sources.

Foreign car makers shrug off these moves. Martin Kuehl, a spokesman for Audi AG, said the restrictions are encouraging trade-ups. “Would you want to put a 100,000 yuan plate on a 50,000 yuan car?” he asked. Bob Socia, China president at General Motors Co.GM -1.33% said even if all 25 cities with severe congestion were to implement restrictions in 2015, the hit to the company’s car sales would be just between 2% and 3%.

In contrast, Chinese auto makers are concerned that license-plate auctions would severely impact their sales. A Shanghai-like auction in Hangzhou would lift plate prices to the level of neighboring Shanghai—about 82,000 yuan, said Victor Yang, spokesman for Hangzhou-based Zhejiang Geely Holding Group. Geely models are largely priced between 80,000 yuan and 120,000 yuan.

China is already the world’s largest market for automobiles, with total sales rising 4.3% to 19.3 million units in 2012. CAAM has forecast that new car sales could reach 30 million units by 2020.

But Hou Yankun, head of Asia auto research at UBS Securities, said congestion could eventually put a brake on growth of China’s car market. “In theory, new car sales in China could grow 20% a year for another decade because of the lower level of private vehicle ownership,” he said. “But China’s road conditions can’t afford such a growth rate. I think China’s car sales growth will likely be flat from 2015 or 2016—and such a period could last for a decade.”

Every kilometer of road in China has about 200 cars, as many as in Los Angeles, which has some of the worst traffic in the U.S., according to UBS research.

“When traffic in more and more cities becomes as awful as in Beijing, measures that curb car sales will be inevitable,” Mr. Hou said. The average speed of car traffic in China’s capital is short of 15 kilometers, or 9.3 miles, an hour, about the speed of easy bicycling, and there are 13 other mainland cities in which the average speed of car traffic is lower than 20 kilometers, he added.

Binyam Reja, the World Bank’s transport sector coordinator for China, described China’s recent moves to reduce congestion and pollution by limiting car ownership as a “good first step.” However, in the long run “more comprehensive” policies are needed, he said. This included going beyond the current regulations to include charging people to bringing cars to downtown areas during peak hours.

“Because someone owns a car doesn’t mean they have to use it,” Mr. Reja said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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