VZCZCXRO7493
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #1339/01 1390421
ZNR UUUUU ZZH
P 190421Z MAY 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4050
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 BEIJING 001339 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM SFLATT/JHABJAN 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE, 
VENKATARAMAN, KEMP, MILLER, MALMROSE 
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (5130); 
HEIZNEN(6510) 
 
E.O. 12958:  N/A 
TAGS: ECON EIND OTRA SENV CH
 
SUBJECT:  CHINA'S AUTO INDUSTRY ENJOYS RECORD SALES FOR FOURTH 
STRAIGHT MONTH, BOLSTERED BY AUTO SUPPORT PLAN 
 
REF: (A) BEIJING 151; (B) SHANGHAI 96 
 
This cable is Sensitive but Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels. 
 
¶1. (SBU) SUMMARY.  Record auto sales in April suggest that China's 
auto support plan is providing a significant boost to the industry. 
April auto sales data released by the China Association of 
Automobile Manufacturers (CAAM) show that 1.15 million vehicles were 
sold, the fourth straight month of record sales and a 25 percent 
increase YoY.  Consumers are taking advantage of the sales tax cuts 
on smaller cars and rural subsidies that were first announced by the 
State Council January 14 and later detailed in the State Council's 
March 20 release of the Automotive Industry Readjustment and 
Revitalization Plan.  The recent trend in increasing sales and 
decreasing exports reflects the growing influence and strength of 
the Chinese market in the global automobile industry.  According to 
Embassy contacts, the short term result of the stimulus package 
makes China the fastest growing auto market, especially for low 
emission cars, but at the cost of lower profit margins.  END 
SUMMARY. 
 
China Releases Detailed Auto Industry Support Plan 
---------------------------------------- 
 
¶2. (SBU) The State Council released March 20 a detailed plan to 
support China's auto industry.  The plan aims to bolster the 
domestic market through the use of subsidies, transform the auto 
industry through consolidation and technology upgrades, and make 
China a market leader in new-energy vehicles. 
 
¶3. (SBU) Premier Wen Jiabao initially approved the auto industrial 
revitalization plan at the January 14 State Council meeting after 
auto sales had dipped to 6.7 percent in 2008, the first time in 10 
years without double digit growth.  The original announcement called 
for a proactive financial approach including a reduction in sales 
tax on vehicles with engines smaller than 1.6 liters from 10 percent 
to 5 percent.  Miao Wei, Vice Minister of Industry and Information 
Technology and former president of Dongfeng Motor Corporation, 
recently said that MIIT would consider further reducing the sales 
tax if necessary to protect China's recovering auto industry. 
Subsidies include 5 billion RMB earmarked for farmers to upgrade 
their old vehicles and 10 billion RMB to be used for technological 
upgrades and alternative energy development. 
 
Latest Sales Data Shows China Remains a Hot Auto Market 
---------------------------------------- 
 
¶4. (SBU) Sales data released by CAAM show that 3.832 million 
vehicles were sold during the first four months of the year, up 17.9 
percent YoY.  Total production also increased 6.4 percent to 3.725 
million units.  China has even surpassed cars sold in the United 
States, leading some major auto companies to publically announce 
that China is the centerpiece of the global auto industry.  The 
Shanghai Auto Show held in April highlighted China's growing clout 
in the worldwide auto industry, with more than 1,500 auto and auto 
parts companies participating. 
 
¶5. (SBU) GM China Group, through its joint venture with SAIC Motor 
Corporation and Wuling Automobile, sees continued benefits from the 
sales tax cut and even plans to build another assembly plant to 
reach its announced target of doubling its current annual sales to 
more than two million vehicles in the next five years.  GM also 
anticipates using China as an export base once the global market 
rebounds.  Ford China also recognizes China as the main growth 
engine for autos as it plans to move its Asia-Pacific headquarters 
to China from Thailand. 
 
¶6. (SBU) As stated in the plan, China's target for the next three 
years is a 10 percent annual average growth rate, with total sales 
to exceed 10 million units in 2009.  Total sales in 2008 were 9.37 
million, and several industry experts, including China Automotive 
Review's (CAR) Executive Managing Editor Alfred Tian, believe that 
the 10 million unit target is easily obtainable.  A JP Morgan report 
states that China's low auto penetration rate of 32 vehicles per one 
thousand persons in 2008 shows that there is room to reach their 
forecasted 14 percent growth in 2009 and 12 percent growth for 2010. 
 
 
But The Increase Comes At The Cost Of Lower Profit Margins 
---------------------------------------- 
 
BEIJING 00001339  002 OF 003 
 
 
 
 
¶7. (SBU) Not all analysts are so optimistic, however.  China CAAM 
Assistant Secretary General Zhu Yiping said that the high sales 
numbers could contribute to China's GDP growth but at a cost to 
automakers whose income has dropped 9.42 percent YoY for January and 
February.  While total income was 320.4 billion yuan, profit margins 
have decreased 59 percent to just 6.6 billion yuan.  CAAM data shows 
that minivans accounted for 70.7 percent of sales in the first 
quarter.  These vehicles cost around 50,000 yuan (approximately USD 
7300) with a profit margin less than 1 percent.  According to CAAM, 
profits of the top 19 auto manufacturing enterprise groups fell 46.4 
percent in the first quarter YoY. 
 
¶8. (SBU) Chinese Academy of Social Sciences (CASS) Institute of 
Industrial Economics Researcher Zhao Ying told EconOff that these 
sales targets were just numbers and that China was unlikely to reach 
its purported 10 percent annual growth based solely upon tax cuts 
and subsidies.  Zhao said that the "vehicles to the countryside" 
plan, which allocates 5 billion yuan to subsidize farmers who trade 
in older vehicles for newer ones from March 1 to December 31, 2009, 
will only increase sales by 1 million units.  Furthermore, these 
sales may just be pushed forward to take advantage of the financial 
incentive.  The main purpose of the subsidies is to increase 
domestic demand, as Chinese companies exported only 61,000 vehicles, 
a drop of 62.1 percent YoY. 
 
Government Procurement Provision Removed from Detailed Plan 
---------------------------------------- 
 
¶9. (SBU) The main difference between the January announcement of the 
auto industry revitalization plan and March release of the detailed 
plan was the removal of a provision that government procurement 
should be readjusted to prioritize the purchase of new energy, 
environmentally-friendly and independent-branded vehicles.  Auto 
analyst Wayne Xing argued that this provision may have been taken 
out due to the unrealistic goal that independent-branded vehicles 
make up more than 50 percent of total purchases.  The figure 
currently stands at 3-4 percent.   Xing also speculated that China 
was concerned the provision may be in violation of the WTO rules on 
national treatment. 
 
New Energy Vehicles a High Priority 
----------------------------------- 
 
¶10. (SBU) While the plan has the desired short-term effect of 
increasing sales of more fuel-efficient vehicles with smaller 
engines, it also projects into the future with a specific New Energy 
Vehicle Strategy.  The goal is to have annual production of all 
new-energy vehicles reach 500,000 units by 2011, with sales of these 
all-electric battery cars, plug-in hybrids, and hydrogen fuel-cell 
cars to be five percent of total auto sales.  The plan also 
stipulates that all vehicle manufactures must have new energy 
products. 
 
¶11. (SBU) The plan allocates 10 billion yuan in the next 3 years for 
technology upgrades including safety and alternative-energy. China 
is considering rebate offers to encourage domestic demand for 
new-energy vehicles.  Pilot programs are being implemented to 
encourage the new-energy industry.  A three-way partnership between 
Ministry of Industry and Information Technology, the Wuhan 
provincial government, and Nissan is underway to develop electric 
vehicles and an infrastructure of charging stations.  Wuhan, 
Beijing, Shanghai, Chongqing are among the 13 cities to pilot 
programs that will collectively put 60,000 new-energy cars in 
service by 2013. 
 
¶12. (SBU) CASS's Zhao was pessimistic about reaching the goal of 
500,000 new-energy cars, citing a lack of infrastructure and key 
auto parts.  He stated that the current subsidies were not enough to 
jump start the industry and that success would be contingent on 
market demand and public support. 
 
Still Waiting for Restructuring and Consolidation 
---------------------------------------- 
 
¶13. (SBU) The plan calls specifically for eight companies to conduct 
mergers and acquisitions with the goal to form 2-3 large enterprise 
groups with annual production and sales of 2 million units and 4-5 
smaller groups with sales exceeding 1 million units.  The four large 
companies specifically cited to consider nationwide consolidation 
 
BEIJING 00001339  003 OF 003 
 
 
include Shanghai Automotive Industry Corp (SAIC), China FAW Group 
Corp, DongFeng Auto, and Changan Auto.  The companies encouraged to 
consolidate regionally include Beijing Automotive Industry Corp, 
Guangzhou Automotive Industry Corp, Chongqing Automotive Industry 
Corp, and Chery. CAR's Tian told EconOff that forced consolidation 
would not work and should be left to market demand.  He cited SAIC's 
purchase of Nanjing Auto in 2007 as an example of forced 
consolidation that continues to encounter integration difficulties. 
 
 
Comment 
------- 
 
¶14. (SBU) The plan's call for an increase of the domestic market 
share of globally-unique (independent) brands to over 40 percent 
will likely benefit Chinese companies that make their own brands 
such as Wuling, Changan Auto, and Chery.  Although the plan's 
support for industry consolidation will no doubt help China's large 
state-owned carmakers, foreign carmakers with JVs such as GM China 
and private companies such as Geely Automobile Holdings and BYD Auto 
Company will remain real competitors.  Geely has put in tenders for 
both Volvo and Saab as part of their plan to establish a presence 
overseas.  BYD, during the single month of April, jumped from number 
14 to number 7 for domestic auto sales. 
 
WEINSTEIN