Manufacturing News

2012: A LOOK AHEAD:5 key questions for China's auto industry

While China's auto market is poised for growth this coming year, unwary auto executives will have plenty of opportunities to stumble. In 2012, companies will have to sort out inflation, municipal limits on car sales, the fledgling EV market, exports and other imponderables.

Here are five big issues:

Will China's economy cool off?
With exports sliding and the domestic real estate market cooling, China's gross domestic product is expected to grow 8 percent in 2012, down from 9 percent in 2011.

If so, then automakers can rightly be optimistic about China's long-term growth prospects.

But the next year or two may be tricky. With Europe in recession and with a still-shaky U.S. recovery, China can't rely on robust exports to drive growth. Moreover, China's government must continue to keep inflation in check.

One bit of good news: China's consumer price index grew 4.2 percent in November, down from 5.5 percent in October. That's the fourth straight monthly decline since July, when inflation hit a 6.5 percent annualized rate.

Watch those monthly inflation rates. Moderate consumer prices will give the government more leeway to ease credit and allow the economy to grow. If not, China's car sales are likely to stagnate next year.

Will China's cities limit car sales?
Over the past decade, the explosive growth of China's car fleet has caused choking air pollution and severe traffic jams in major cities.

Two cities, Beijing and Guiyang, set tough limits on car sales in 2011. Next year, more Chinese cities are expected to set similar caps. If this becomes a trend, China's car sales could decline as much as 17 percent, according to one estimate.

Keep your eye on Beijing's smog. If air quality gets even worse, automakers may face additional government restrictions on car sales.

Can Chinese automakers create stronger brands?
As foreign automakers introduce entry-level brands, China's domestic carmakers are struggling to defend their market share.

The domestic brands rely heavily on sales of inexpensive microvans and compact cars. So they were hit hard last January when the government ended scrappage incentives and tax breaks for small cars.

As their price advantage dwindles, the domestic automakers must improve quality and upgrade technology. But that will take awhile.

In the short run, Chinese brands will continue to cede market share to global giants such as General Motors and Volkswagen AG.

Can the government create a market for EVs?
China plans to have 1 million electric cars and plug-ins on the road by 2015, but it isn't at all clear how this will happen.

Virtually every major international automaker in China has announced plans to roll out EVs or plug-ins over the next few years. But that's because they have no choice. Foreign automakers must introduce EVs in order to receive permission to expand production of conventional vehicles.

In turn, the government offers generous sales incentives -- up to 60,000 yuan for electric cars and 50,000 yuan for plug-in hybrids -- in five major cities.

Yet, EV sales remain microscopic. China's cities lack EV recharging stations, and there is no perceptible consumer demand for EVs.

For China's fledgling EV industry, public transportation seems like a better bet. In 2012, look for China's cities to start creating fleets of EV buses and "people movers."

Are Chinese automakers ready to become major exporters?
When -- if ever -- will Chinese-made autos flood Europe and North America.

In Europe, Great Wall Motor Co. has sold a small number of Haval SUVs, and SAIC Motor Corp. has revived the MG brand. Meanwhile, Honda Motor Co. has begun exporting Chinese-made Honda Fit subcompacts to Canada.

But in 2012, Chinese vehicle exports to Europe and North America will remain a trickle, not a flood. Instead, look for domestic Chinese automakers such as Chery, Geely and Great Wall to target developing markets in South America, Asia and Eastern Europe.

The domestic Chinese brands must improve the quality, technology and crashworthiness of their vehicles before they can be a major force in Europe and North America.

That will happen eventually, but not in 2012.

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