CHINA'S AUTO INDUSTRY ENJOYS RECORD SALES FOR FOURTH

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