China offers subsidies for small cars

As part of its green car strategy, China announced last month that it has set aside CNY6 billion (US$952 million) for subsidies of up to CNY3,000 (US$469.76) for the purchase of every vehicle with an engine capacity of 1.6 liters or less, and fuel consumption of up to 6.3 liters per 100 kilometers.
The southwestern city of Chongqing followed suit a few weeks later with its own local incentive program, the first of its kind in the country. Chongqing promised a subsidy of 6% on the sale price of cars and mini-buses with engines of 1.6 liters or less and capped the subsidy at CNY3,000 (US$469.76) per vehicle.
The new policy announcements resulted in a 21% increase in deliveries of smaller-engine vehicles in May to 638,500 units, compared to the previous year; this resulted in positive cumulative volume sales in that segment for the first time. A 16% increase in vehicle sales across all segments has caused some skepticism however; analysts attributed the increase in deliveries of smaller-engine vehicles to seasonal factors and competitive pricing.
China’s subsidy programs for the auto industry
China has experimented with subsidies to boost sales of the auto industry but has begun to change its approach; case in point, a CNY 10 billion (US$1.56 million) stimulus program that expired last year. The new round of subsidies is smaller and narrower in scope.
“The latest government program covers fewer car models than in the previous years after raising the energy-efficient threshold, and the money allocated can subsidize only 2 million units, compared with more than 3 million units last year,” said Zhang Yu, managing director of Automotive Foresight.
The subsidy criteria will only be met by about 100 car models this year, compared to 420 qualified models under the previous program, which covered fuel efficiency of up to 6.9 liters per 100 kilometers. Zhang said small-engine vehicles have less room comfort and don’t appeal to consumers. He suggested that the government offer more attractive incentives, such as a rebate on the vehicle purchase tax, which accounts for up to 10% of a car’s retail price. Analysts are equally pessimistic over the new round of subsidies and have expressed doubts that Chongqing’s local incentive program will be repeated across China.
“The move by Chongqing is largely to boost the sales performance of Chang’an Automobile, which is a big producer of vehicles covered by the subsidy program,” said Ye Sheng, auto research director at Ipsos. “But even if they all follow suit to introduce local stimulus programs, we still cannot expect much from the market response,” Ye said. “There is not much untapped demand left for small-engine vehicles after all these years of subsidy-fueled growth, since consumers buy new cars once every 4 to 5 years.” (June 21, 2012 )