Chinese Government Policies Aimed to Invigorate Auto Industry

By Ken Duck, Foley & Lardner LLP

This article is part of our Summer 2009 edition of Legal News: China Quarterly Newsletter, Eye on China.

In 2008 and the first quarter of 2009, the Chinese government implemented or announced several new measures aimed at addressing the following concerns: (1) a decreased growth in China’s passenger vehicle sales; (2) the country’s growing reliance on foreign oil and the impact of China’s industrial development on the environment; and (3) difficulties faced by Chinese automotive manufacturers trying to be competitive in the international marketplace.

After several years of double-digit growth in new vehicle sales in China, 2008 new vehicle sales slumped to a seven-percent increase over 2007 sales growth. In furtherance of the Chinese government’s goal of maintaining at least a 10-percent annual growth rate during the next several years, it has implemented consumer incentive programs ranging from road-fee reductions to subsidies to tax reductions. Certain measures aimed at increasing passenger vehicle sales also are generally focused on encouraging consumers toward more fuel-efficient and lightweight vehicles. One such program provides subsidies to residents of rural areas who purchase lightweight pick-up trucks and minivans as well as motorbikes. First-time vehicle buyers are eligible, as are persons who trade in late-model three-wheelers and pick-up trucks. At the same time, the Chinese government has altered its sales tax policies on sales of certain vehicles, establishing a sliding sales tax, with the sales tax favoring smaller cars and engines and raised fuel prices. An encouraging 24-percent year-over-year growth in automotive sales in February 2009 has been attributed to these and other stimulus programs.

For the past several years, China has had a stated policy objective of encouraging investment in environmentally friendly and energy-saving technologies. The automotive industry has achieved significant foreign investment by offering tax incentives and by loosening approval requirements for projects aimed at achieving the objective. More recent programs encourage consumers and manufacturers alike to consider more environmentally friendly vehicle options. The Chinese government recently offered a subsidy for the purchase of a hybrid vehicle and is expected to spend almost $300 million by 2012 promoting alternative-energy vehicles through financial subsidies, research and development investment, and tax incentives. In addition, the newly implemented fuel tax is expected not only to encourage consumers to purchase fuel-efficient vehicles, but also to encourage automakers to invest in the development of alternative-energy and fuel-efficient vehicles to keep up with the consumer demand. Likewise, the phasing-in of new emission standards will oblige automakers to continue to improve upon their vehicle-emission standards and consumers to purchase vehicles meeting such standards.

China has identified its currently fragmented automotive industry as one factor presently hindering its success in international markets. With more than 100 auto companies nationwide and certain manufacturers producing fewer than 100 vehicles per year, the industry faces problems resulting from overcapacity and low output among certain manufacturers. To alleviate this issue, the Chinese government has announced plans to encourage the top 14 original equipment manufacturers to consolidate into 10 companies, known as the Big 10. The Big 10 will be split into two groups — four companies in one group are each expected to have annual sales of 2 million vehicles, and six companies in a second group are each expected to have annual sales of 1 million vehicles. The Chinese government plans to facilitate the consolidation into the Big 10 by permitting certain automakers to purchase their competitors nationwide and to permit others to make regional acquisitions.