As winter comes, fog and haze in northern China has once again grabbed the public’s attention. Various remedies have been discussed to solve rampant pollution problems caused by coal-burning heat supply and industry production. Unfortunately, a fully effective resolution is very difficult to be provided and implemented in such short period of time. As a result, the automotive exhaust gas treatment has become the only choice at the moment to ease public concerns and improve air quality. Recent news reported that eight cities were considering the feasibility of restrictions on car use and car purchase, in order to reduce traffic congestion and air pollution.
Auto sales in China have experienced exponential growth in past decade thanks to arising purchasing power and declining car price. China has already become the largest automobile market in the world in 2009 and its total sales of automobile by the end of 2013 is expected to exceed 20 million units. According to the China Association of Automobile Manufacturers, the estimated total sales of new vehicles in China will surpass 30 million units by 2020. This rapid increase in number of private vehicles inevitably results in problems such as traffic congestion and pollutions.
Even though levels of contribution of vehicle exhaust to the total air pollution may vary depending on different local industrial structures and testing seasons, vehicle exhaust still plays a very important role in causing air pollution. For example, the automotive exhaust gas pollution accounts for over 20% of the total air pollution in winter. In Hainan where its blue sky and beautiful nature have made the city one of the most famous winter resorts, the automotive exhaust gas pollution is responsible for nearly 70% of its total air pollution. Generally speaking, the automotive exhaust gas pollution contributes half of the PM2.5 pollution in urban areas, which could induce various cancers and respiratory diseases. Four cities, namely Beijing, Guiyang, Shanghai and Guangzhou, have therefore already implemented various policies to restrict car purchase in attempt to solve such problem. While many people are delighted to see such action, certain concerns are also raised especially about the car market in China. If there are more cities to follow up, will restrictions on car use and car purchase become major hindrances to the growth in demand for private cars in China?
Along with rapid economy growth, China’s GDP per capita grew from Rmb7,517 in 2001 to Rmb38,354 in 2012. Due to this significant rising purchasing power, cars are no longer luxury goods to many consumers. They have become essential consumer goods. This is why we witnessed a great increase in total sales to 18.6 millions, with CAGR of 26% in 2001-2011. After the corrections in 2011 (+4%) and 2012 (+4%), car sales resumed high growth in China in 2013, with 16% y-y YTD. However, the car penetration rate in China (~10% in 2013) is still much lower compared to the figures in some developed countries such as South Korea, Japan and USA where their penetration rates come at 30%, 45% and 70% respectively.
Based on the historical experiences of motorization in developed countries, the annual automobile sales volume of a country will rise exponentially with a CAGR of above 20% for ten years if its R value (average car price/GDP per capita) comes below 3. The rule was proposed by a professor at MIT in 1980s, and was later supported by the experiences in Japan (since mid-1960s), South Korea (since late 1980s), France (in 1970s), and Brazil (in 1990s). China’s R value came below 3 for the first time in 2012, and then further fell to 2.5 in 2013. Therefore, it can be argued from a theoretical perspective that China’s passenger vehicle market still has great potential. Given the relatively low penetration rate in China, it is still theoretically possible for the sales volume of new vehicles to maintain a CAGR of 20% in the next 5~10 years.
In practice however, we may come to realize a different conclusion. On one hand, given the number of vehicles per kilometer of road (car density on road) in China’s urban areas, we see many cities in China are already overburdened. Despite rapid growth of investments in infrastructural construction in the past ten years, the development of China’s roads (CAGR of 4.5%) is lagged far behind the growth of auto sales (CAGR of above 20%). This lag in development has resulted in an enormous surge in the average car density on road in urban areas from 54/km in 2003 to 236/km in 2011. In fact, the car density on road of many cities in China now has even exceeded that of some developed countries. For instance, the car ownership density on road of Beijing has come to 700/km and that of Shanghai comes above 300/km. In contrary, the car densities on road on Hong Kong and Singapore are 300/km and 200/km.
On the other hand, road usage is also an important factor to be taken into account. The average driving distances in Hong Kong and Singapore are around 3000km per year, while that in mainland China is above 10,000km per year. As a result, traffic congestion became a nightmare for many Chinese and the fog and haze has made the situation even worse. The average driving speed in Beijing is currently around 15km/hr, hardly any different from the speed of a wagon 100 years ago or riding a bicycle 30 years ago. It is so ironic to see that the achievement of our techno-economic development is being offset by the negative impact of its own.
There are approximately 120 million vehicles in China at the moment. With an annual growth of 10% in sales volume, China’s car ownership is likely to double in approximately four years. Subsequently, the penetration rate will rise from 10% to 20%. Since annual growth in infrastructures will achieve at merely 3%, China’s car density on road will be roughly 1.7 times of that today. It is an unbearable burden for China because the country’s overall average road congestion level will even surpass the level of today’s Shanghai. Therefore, besides the air pollution, the pace of development in urban roads will also present a great challenge to the development of automobile market in the future.
Based on the experiences of developed countries, when traffic congestion became a serious problem, governments would introduce policies to curb demand for car buyers. Policies included the congestion charges in Singapore and London, as well as high parking fees, vehicle purchase tax and fuel tax in Hong Kong. So far, the four cities in Mainland China with similar problems have already introduced various restrictions on car purchase. Data showed that since the introduction of the restriction policy, sales of new cars in these cities dropped sharply by 30-50%.
Under the pressures of traffic congestion and environmental pollution, it is very likely that more cities are expected to follow up the implementation of policies to restrict car purchase. Policies such as the introduction of the auction system of new car license have been greatly welcome and encouraged. This is because the auction system can more effectively control the number of urban vehicles. Compared to the improvement of urban infrastructure or massive R&D research project in green automotive environmental technology, the method can reduce traffic congestion and CO2 emissions more rapidly and directly.
Furthermore, the auction of new car license plates will bring an increase in government revenue, which can be used to provide funding for infrastructure projects. Taking Shanghai for example, the average bidding price of car license plates in Shanghai met a new high at Rmb91,900 in March 2013, and Shanghai government’s revenue from auction of car license plates is expected to reach more than Rmb9bn in 2013. Therefore, policies like implementation of auction system of car license plates that can generate massive revenue are particularly appealing to other local governments who intend to restrict car purchase as well.
Overall, we think many cities will have to restrict car purchase or usage in the next 3-5 years, which will inevitably have negative impact on automobile sales in China. Meanwhile, some provinces in central China and inland cities in Shandong and Jiangsu provinces will underpin the overall industry due to on their low car ownership per capita, low car density on road, as well as relatively high household income.