June 15, 2012

The Chinese economy is growing, which is also benefiting the local automobile market. At the same time, though, there are pronounced regional differences. Both per-capita GDP and car density vary considerably from province to province. At the regional level, car sales are often influenced by official measures. Hence it is important for the automobile industry to take these regional differences into account in its production and marketing plans.

Over the last month, there have been growing signs that economic growth is slowing in China. We still believe a “hard landing”is unlikely and expect the Chinese economy to grow by between 8% and 8.5% p.a. in 2012 and 2013. However, these figures mask the pronounced differences in economic development between the provinces.

For some years now, economic momentum has been shifting from the more established coastal regions to the hinterland (see chart). In 2011, nine of the ten fastest growing provinces were located further inland. For one thing, this is the result of targeted policies by the central government which had recognised the necessity of providing a boost to these regions; key elements in this context are the “go west” strategy and the revitalisation of the country’s northeast. For another, it is the result of structural changes: these include rising labour costs in the coastal provinces, the trend away from cheap production towards more sophisticated production processes as well as a traditionally greater openness to trade of the coastal provinces and thus their greater vulnerability to global cyclical effects. As a result, per-capita incomes in the coastal and land-locked provinces are beginning to converge: the ratio of highest to lowest provincial GDP per capita has more than halved over the last ten years, from 11:1 to 5:1.

However, this does not necessarily mean that the gap between the richest and the poorest will narrow. The difference between the highest and lowest urban household disposable incomes is relatively constant, and differences between coastal and inland provinces are changing only slowly. A similar picture emerges when comparing household incomes in rural areas, with the exception that growth rates have been higher in the last five years in inland provinces than along the coast.

Enormous regional divergence in the car market

This heterogeneity of the individual Chinese provinces is also reflected in the country’s automobile market. Between 2000 and 2011, car sales in China expanded by an average of more than 30% per year. However, this expansion did not lead to roughly the same degree of motorisation in the individual provinces – on the contrary. Car density varies considerably from province to province. The province-level city of Beijing (including the surrounding areas) ranks at the top. In 2010 (more recent data not yet available) car density in Beijing amounted to 217 cars per 1,000 inhabitants, even though we presume this number to be higher in the city itself. Hence, Beijing’s car density is not very far from that registered in the state of Berlin (328 cars per 1,000 inhabitants). At the other end of the scale, there is Jiangxi province, a land-locked province in the southeast of the country, with a car density of just 21 cars per 1,000 inhabitants or roughly one-tenth of the Beijing level in 2010. The differences in the degree of motorisation between individual provinces therefore are much bigger than in industrialised countries such as Germany. Generally speaking, it hardly comes as a surprise that the Chinese coastal provinces, which over the last few years achieved the highest level of development within China, also beat the hinterland provinces when it came to car density (see map).

A look at regional differences is worthwhile not only as regards car density. Car sales also developed extremely differently in regional terms from one year to the next. Frequently this is due to government measures that sometimes pursue conflicting objectives. For instance, regional and/or temporary limits to new-car registrations have been imposed in the past in order to counter congestion in cities or ecological problems. By contrast, government programmes may seek to stimulate the demand for cars in certain regions,for instance for cyclical reasons (e.g. by means of tax or other fiscal incentives). In both cases, individual vehicle classes can suffer or benefit to different degrees. Moreover, central and provincial governments influence purchasing decisions by public administrations. Together, these measures have an impact on both total car sales and market shares of individual manufacturers. The effects may also differ from region to region.

This situation is making it very difficult for carmakers to plan their production and marketing. True, China will continue to offer large growth potential for auto sales over the coming years. But companies that are better than their competitors at gauging the regional differences within China and adjust their plans accordingly will probably be better equipped to tap this growth potential and avoid transaction costs in the process.