This is a guest post by my “Monetary and Financial Theory” student Fanglue Zhou: 

China used to be considered a big market for many kinds of products. However, as China’s economy has slowed recently, its role as the biggest growth engine for the global car business depends on auto makers getting reluctant customers behind the wheel, as written in Wall Street Journal.

The automotive industry in China is quite unique as the joint ventures with foreign car makers play a very important role. Of the automobiles produced, 44.3% were local brands (including BYD, Dongfeng Motor, FAW Group, SAIC Motor, Lifan, Chang’an, Geely, Chery, Hafei, Jianghuai, Great Wall and Roewe), and the rest were produced by joint ventures with foreign car makers such as Volkswagen, General Motors, Hyundai, Nissan, Honda, Toyota, Mitsubishi etc. Most of the cars manufactured in China sold within China. Foreign automotive companies cannot sell the cars directly to China’s market, instead, they have to become joint ventures with Chinese local car makers in order to have the right to produce and sell within China.

Why is there a sales decline in China’s automotive industry given that China has just become the world’s biggest automobile market in 2013?

• Slowing economic growth. The disinflationary policy is slowing down economic growth in China. Chinese consumers’ interest in cars had shown signs of cooling along with broader economic growth.
• Auto Sales Control. A growing number of Chinese cities are controlling auto sales to fight against traffic congestion and pollution. To combat air pollution, China’s State Council, or cabinet, released a national plan in September that called for a 15 percent to 25 percent reduction in particulate matter by 2017 in the three key manufacturing regions anchored by Beijing, Shanghai and Guangzhou.
• Anti-corruption campaign. The demand for imported luxury vehicles will decline as the official frugality campaign spreads beyond the government and affect companies and individual consumers.

Nevertheless, we can still find ways out for the automotive companies:

• Young people should be the targeted consumers. Given that many of the young are paid relatively well compared to the old generation, they may today borrow to finance their housing or cars instead of saving until they have enough money to enjoy.  Moreover, the good news for most of the automotive companies is that – Chinese people love brand new cars. Most of the Chinese prefer brand new cars to the second-hand because they may think it uncomfortable to use something that may have been owned by others.
• Inland cities would be promising markets. Since most of the big cities, as well as the rich costal cities, are already overwhelmed by too many cars, their local government may implement the “controlling” policy sooner or later so that the demand for cars is limited. Most of the inland cities are quite well-developed in recent years. Many well-paid job opportunities are created in these cities creating many relatively high-income people. Hence, the inland cities will be a promising market for the automotive industry in the near future.