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For cars in China, the selling ain't easy

November 24, 2010

Forecasting sales of cars and small trucks in North America for 2002 is difficult. But consider the same task in China, where changing laws, lower tariffs, rising unemployment and the general lack of confidence Chinese tend to have in their government all affect how many vehicles will be sold in coming years.

Consider that just 11 percent of Chinese own an automobile now and that it is a purchase almost always made after the family has paid off a home. Many predictions pointed to falling new-car prices upon China's inclusion in the World Trade Organization. Initially, that has occurred. But many call it a temporary condition and say vehicle sales will not increase significantly in China until cars become simpler to buy.

For instance, about 95 percent of vehicle sales in China are cash purchases because financing is so difficult to obtain. There are no automaker credit arms-at least, not yet-so anyone who wants to finance a car must do so through a bank.

Moreover, stringent lending rules of banks make it difficult to qualify for a loan. Efforts are underway to allow non-banking financial institutions to offer car loans in China, but those new regulations are not expected soon.

On the plus side, the Chinese government realizes what a booming auto industry can do for its economy and the State is expected to act to promote car purchases. Perhaps the greatest insight to China's carbuying future lies in its recent past. In 1990, China produced 500,000 cars. By 1995, production jumped to 1.45 million units.

However, the production rate slowed over the next five years, reaching 2.06 million vehicles in 2000. Chinese consumers have demonstrated patience and they will wait to buy vehicles if they believe prices are too high. Prices, of course, will depend to a great extent on expanding vehicle imports and any government imposed tariffs.