Automobile and Domestic Consumption in China
Amidst the US-China trade war, ongoing for more than 18 months, there have been many speculations on the impact of US tariffs on our domestic economy. According to the NY Times, “The United States has now collected more than $39 billion from the tariffs placed on $360 billion worth of Chinese goods,'' which are costs imposing on our consumers. On the other hand, the trade war is also creating an atmosphere of uncertainty that is causing many families to rein in spending. In an analysis by the South China Morning Post, this is a phenomenon where consumers are purchasing more oyster sauce, a cooking essential, while forgoing luxuries such as wine.
In a time where the Chinese export is challenged by US tariffs, it appears logical that the government will seek to strengthen its economy through growing the domestic consumption sector. Indeed, the trends from previous years have shown that overall, Chinese spending contributes to around 60% of increases in GDP. This means that the decrease in consumer confidence due to the trade war can indirectly harm China's economic prospects.
Alternatives to the traditional automobile have been steadily on the rise as a consequence of increasing efforts by the Chinese government to invest in public transportation and reduce car emissions. These domestic policies may be playing a larger role in the industry than one would expect in the context of the trade wars with the United States.
For many years, owning a car in China is a sign of upward mobility and can even be considered a necessity for some families. Despite historically upwards trend in car sales, recently, even the automotive industry is experiencing fewer buyers. During the month of October 2019, there was a total of 2.46 million vehicles sold, representing a 3.6% year-over-year decline. While the US-China trade war does impose a culture of spending less, there are other factors that can explain the decline in automobile purchases.
First, Chinese investments in alternative transportation has made the population less reliant on cars when commuting. During May 2019, official data indicated that investment in railway infrastructure increase 12.6% when compared to 12 months prior. Other transportation solutions come from the private sectors. For example, Chinese people are using the popular car-hailing service of Didi Chuxing, a comparable Chinese version of Uber. Founded in 2012, Didi Chuxing has enjoyed significant popularity in China with “550 million users and 31 million drivers”. Beyond alternative transportations, certain governmental policies are also creating challenges for automobile manufacturers. Earlier this year, 17 cities and provinces across China has adopted a new car emission standards in order to limit environmental impacts. For consumers, this would discourage them from buying the sub-standard, older generation cars because it will be difficult to obtain a local license plate. While the new regulations will benefit China’s air quality in the long run, on the other hand, the recent Chinese policies seem to be less supportive of New Energy Vehicles (NEV). In fact, the government has cut back on subsidies for NEVs causing its sales to decrease by nearly a half earlier in October, 2019.
While the trade war has impacted China’s domestic consumption, our analysis of the automobile industry shows us that consumer behaviors are further influenced by governmental policies and social developments. On one hand, decline in car purchases reflect the increasing acceptance of other more energy efficient transportation methods such as rail transportation or car-hailing services. On the other hand, decrease in government subsidies for NEVs may hinder the future developments of green transportation technology.
Thumbnail Image: Taken on September 21, 2012 by jo.sau on Flickr