Consumer

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China's drive to combat pollution is helping homegrown carmakers, which are boosting sales at the expense of Western brands. But General Motors and Volkswagen -- makers of the biggest-selling cars in the world's largest market -- shouldn't worry: Changan and Great Wall won't topple them.

Driving Ahead
Volkswagen has the biggest share of sales among foreign automakers (%)
Source: Bloomberg Intelligence, China Automotive Information Net
Footnote: Volkswagen cars include Skoda and Audi

In October, China cut taxes on cars with engines of less than 1.6 liters to 5 percent of the purchase price from 10 percent. The reduction did two things -- reversed a decline in overall car sales and buoyed demand for domestic brands. Between 80 percent and 85 percent of vehicles produced by local carmakers are in the small-engine category, according to Bloomberg Intelligence analyst Steve Man. By January, Chinese domestic brands had a 41 percent share of car sales in China, up from about 38 percent a year earlier, according to data from BI and the China Automotive Information Network.

China's auto sales had been falling until the middle of last year, for several reasons, among them the slowing economy and the government's anti-corruption drive, which ate into demand for ostentatious vehicles. The tax cut helped push new passenger car sales to 21.1 million units for the full year, a 7.3 percent increase from 2014. The improvement has extended into 2016: Sales in January and February combined reached 3.61 million units, up 5.1 percent from a year earlier, data from the China Association of Automobile Manufacturers showed Thursday.

Instant Boost
An October tax cut buoyed sales growth for cars with small engines
Source: Bloomberg Intelligence, China Automotive Information Net

On top of the October tax cut, numerous local and national subsidies for electric car producers that can reduce the purchase price by 50 percent or more have helped local brands. Shenzhen-based BYD, in which Warren Buffett's Berkshire Hathaway owns a stake, has a venture with Daimler that produces electric cars. Otherwise, most such vehicles are produced by local automakers going solo. Electric cars accounted for 2.5 percent of cars sold in China last year, more than doubling from 1 percent in 2014 and making the country the world's biggest market for pure battery-powered vehicles.

The country's carmakers shouldn't get too comfortable. A  spate of new models could prompt buyers to shift allegiance back to Western brands and their local partners. (China began allowing foreign carmakers in the 1980s , starting with Volkswagen, on condition they produced cars in ventures with domestic firms. While imports are allowed, they are taxed as much as 25 percent of the purchase price, so beyond a few luxury marques such as the Lamborghini, overseas automakers have chosen to manufacture locally.) 

Catching Up
Foreign carmakers are preparing to introduce a wave of new models in China
Source: Bloomberg Intelligence
Footnote: 2016 figure is an estimate of new model launches and major facelifts

Even if local brands continue to make inroads, overseas automakers may have ways to benefit. Baojun, one of the best-selling Chinese car marques and a favorite in rural areas, is produced by GM's joint venture with SAIC and Wuling. Nissan, meanwhile, has the China-only Venucia brand, which uses some of the older technology of its Tiida cars. The company sold 11,161 Venucia cars in January.

Apart from new models, there are two other reasons Chinese carmakers may find their days in the spotlight cut short. Hybrids, the more pragmatic option for electric car fans, are coming: The southern city of Guangzhou and Tianjin in the north are allowing foreign ventures to make them and Hyundai plans to start sales this year, according to BI's Man. While growing fast, demand for electric vehicles has been restricted by a lack of charging stations and high prices, favoring the prospects for hybrids.

Secondly, the gain from the tax cut will be temporary. China last lowered the levy in 2009, briefly boosting the share of local brands before restoring the tax to 10 percent. This time, the 50 percent reduction expires in December, barring a government extension. China's carmakers may be feeling a sense of deja vu.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net