China auto rules could ward off new firms

December 30, 2011
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Beijing is trying to shore up the economy by helping domestic companies/FILE
BEIJING, Dec 30 – China’s decision to “withdraw support” for foreign investment in its auto sector is unlikely to see global firms leave the country but will make it harder for new carmakers to enter, analysts say.

The guidelines – released by the National Development and Reform Commission (NDRC), the top economic planner, late on Thursday – signal an end to incentives for foreigners and discourage fresh projects in China.

The move comes as sales in the world’s biggest market slump and Beijing tries to shore up the economy by helping domestic companies and opening up other industries to foreigners such as environmental technology.

“The government is signalling that it is worried about overcapacity (in the auto industry) and that it will reserve any new capacity to local brands or new energy vehicles,” said John Zeng, director of forecasting for research firm LMC Automotive.

“In previous years, a joint venture in China enjoyed tariff reductions on the import of new equipment, but now with the new policy there will be no such incentives, so investment costs will increase.

“New foreign brands could be restricted.”

The new policy – due to go into effect on January 30 – will likely affect some of the world’s biggest car firms, including General Motors, Honda and Volkswagen, all of which have long had operations in China, he said.

However, Zeng said: “This new policy is not a surprise. Previously the government announced that any new capacity should be for local brands, they are reclarifying what has already been said.”

Jia Xinguang, managing director of the China Automobile Dealers Association, said authorities were now likely to block new projects in the sector – such as factories – planned by foreign firms.

The measure comes as China’s auto sales slump amid a global and domestic slowdown.

China overtook the United States as the world’s number one car market in 2009 and soared 32 percent last year to a record 18.06 million units.

But the sector has since lost steam after Beijing phased out sales incentives such as tax breaks for small-engine cars.
Sales slid 2.4 percent in November from a year earlier to around 1.66 million vehicles, marking the second straight monthly decline.

In a statement announcing the new guidelines, the NDRC and the commerce ministry said they were issued “because of the need for the healthy development of domestic auto manufacturing.”

Jia told AFP the guidelines are “a signal to foreign investors that China has overcapacity (in the auto sector), and investment risk is bigger now.

“Manufacturing capacity is about 350 million units, but the rosiest sale estimate is for just 200 million units next year.”

But he said other obstacles to foreign investors in the car industry had already been in place for years, such as requirements to build R&D centres.

According to the official Xinhua news agency, China attracted $103.77 billion in foreign direct investment in the first 11 months of 2011, up 13.15 percent from a year earlier.

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