China surpassed the United States as the world's largest market for cars in 2008. China roadways now have almost 70 million cars and it is expected to triple this amount by 2020. Is this possible, when traffic is already so bad now? I live and drive in Beijing, where there are presently over 5 million cars on the roads and adding 240,000 vehicles each year. It was just announced that this amount would be reduced to 150,000 for next year.
The demand for cars is certainly prevalent, because even with the existing lottery system restricting owners to obtain car license plates; meaning that your chances to obtain a plate is 1 in 36, and there are over 500,000 applications in the waiting pool. In the USA, there are 700 cars for every 1000 persons, Beijing is 70 for every thousand and as people become more affluent, there will be more car owners. It seems that everyone's China Dream is: owning a home and owning a car.
I first visited China in 1986, at that time there were no privately owned vehicles on the road. My, that has changed, but so has the economy. China is now the second largest economy in the world and has over one million millionaires with the average age of these millionaires under 40. For them, owning a car is a status symbol and showing that they have made it to the top. This status symbol is usually in the form of a luxury car, and the luxury car manufacturers know this and have expanded sales in China, which has become the second largest market in the world for luxury car sales.
Last year 1.25 million luxury cars were purchased in China and 1.7 million in United States. The trend in China is growing and expected to equal USA by 2016 and forecasted to be 3 million in 2020 compared to 2.25 million for the USA. Britain's Bentley dealers have seen this trend and have opened 12 dealerships in China. I certainly see more Bentleys on the road here than in Canada. The Bentley and the Rolls Royce is probably the top of the luxury cars. The Bentley Spur is over 4 million rmb and the Royce Dragon Phantom is over 8 million rmb. More Rolls Royce cars are now sold in Beijing and Shanghai than in London and Beverly Hills.
The Chinese consumer may be cheated because most luxury cars sold in China are at least 30% - 50% higher than abroad. Although China has a 25% import duty, this does not explain such a large differential. For example, the BMW X5 is almost 2 million rmb in China but only half this amount in Canada or the USA; just as the Ferrari is 4 million rmb in China but only $230,000usd elsewhere. But even with such a difference, there is a waiting list for luxury cars and dealers are expanding to have more outlets to try and meet this increasing demand.
The average age of the Chinese luxury car buyer is 10 years younger than the North American buyer. McKinsey & Company estimates that the Chinese car market will grow ten fold between 2005 and 2030. As major cities implement more restrictions on the number of vehicles, growth will come in the smaller cities. GM General Motors will expand its 2900 dealers to 3500 locations by this year, selling Buick, Chevrolet, Cadillac and their new Chinese Baojun brand. Chinese car manufacturers are presently supplying the regular car market and export about one million vehicles annually, mostly to developing countries.
However, a recent study by the University of Michigan showed that the respondents, who were under forty and did not have a driver's license, had no intention to obtain a license or a car. One third indicated that they were too busy; another third said owning a vehicle was too expensive and the final portion said that they were able to catch a ride. The survey authors indicated that there was a cultural shift and people were moving from the suburbs to the cities where public transportation was available.
One has to keep in mind that this was a survey of Americans and probably the emphasis on owning a car, as a status symbol is not a major factor. I would also agree that in China, there are a segment of young people that do not have any intention to buy their own car for all the reasons indicated as the traffic congestion is becoming worse; it is faster and cheaper to use a bicycle, bus, subway or taxi.
The purchase of a car is the worst investment anyone can make. Once you drive your car off the dealer's lot, the value has depreciated by 30%. The price of gas is always rising; there are regular and unforeseen maintenance and repair bills. There are annual insurance and license fees and car inspection certificates, every 2 years for a new car and annual inspections after that. Depending on the type of car you buy, the annual costs can be about 40,000rmb and that is not including any depreciation or lost capital costs, which translates to over 100 rmb each day, whether you drive or not. You can take a lot of taxis for this and not have to worry about finding a parking space. So why own a car?
As I mentioned, it is a status symbol. Why do people by an expensive Rolex watch? Since everyone has a cell phone, who needs a single function device such as a watch? It's "face" 面子 Mian Zi, this is an important factor in China.
What other method can a young Chinese businessman demonstrate the status that he or she has attained other than by having a luxury car? Although the prices are exceedingly high, for the upper end of China's young one child protégés, the cost is attainable. Auto financing is available but only 20% of buyers use this debt. Their preference is to borrow from their parents and with no competition from siblings, this is an easy option.
But the traffic congestion problem will get worse. Cities have implemented several types of restrictions. Beijing has the license lottery but this can be circumvented if you buy a second hand car that has plates. This has also resulted in a second hand car market that is in turmoil. One can see a used car priced more expensive than a new car just because of the plates. Shanghai has implemented an auction for plates and the most recent price was almost 80,000rmb, about the price for a car. Major cities have implemented daytime restrictions of large trucks into the inner city. However logistic companies have reverted to using smaller vans – “bread cars” (because the vans look like a loaf of bread) 面包车 Mian Bao Che. So instead of one large truck, there are ten small vans delivery goods during the day.
Still this traffic factor will not overcome the need to express one's status. One common solution is to hire a driver to contend with driving and no need to worry about finding a parking space; he will just wait or come and pick up the owner on call. During the drive, the owner can do his business via his or her smartphone.