China's Rural Subsidies Aid GM's Sales More Than U.S. Bailou

General Motors Corp. can thank U.S. taxpayers for $13.4 billion in loans that have kept it running. The carmaker can also thank China's government, which is kicking in subsidies of as much as $1,170 to help it sell vans.

The automaker's China minivan venture boosted sales 32 percent in the first two months after a cut in retail taxes on small vehicles. The government is now giving out 5 billion yuan ($731 million) in subsidies to spur auto sales in rural areas.

GM doubled its 2009 forecast for China's market growth as the tax cuts and subsidies revived demand, helping the country pass the U.S. as the world's largest auto market so far this year. By contrast, the Detroit-based carmaker's domestic sales have plunged 51 percent, forcing it to seek as much as $16.6 billion more in government aid.

Every farmer in China wants a new vehicle, all 800 million of them,"said Yale Zhang, a consultant at CSM Asia in Shanghai. "It looks like the government wants to make that happen."

The auto subsidies fit into China's wider push to help spread economic growth into rural areas, heavily dependent on agriculture. The rural areas are home to about half of the country's 1.3 billion people. They are also in line with China's 4 trillion yuan stimulus plan designed to help revive the economy by spurring domestic consumption.

China's Demand

Vehicle sales in China may rise between 5 percent and 10 percent this year, according to GM, the largest overseas automaker in the country. It had previously forecast sale growth of less than 3 percent. The automaker expects to outperform the wider market by as much as 3 percentage points, helped by sales at SAIC-GM-Wuling Automobile Co., the largest minivan-maker in China. The venture accounts for at least half of GM's China sales. SAIC Motor Corp. gained 2 percent to 9.88 yuan in Shanghai today. The stock has gained 84 percent this year.

"There's a very direct link between the government's efforts to boost rural consumption and Wuling's rising sales,"said Nick Reilly, GM's Asia-Pacific president. "The government has also come out with its stimulus package and the stock market is up and that's giving people confidence to spend again."

SAIC-GM-Wuling sales rose to 72,947 vehicles in February, about 50 percent more than a year earlier, according to the China Association of Automobile Manufacturers. In January, the government halved retail taxes on vehicles with engines of 1.6 liters or less. The tax break, covering more than half the market, helped end three months of falling nationwide sales

Help for Farmers

Chinese farmers and other rural residents who buy a new minivan or light truck can also now get a subsidy equal to 10 percent of the purchase price up to a maximum of 5,000 yuan. Rural drivers who replace an existing light truck with a new truck or minivan can get a further 3,000 yuan.

The government help allowed Wu Tao, 25, to replace the electric bike he used to ferry goods to his store in Hebei province with a SAIC-GM-Wuling Sunshine minivan -- the first vehicle his family has ever owned.

"Because the government is giving us money, I was able to get it now instead of waiting until I had saved up more,"Wu said.

Wuling's Sunshine minivan, the best selling SAIC-GM-Wuling model, is 3.73 meters (12.2 feet) to 3.8 meters long, with either a 1.1-liter or 1.2-liter engine. That compares with the 4.77-meter long Odyssey minivan with a 2.4-liter engine that Honda sells in China.

Surging Sales

SAIC-GM-Wuling, also part-owned by SAIC Motor Corp., China's biggest domestic automaker, will be the biggest beneficiary of China's tax cut and subsidies, according to Beijing Polk-CATARC, which tracks vehicle sales. Domestic carmakers, including Beiqi Foton Motor Co. and Chongqing Changan Automobile Co., will also benefit, it added. Nationwide minivan sales may rise as much as 30 percent this year, according to Shenyin & Wanguo Securities Co.

"Consumers are very happy because of the government policies,"said Li Shaoyan, general manager of Hebei Tongling Auto Sales Co., the largest SAIC-GM-Wuling dealer in Hebei.

While the Chinese subsidies have boosted sales, they may do little for automakers' profits. The impact for GM is diluted by the fact that it only holds 34 percent of SAIC-GM-Wuling. SAIC Motor owns 50.1 percent and Liuzhou Wuling Motors Co. owns the remainder. More generally, farmers are mainly buying cheap, low- margin models -- prices run as low as 30,000 yuan.

"Farmers are sensitive to differences in prices of as little as 100 yuan,"said Zuo Yanan, chairman of Anhui Jianghuai Automobile Group Co., China's biggest light-truck exporter.

Automakers have begun to suggest consideration of vehicle subsidies in the U.S., where GM, already propped up by $13.4 billion of federal funds, is shuttering plants after industrywide sales fell to the lowest level since 1981 last month.

Subsidies "should be investigated,"Jim Lentz, Toyota Motor Corp.'s U.S. sales chief, said in Washington on March 11. "Anything aimed at stimulating car sales is a good thing."

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