Friday 13 March 2009

Motorcycle Producers Feeling the Crunch

Even government subsidies may be unable to rescue motorcycle makers in the face of falling exports, Indian rivals and urban trends.

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Motorcycle Producers Feeling the Crunch

Even government subsidies may be unable to rescue motorcycle makers in the face of falling exports, Indian rivals and urban trends.

Deng Hai
13 March 2009

Revving the engine of a Chinese industry that directly employs more than 1.5 million people and relies heavily on exports is the goal of a new government push to encourage sales of gas-powered motorcycles in rural areas.

But industry insiders as well as China’s current development trends suggest the motorcycle industry incentives unveiled in January by the State Council, China’s cabinet, may not be enough to steer domestic manufacturers out of the slow lane.

Government policymakers have already adjusted the scheme to placate small manufacturers who feared only their big competitors would benefit from the original plan, through which the central government would subsidize 13 percent of the price of each motorcycle bought in rural areas over the next four years.

On March 5, the ministries of finance and commerce responded to small-company cries by jointly cancelling a government bidding process and allowing subsidies to cover all domestic manufacturers – not just select motorcycle brands made by companies that outbid competitors.

Policymakers initially hoped the use of bidding would encourage industry consolidation by boosting sales of certain manufacturers deemed valuable enough to save in the current economic slump.

Global Competition

But China’s manufacturers are being squeezed across the board. Not only have exports weakened due to the global financial crisis, but competition from motorcycle makers in other countries is heating up. Meanwhile, the domestic business is under stress not only due to consumer caution but also because rural markets are nearly saturated and urban areas are changing.

Industry experts are sceptical about the market outlook, even with government support. “The subsidy scheme will help companies in the short-term,” said one insider. “But it can’t save the industry from a downturn.”

China has been ranked the world’s No. 1 motorcycle exporter for the past eight years. Total export value topped US$ 5 billion in 2008. And overseas business accounts for about 40 percent of the industry’s revenues and 50 percent of profits.

However, overseas demand has been shrinking. In December, for example, exports fell 23 percent from the previous month.

The distress may deepen in 2009. According to research by the China Automobile Industry Association, the combined January export value of 94 exporters surveyed was US$ 234 million, down 34.9 percent year-on-year.

Even more damaging than flagging exports is the stiff competition from Indian motorcycles, which are selling well overseas thanks to high quality and bargain prices made possible by the rupee’s depreciation in recent months.

Weak currencies in the Chinese industry’s overseas markets have hurt manufacturers as well by driving up export costs, according to Gao Yong, president of one of the country’s biggest motorcycle producers, Chongqing-based Loncin Industrial Ltd. Most currencies in regions that buy Chinese motorcycles -- Southeast Asia, Latin America and Africa -- have depreciated by about 30 percent against the U.S. dollar in recent months.

Thanks to the falling value of the rupee and the rock-solid Chinese yuan, Indian motorcycles now cost 20 percent less than comparable products made in China. This has helped Indian companies swallow about 30 percent of China’s global market share.

Feeling the crunch, Chinese manufacturers as well as their parts suppliers are being forced to cut back. Many have trimmed jobs and partially suspended operations.

Zuo Zongshen, president of Zongshen Industrial Group, told Caijing that due to rising costs his company is considering closing its overseas operations. Already, the group has shut down one of its three overseas plants and cut production at the others to 1,000 units per month.

And looking beyond the current downturn, some producers say their best days may be over. They worry that a variety of factors from Indian competition to Chinese government policies may prevent them from regaining market share even after the world’s economy recovers.

An official for the Chongqing municipal government’s economic department told Caijing that Indian motorcycle producers enjoy key advantages such as a favorable foreign exchange rate and government tax support. He said Chinese motorcycle producers, on the other hand, have been neglected by government policymakers who make fiscal and tax incentive decisions.

Indeed, export tax rebates for motorcycle makers in China now stand at 14 percent, compared with 17 percent for auto exporters. Not long ago, the motorcycle rebate was as low as 9 percent.

Gloomy Domestic Market

In addition to seeking better export rebate rates, motorcycle producers want local governments to encourage domestic consumption by lifting restrictions on motorcycles. Their call for cities to welcome more motorcycle traffic fits an overall strategy aimed at focusing on domestic sales.

Chen Bingnan, general secretary of the China Chamber of Commerce for Motorcycles, told Caijing that while China’s motorcycle exports have grown by about 30 percent yearly over the past several years, domestic sales have been flat -- about 15 million units every year. He blames government bans on motorcycles in many cities.

According to Zuo, more than 170 Chinese cities with a combined population of about 500 million currently impose restrictions on motorcycle use for reasons such as safety and environmental protection.

But road restrictions are not the only hurdle for motorcycle makers. China’s development strategy for urban public transportation is increasingly out of synch with the use of motorized two-wheelers.

Moreover, it’s likely that urban motorcycle use will decline as wealth rises in China. Studies show that when a country’s average annual income reaches US$ 2,000 – as it has in China since 2006 -- motorcycle demand falls dramatically.

Rural Opportunities?

The open road for the motorcycle business, then, appears to be in rural China. The government used this reasoning in mapping out its subsidy plan, which Zuo predicted would boost rural sales 30 percent over the next four years.

But room for sales growth may be limited. China’s roadways and garages currently accommodate 90 million motorcycles, 90 percent of which are in rural areas. These statistics indicate that the rural market is nearly saturated.

Rural market growth is also affected by tax policies which, to date, have worked against motorcycle sales.

In January, for example, the State Council left motorcycles out of a stimulus plan for the auto industry that cut the purchase tax for cars with engines with less than 1.6 liters to 5 percent from 10 percent. The sales tax for motorcycles remained at 10 percent, and a 3 percent consumption tax has been levied on motorcycles with engines between 0.1 liter and 0.15 liter in size.

Loncin’s Gao told Caijing these taxes add about 500 yuan to each motorcycle price tag – an extra amount that’s bound to hinder sales in rural regions.

Switching Strategy

Government policies to encourage rural consumption and the development goals of individual motorcycle companies may clash as well.

A Chongqing official told Caijing that the government’s goals and strategies will have a significant influence on how the industry approaches upgrading, raising expand consumption levels and employment.

But experiences from developed countries show that as living standards improve, motorcycles are used less as a basic means of transportation and more for sports and leisure. But Chinese manufacturers that put too much emphasis on rural markets may be unable to upgrade their products to meet the future demands of wealthier urban consumers.

Rural consumers are also less able to absorb the rising costs of labor, production and environmental rules that Chinese motorcycle producers face. Neither can they be expected to pay more to offset expenses tied to the rising value of the yuan and decreasing export rebates.

Manufacturers are not being complacent. Some are looking for ways to diversify by, for example, exploring new fields such as auto manufacturing, mining and real estate.

The world’s largest motorcycle gear producer, Chongqing Qiutian Gear Co., which controls 40 percent of the Chinese market, adjusted its business to emphasize gears for engineering equipment rather than two-wheelers. And a number of motorcycle parts suppliers in Chongqing have onto a completely new business road – the food industry.

The general manager of Chongqing Qiutian, Zou Daiyou, predicted that motorcycle exports will continue declining over the long term. He also doubts whether the domestic market will ever see a significant revival.