Have car, will travel
Statistically, China looks like a car salesman's heaven. With a population of about 1.3 billion, it has more than four times as many potential customers as the US, the world's largest car market. But the number of individually owned cars is less than one for every 100 people, compared with almost one for every two people in the US, writes Cris Heaton
A CLOSER look at the demographics reveals that this overstates the potential market, at least in the short-term. Despite China's runaway economic expansion—GDP will increase by over 9% this year and is expected to manage around 8% growth in 2005—most of the wealth created passes to an urban-dwelling minority. Over half the population lives in rural areas and works mostly in low-paid agricultural jobs. The average rural household had a disposable income of Rmb2,620 ($317) in 2003 and spent nearly half their money on food.
A wealthier middle class is emerging in cities in the economically booming eastern provinces. But even here, where incomes have been rising at an average of 14% a year since Deng Xiaoping began economic reforms in 1978, there is still a long way to go before mass car ownership takes off. A locally built Volkswagen Polo carries a price tag of around Rmb140,000, while an average city-dweller earned just Rmb8,600 in 2003.
But among those who can afford them, car purchases are surging. Last year, 2 million cars were sold, a staggering 75% increase on 2002. This was a one-off—a surge of pent-up demand released by China's accession to the World Trade Organization (WTO) and the consequent liberalisation of trade—and the rate of growth has softened in 2004. But sales in the nine months to September were up by a still-solid 20% year-on-year and analysts expect growth to remain strong through to 2010, with annual increases of 10-20%.
Once this initial demand is met, ownership is likely to spread slowly, with rising incomes gradually making cars more affordable. This may take two or three decades, but the long-term potential means foreign firms are anxious to establish a sound foothold now, with companies such as Volkswagen investing billions of dollars in manufacturing plants—to such an extent that there are serious concerns about overcapacity.
At the same time, oil companies have been fighting for the chance to fuel all these new cars. Fuel retail is dominated by state-owned Sinopec and CNPC, following a spending spree in the late 1990s that forced up the price of prime development sites until the two companies called a truce in 2000 amid concerns they had severely overspent. In 2003, there were around 90,000 service stations, of which 30,242 were under the Sinopec brand, 12,102 sold CNPC's products and the rest were mostly owned by smaller independents and local governments.
Foreign oil companies have been keen to enter the market and several have formed joint ventures with Chinese companies. BP is setting up 500 service stations with Sinopec in Zhejiang and 500 in Guangdong with CNPC, and a Shell-Sinopec partnership will do the same in Jiangsu. Total will join with Sinochem to build 200 stations in the areas to the north of Bohai Bay—Sinochem's purchase of South Korea's Inchon Oil Refinery is understood to be intended to supply these.
Retail market opens
Under the terms of China's accession to the WTO, the oil products retail sector will be fully opened to foreign companies in December 2004. But this is unlikely to spark a mass influx of foreign retailers, because, says KF Yan, director of China oil research at Cambridge Energy Research Associates, 'with retail alone, you cannot do much'.
Sinopec and CNPC control the wholesale distribution of gasoline and diesel, with a combined market share of 90%, and this sector will not be opened to foreign firms until the end of 2006. Also important, says Yan, are controls on importing oil products, which must be done through Sinopec, CNPC, Sinochem or Zhuhai Zhenrong. As yet, there is no schedule for removing this restriction and allowing foreign companies to import gasoline and diesel.
Almost all privately owned cars in China are fuelled by gasoline. Volkswagen would like to begin large-scale production of a diesel-engine car, but the government does not seem keen, probably because the country has a small surplus of gasoline but a growing diesel shortage. Diesel demand has rocketed over the last year, rising by nearly 25% year-on-year in the nine months to September, as companies invest in back-up diesel generators to cope with China's severe electricity shortages (see p28). Refinery configurations in many plants are at the maximum ratio of diesel to gasoline production and producers have been unable to match the surge in demand, pushing up imports.
But a gasoline shortage is also looming in the near future. Consumption in the nine months to September rose by 20% year-on-year, partly because of increased demand from all the extra cars, and the government is now considering fuel conservation measures. These include the extension of a biofuels programme devised by the previous administration, under which all gasoline sold in some regions—except that intended for military use—had to be blended with 10% grain ethanol. This was intended to support local farmers, who had large stocks of grain that was no longer fit for consumption.
Tight gasoline supplies
The government had been far from enthusiastic about the project because of the poor economics—grain ethanol generally costs more to produce than gasoline and so requires state subsidies to be sold at the same price. But as gasoline supplies have become tighter, the idea has regained support and is being implemented in five provinces, with a further four to follow by the end of 2005. If this proves successful, the project may be rolled out nationwide.
Fuel-supply crunches are not the only problems surrounding the spread of car ownership. Pollution is a growing concern, resulting in the implementation of tougher fuel-quality standards. The government is promoting research into technologies such as hydrogen fuel-cells and cleaner public transport is also on the agenda, with several cities, including Beijing, switching some of their buses to liquefied petroleum gas. Sensing an opportunity, Toyota is to start building its Prius electric-gasoline hybrid car in China in 2005.
But whatever measures it takes to deal with pollution, there is one scourge of mass car ownership that China will not escape—congestion. The average speed of rush-hour traffic in Beijing is now around 11 km an hour—even slower than the London traffic that crawls the streets around the office of the Petroleum Economist.