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License limits could throttle car industry
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Following Shanghai, Beijing and Guangzhou, the port of Tianjin has become the fourth city in China to impose a quota on the number of new car license plates. The new policy takes effect this month and is aimed at curbing both traffic congestion and air pollution by capping the number of new licenses issued at 100,000 a year.
The licenses will be granted by lottery and auction, with 60,000 going by lottery and 40,000 by auction. There are additional quota-like measures that would limit use of vehicles— based on odd or even license plate numbers — during peak congestion periods. This practice is already in place in Beijing, and other cities may follow suit.
When the policy was announced in Tianjin in December, citizens flocked to dealer lots to buy cars before the measure came into effect. That added to a sales surge at the year end. Overall, the Chinese auto market saw another year of strong growth, outperforming tempered expectations for 2013 with 14.2 percent growth from 2012.
An additional eight large cities are rumored to be ready to follow suit with similar car-restriction policies in the coming months, prompting potential buyers to expedite purchases. According to the China Passenger Car Association, retail sales volume reached 1.7 million in December 2013, an 11 percent increase over November and up 20 percent year on year.
As rising levels of air pollution and growing traffic congestion plague large cities, slowing the expansion of vehicle use is an obvious and immediate solution. In the long term, there are implications that may leave the market in a precarious situation. Any overarching policy, such as registration limitations, is seen as a disruptive change that could result in shifts in supply and demand.
The stimulus programs of 2009 boosted the car market by more than 10 percent that year, and, in our estimation, the impact of additional cities imposing limits could lead to a 15 percent decline in the mid-to-long term. Moreover, the rising cost of new license plates, increasing the overall cost of car ownership, may change buyer preferences. Buyers may splurge on higher-priced models because the license is seen less as a commodity and more as a privilege. Conversely, buyers may downgrade their choices to offset the increased burden. Either way, the growth of entry-level vehicles is expected to be curbed because eventually buyers will prefer a decent car within their capability.
There is little doubt that the four cities that have enacted license limitations benefited in terms of pollution and congestion to some extent. The situation would have become more intolerable if vehicles were released to the road without limitations. It should be noted, though, that the problems Chinese cities have are not much different from the growing pains experienced by other metropolises in recent history. Tokyo faced a similar situation in the 1960s, as vehicle penetration grew from under 500,000 units in 1965 to 1.2 million by 1970. The city’s rapid urbanization eventually led to a stronger public transportation network, and what was once a city riddled with air pollution and traffic congestion is now one of the more efficient megacities of the world. Statistics shows that in today’s Tokyo, merely 11.6 percent people use a car to go to work or school. Most people use metro or railway (38 percent), auto bikes and bikes (16.5 percent) and the other measures.
There is no silver bullet to address the multifaceted issues of the rapidly growing cities and the corresponding impact on the auto market. Despite looming concerns, we remain optimistic about growth within the country. Municipalities and original equipment manufacturers can use this opportunity to develop a more eco-minded way of balancing the needs for mobility amid burgeoning population growth.
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