“Disappointing” is not the word that European automotive manufacturers would use for sales growth of 4.3% in their home markets at the moment. But that’s how 4.3% growth in vehicle sales in China has been described for 2012. Compared with 46% growth in 2009 and 32% in 2010, it is clearly a different story, but as European economies are learning, growth does not continue forever. In total 19.3m vehicles were sold in China in 2012, of which 15.5m were passenger cars.

Passenger car sales growth reached 7.1% for the year, down on the 8% predicted by the China Association of Auto Manufacturers (CAAM). The biggest growth was in SUV sales, which rose 25.5% during 2012 to 2,000,400. Just the same, saloon cars still accounted for the majority of sales, rising 6.15% to 10,744,700. MPV sales fell by 0.87% to 493,300, while microvan sales, included in passenger car data, experienced a marginal reduction of 0.07% to 2,256,700.

The table shows domestic sales. Chinese manufacturers also had a record year for exports with sales of 1,056,100, an increase of 29.7% compared with 2011. It was the first time that exports had grown above 1m. The top five exporters were Chery, Geely, Great Wall, SAIC, and Lifan. According to the Financial Times, the top export markets for Chinese manufacturers in 2012 included Algeria, Chile, Iran, Iraq and Russia.

By contrast, commercial vehicle (CV) sales fell by 5.49% overall to 3,811,200, with buses showing the only growth in the CV sector in 2012, up 5.51% to 425,600. Truck sales fell by 1.8% during the year to 2,653,400.

But the trend is upward. Total vehicle sales growth in 2011 was 2.5% and sales growth increased towards the end of 2012, encouraging analysts to believe that 2013 will see further expansion. CAAM is predicting average growth of 7% in the total Chinese vehicle market in 2013, with car sales growing by 8.5% and commercial vehicles by 1%.

Factors said to have affected growth in 2012 have included slowing economic growth, the ending of incentives for domestic manufacturers, restrictions on sales in some large Chinese cities, in an attempt to control congestion and the dispute over the Senkaku islands between China and Japan, which has limited sales of Japanese vehicle brands in China. Air quality is also a major concern in many Chinese cities. At the time of writing,

Beijing was gripped by smog with PM 2.5 (fine particles measuring less than 2.5 microns in diameter) levels at official and unofficial monitoring stations having climbed way above the World Health Organisation (WHO) danger level of 300 microgrammes per cubic metre.

Since China outpaced the US car market in 2009, making it the largest car market in the world, a comparison with the 2012 US car market makes interesting reading. The US passenger car market grew 13% to 14.5m in 2012. Comparing the populations of the two countries shows the US with a population of approximately 315m, while the population of China is estimated at 1,347m. Applying the 2012 US car sales data to the Chinese population would provide a potential market for 62m new car sales in China last year.

Obviously this a very crude analysis that does not take economic factors in China into account. Just the same it makes it easier to understand why there is so much optimism applied to the Chinese vehicle market and why the Japanese, Korean, European and North American manufacturers have been so keen to do business in the market with the largest population in the world, particularly when prospects for growth elsewhere are not encouraging. Of course there are many reasons why it will take some time yet before the vehicle market in China could reach that level.

Foreign motor manufacturers cannot enter the Chinese market without a 50/50 stake in a joint venture with a Chinese partner or partners. This has resulted

in a number of joint ventures between a single Chinese manufacturer and a number of rival foreign manufacturers. For instance Dongfeng has joint ventures with Nissan, PSA Peugeot Citroën, Honda and Kia (in partnership with Jiangsu Yueda).

Similarly, some foreign manufacturers have formed joint ventures with more than one Chinese partner. The Volkswagen Group is an example, having formed partnerships with First Auto Works (FAW) and SAIC (Shanghai Automotive Industry Corporation).

Under the JV with FAW, both Audi and VW models are produced, including the Audi A4L, A6L and Q5. VW models include the Bora, Passat CC, Golf, Jetta, Magotan (Chinese Passat variant, launched in 2011) and Sagitar (based on the 2010 VW Jetta, launched in China in 2011.) The JV with SAIC produces the VW Lavida (a saloon developed for the Chinese market, based on a lengthened Golf Platform, launched in 2008), New Passat, Passat-Lingyu (a lengthened Passat for the Chinese market, launched in 2005), Polo, Santana and Tiguan. For Skoda the JV manufactures the Fabia, Octavia and Superb. Other examples of manufacturers building vehicles with more than one Chinese partner include GM and Toyota.

The models produced for China are not necessarily the same as those produced by the original manufacturer elsewhere. Many business managers prefer to be driven. For this reason it is fairly common for long wheelbase variants to be produced specifically for the Chinese market, such as the Audi A4L, A6L and Chinese VW variants mentioned above.

As the best seller tables show, Chinese manufacturers are not necessarily preferred by Chinese buyers. For saloons and hatchbacks, there were only three Chinese models in the top 20, the Geely Emgrand EC7, FAW Xiali and Chery QQ, taking the 14th, 16th and 18th places respectively in 2012.

Chinese manufacturers performed better in the growing

SUV sector, although as already discussed, the passenger car sector is far larger.

The story is different in the MPV sector where Chinese

producers performed better.

What of the opportunities for fleet business in such a large and growing market?

Despite the requirements for JV operations where motor manufacturers are concerned, the Chinese authorities take a different view when it comes to providing finance. As The White Clarke Group points out in its recent report, China Asset and Auto Finance Survey, the market was opened up by the Ministry of Commerce (MOFCOM) in 2005, when foreign owned leasing operations were permitted to operate in China and this included overseas car manufacturers’ finance operations.

The report points to around 17 auto finance operators in the country. These include a mix of foreign funded, JV and wholly Chinese funded operations. Volvo Financial Services was the first to gain a licence.

China is ranked 29th out of 144 countries in the World Economic Forum Global Competitiveness Index 2012-13, which is a good score. As the White Clarke Group indicates, the 2011-12 Global Competitive Report highlights several problem areas for doing business. Most problematic is access to financing. In order, the top five problems are listed as inflation, policy instability, inefficient government bureaucracy and corruption. The international organisation Transparency International has produced a Corruption Perceptions index, indicating how corrupt a country’s public sector is perceived to be for many years and the 2012 index, published in December 2012, rates China as joint 80th out of 176 countries. The report also gives a corruption score and China scores 39 out of 100. Scores below 50 indicate a high level of corruption. China appears to have work to do to improve this perception.

ALD Automotive is active in China, based in Shanghai. We spoke to the company’s general manager in China, Frédéric Hamain, and Guillaume Bourst, business development manager. Mr Hamain started by underlining the relatively small size of the market, “despite everybody mentioning that this is the largest market in the world, we are speaking about a stock of cars which is very, very low – between 80 and 90 million. This market is very big potentially, but very small today, if you compare it with the population. Only 7% of people have cars. The expectation is that in 20 years, the rate will be only 25%, compared with the US and Europe, where it is 80% and 60%.”

Guillaume Bourst highlights some of the difficulties in assessing the size of the business car market, “It is very difficult to find reliable figures on this market because it is not very well structured and we don’t have any official numbers.”

“There is an estimate that at the end of 2012, there would be 11m business cars – essential cars used by companies and government”, says Mr Hamain, “Around 15% of the total market. If you compare again with Europe, the business market is closer to 25%. So there is still a gap. The experts believe that this gap will increase, because the population will get more and more new cars but the rate of growth for business will not be the same. So probably it will drop from 15% to 13%.

“Most of the business cars today are actually management cars and a lot of them are government cars used by officials or people in state-owned enterprises”, continues Mr Bourst, “These are mainly luxury cars.” Audi tends to be the preferred brand here and Mr Bourst points out that the image of BMW is too luxurious for the company car market. “They believe Audi is the right fit because it is a good mix of a Western brand, a good image, a long, black car, most of the time with tinted windows. At the same time, the image is not too high like Mercedes or BMW would be. Despite all the efforts of the Chinese Government to promote the local Chinese brands, it’s still dominated by the foreign brands.”

Who has a business car in China? “Of all the requests we receive, most are for managers or heads of departments. There are almost no corporate fleets, as you would find in other countries for the sales and technical guys, that’s also why the figures are pretty low”, says Mr Hamain.

“What we have seen recently is an increase in car allowances for people to buy their own cars. In China there is still very much a desire to own”, says Mr Bourst, “This is changing for several reasons. First is the rotation rate. It’s very common for Chinese people to change jobs after 1 or 2 years and companies are looking for retention tools.” The moves to limit cars in cities is another reason.

Business and private cars pay similar taxes, says Mr Hamain. At purchase this includes VAT and a purchase tax of around 10% of the price. Local authorities also levy an annual tax. “In 2012, VAT was introduced but only leasing companies have the capacity to deduct the VAT because it is considered a working tool. So if I am a company and I lease the car, because the leasing company can deduct VAT, I can save around 15% on the cost. So we anticipate that this will definitely boost the leasing market.”