The new small-car revolution in China

  • 19-Jun-2008 04:13 EDT
BYD F1.jpg

The BYD F1 uses a 1.0-L engine and has a mass of just 870 kg (1920 lb), promising very economical motoring.

One of the most dramatic themes of this year’s Auto China 2008 was the literal explosion of new near-world-class small cars (and even small-car families) from the domestic automakers. There were large, luxury models on display too, but the sheer numbers of new small offerings far outweighed them.

Independent makers Chery, Great Wall, and Geely all showed new small-engine (1.0-1.5 L) vehicles and so did some of the Chinese sides of the foreign joint-venture makers such as Tianjin FAW. Emissions, performance, equipment, engineering, and safety are almost a quantum leap ahead of the small cars recently offered by the Chinese manufacturers.

Small cars have had a rather bumpy ride in China, with, in the past, many budget models being based on aging versions (or copies) of formerly foreign makes including Daihatsu, Citroën, Suzuki, and Seat. The cars performed poorly and often used old, dirty small engines. In addition, hatchbacks, the usual body style for small-engined models, have, even until today, been viewed as down-market and low-rent in comparison to their larger sedan relatives by the Chinese. The fact that their ancient designs also missed out on the latest in safety features, such as airbags and reasonable levels of crash performance, did little to help their image.

The small, cheap hatchback was seen as so dirty, polluting, and generally unroadworthy that China’s larger cities such as Beijing, Guangzhou, and Shanghai banned them a few years ago. Only in 2005 was this ban lifted, but the lower-class stigma has remained for all but the most recent of small cars.

Chery’s small QQ hatchback, a shameless copy of Daewoo’s Matiz (now General MotorsChevrolet Spark), began to reverse that trend when it emerged in 2005. This car was a partial turning point in the small-car segment in China, because it sold in unparalleled numbers for its size. Despite the competition’s efforts to upgrade and refit their aging small-car designs with airbags, “luxury” features, and cleaner engines, small-car sales have continued to languish at well under 10% of the market.

To add to small cars’ troubles, the city of Beijing implemented Euro IV emissions standards for all new cars from 2008 in an effort to improve the air quality there. Many small, older-design cars, with their outdated engines, were forced to be withdrawn from sale. However, the joint-venture automakers in China, with their focus on larger, more modern designs, often with the assistance of their wealthy and experienced foreign partners, were less severely affected.

So why the sudden explosion of so many brand-new small cars at Auto China 2008 this year? The answer lies in two political factors—the government’s five-year plan and a tax on the private use of fuel.

The government’s 11th Five-year plan, issued for the 2006-2010 timeframe, contains a number of “guidelines” designed to assist the development of China’s auto industry. In it, the government insisted that automakers strive to develop and design their own cars in China in an effort to move to exporting not just low-cost “made-in-China” products, but also the added value that comes from owning the rights to one’s own intellectual property. The result is intended to be world-competitive cars that could be sold around the world.

At the same time, the 11th Five-year plan also contained renewed demands to focus on energy efficiency and develop alternative fuel and powertrain vehicles, a guideline that had already existed in the form of the high-technology development Plan 863, which was first announced in the 10th Five-year plan (2001-2005).

The debate about taxing the private use of fuel has been raging in China for more than a decade. To this day, the major system of tax on the auto industry is the “road maintenance fee,” an annual fee levied on the owners of all motor vehicles in China, regardless of the car’s type or engine size. In fact, there is a small difference in the annual road maintenance fee, which is charged according to whether the car is judged to be a four- or a five-seater.

Narrow-bodied small hatchbacks (such as the Chery QQ, BYD Alto, Chang’an Ben Ben, and Tianjin FAW Xiali) are rated as four-seaters, and their owners pay about 1100 yuan ($157) per year. All other conventional passenger cars are classed as five-seaters, and they are charged at 1320 yuan ($188) per year.

Lobbyists, including strong representation by environmentalists and China’s automakers, have long argued that such a system is outdated and unfair because it makes no allowance for engine efficiency. In fact, the road maintenance fee is very unpopular with the Chinese public, because it means that whether one drives 10,000 or 100,000 km (6200 or 62,000 mi) a year, the owner pays the same tax. In addition, the price of gasoline, fixed by the government at 5.34 yuan/L ($2.88/gal), unlike the much higher prices in Europe, is no deterrent to buyers of larger vehicles.

The debate is still going on, but the research and legislative framework for a private fuel tax to replace the road maintenance fee has largely been completed. The question, it seems, is not if, but rather a matter of when a fuel tax will be implemented. Signs from the government are that the tax is not far away.

A possible clue to the imminence of such a tax came when AEI asked an anonymous official of a major Chinese independent automaker about why it had invested so much money on developing so many new, smaller-engine cars for Auto China this year. “Well, we also produce medium-sized cars as well, but the main reasons that we have developed brand-new small cars are for their economy (cheap to run and buy) and the environmental benefits that they can give. And because of the tax on fuel,” he replied.

There haven’t been any announcements recently about increases in the duty on fuel in China. However, as has been clearly demonstrated in other parts of the world, even small changes in the price of fuel can have a disproportionate effect in terms of consumers downsizing their cars or engines. Could it be that the tax is finally on its way? We’ll have to wait and see, but it won’t be before 2009, at the earliest (just about the time that all the new small show cars will be going into production).

For the moment, one other factor that strongly affects the sales of small (usually hatchback) cars is Chinese car buyers’ conservatism, preferring the more traditional sedan body style when it comes to choosing their family cars. However, China is now producing a new breed of middle-class consumers faster than it has ever done in the past. These new buyers are keen to embrace new styles to separate themselves from China’s climate of tradition; and they are not only style-conscious, but also well-educated and upwardly mobile. There are signs that China, despite its traditional roots, could quite rapidly become a hot market for modern, international-standard small cars, in the cities at least. This would provide economies of scale at an unprecedented level to offset the enormous investment costs of this traditionally low-profit small-car market segment.

The new domestic small cars will certainly have their work cut out for them in the face of stiff competition by foreign joint-venture vehicles (see table). In view of the tough competition, the sooner the domestic automakers can rush out their new superminis, the better.

BYD: This former battery manufacturer from Shenzhen showed its lightweight, low-cost supermini, the F1, which entered production in May this year for sale in the summer. It uses an in-house-developed 1.0-L three-cylinder engine that meets Euro IV emissions standards. The 3.46-m (11.4-ft) long hatchback has a mass of just 870 kg (1920 lb).

Chery: The company launched a family of new small cars called the Faira, with seven body styles including sedan, three- and five-door hatchbacks, baby SUV, small coupe and cabriolet, and a 3.2-m (10.5-ft) long two-seat Smart competitor—all on a common platform. Engines range from 1.0 to 1.5 L and include the company’s brand-new Euro V-capable Acteco engines.

FAW: The Chinese auto giant that has joint ventures with Toyota, Volkswagen, Mazda, and others launched four new small cars from its facility in Tianjin. The TFC M1 sedan and TFC M2 hatchback are aimed at 21- to 35-year-olds. Core sales will come from well-educated under-30-year-olds, which FAW calls the “‘80s and after” generation—white-collar workers, university graduates, and city dwellers in search of a modern lifestyle. These two models use Tianjin FAW’s brand-new global-strategy small-car platform with all-round fully independent suspension for greatly improved comfort. The modern wheel-at-each-corner design uses an unusually long 2448-mm (96.4-in) wheelbase to maximize interior space. Both cars come exclusively with Tianjin FAW’s variable-cam-timing 1339-cm3 engine. The slightly larger TFC H1 sedan and TFC W hatchback use 993- and 1339-cm3 engines and have been designed for export, according to FAW. All of these new models will go into production in the first half of 2009.

Geely: While being less cohesive than Chery’s range of cars, many of this company’s 23 new offerings make use of small engines, including a 1.3-L turbo version. The company is also working to meet Euro V emissions standards, specifically to allow exports to Europe.

Great Wall: Though the company has until very recently been a maker of only medium and large SUV-type vehicles and is only just starting out in passenger-car production, the bulk of its new car offerings use engines of no larger than 1.5 L.

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