文 | Karakush

In the summer of 2009, Ba Peijun, 47 years old, took his family of five to Beijing to shoot an advertisement with Zhang Fengyi.

They shot for ten days, with the party responsible for receiving guests and Zhang, the actor, giving autographs and taking photos. Ba Peijun brought the big picture back to Henan with excitement and hung it in his home.

The advertisement for SAIC-GM-Wuling was later broadcast on multiple channels of CCTV.

Compared to Zhang, Ba Peijun is the real king of product promotion.

He comes from Gongmazhuang, Zhengzhou, and is a self-employed meat dealer in the village. It is unknown how much meat he sold that year, but he sold over 200 cars to his fellow villagers, with the majority being Wuling.

As an owner of Wuling Zhengguang, he successfully attracted more than 40 new customers in 2009, even outperforming provincial sales managers. SAIC-GM-Wuling not only invited him to shoot a commercial, but also sent him a set of corporate uniforms. They treated him like family.

The rise of the rural marketing giant is inseparable from the times. “Farmers buy cars for practicality,” Ba Peijun said in an interview by CCTV News 30 Minutes. “Buying a car can get more than 5,000 yuan in subsidies, which is equivalent to the government giving you a cow.”

A cow is an average, to be exact, about 10% of the car’s price.

As part of the “Automobile Industry Adjustment and Revitalization Plan” in 2009, the state decided to allocate RMB 5 billion from March to December of that year to offer a one-time financial subsidy for scrapping three-wheeled vehicles and low-speed trucks and purchasing light-duty trucks with a displacement of 1.3 liters or less and micro passenger cars.

This was called “Automobiles to the Countryside.”

This was the first year of “Automobiles to the Countryside”, which achieved the domestic auto industry’s first single company with an annual production and sales of more than 1 million vehicles- SAIC-GM-Wuling, with sales of 1.06 million vehicles and a growth rate of 65%.

This achievement came almost entirely from support by farmers; the proportion of rural users reached 80%, and many “Wuling Villages” emerged in Zhejiang, Shandong, Henan and other places. The Wuling ownership of a village can be over 80%.

The “Changan Village” is not far behind the “Wuling Village”. Changan quickly proposed a strategy of “One car for each household in one Changan Village” and completed the mergers and acquisitions of Hafei and Changhe, forming a large micro-car group with sales exceeding 650,000 vehicles, achieving double-digit growth year over year.

Policy stimulus is the source of growth. Its effectiveness was so good that years later, the Chinese auto market did not forget this powerful tool. Last Friday, the auto sector rose across the board, even triggering a wave of limit ups, allowing auto stockholders to witness the long-deliberated human warmth.

News leaked out that a new round of “Automobiles to the Countryside” will be announced soon, as soon as this month.In fact, since March, a number of documents have provided macro guidance, which will “continue to support new energy consumption,” “encourage large commodity consumption such as cars and home appliances,” “encourage the development of new energy vehicles and smart home appliances in eligible areas,” and “gradually cancel car purchase restrictions based on local conditions.”

At the local level, including Guangdong Province, Jiangxi Province, Shandong Province, as well as Tianjin, Shenzhen, Zhongshan, Shenyang, Haikou, Nanchang, Jinjiang, Jinzhong, Yiwu and many other regions, have introduced car purchase subsidies, ranging from several thousand yuan to over ten thousand yuan, from the beginning of the year to the end of the year.

The goal is to maintain stable growth and promote consumption to make it seem like we’ve traveled back to the 2009, when China’s auto market reached an annual production and sales of 13.64 million and surpassed the United States for the first time to become the world’s largest country.

However, as we stepped into the same river for the second time, we realized the poverty of historical determinism: humankind cannot predict the future formation with known rational methods.

A Heavy-handed Collapse, Limited Talent

Looking back in 2009, it always carries a very heavy sense of history: China’s auto market achieved an annual output and sales volume of 13.64 million, surpassing the United States for the first time and becoming the world’s No.1. No country has ever done this before in the modern industrial history of the past century.

However, we often forget how frustrating the start of 2009 was: the growth rate of the previous year dropped by 15 percentage points, tragically ending the continuous growth rate of more than 20% for six consecutive years. “Automakers became very low-key overnight,” as the China Youth Daily recorded, “and when asked about the sales target for 2009, the vast majority of enterprises remained silent.”

The rescue operation quickly launched, and the “Automotive Industry Adjustment and Revitalization Plan” proposed 17 measures in one go. The two most outstanding effects were the implementation of the policy of automobile sales to rural areas and a 5% reduction in vehicle purchase tax for passenger cars with an engine displacement of 1.6 liters or less.

Benefiting from this, sales of passenger cars with small displacement engines in 2009 reached 7.1955 million, a year-on-year increase of 71%, and the contribution to the growth rate reached 70%, becoming the main force driving the passenger car market.

During this time, independent domestic car brands took the opportunity to gain market share, exceeding 44%. BYD took the most advantage and its F3 surpassed mainstream joint ventures, such as Chevrolet Lova and Verna, becoming the best-selling model of the year. Unrelated yet echoed with this achievement, Wang Chuanfu became the richest man in mainland China that year.

Joint venture brands also shined, with mainstream automakers not suffering any losses, further improving the concentration of the industry. The top ten automakers’ market share reached 87%, averaging a growth rate of over 46%, which is nearly 10 percentage points higher than the historical growth rate record of 37% in 2002, forming a second wave of a “boom.”The only mainstream automaker whose growth rate is significantly lower than the average among the thousands of auto companies is Toyota, with both its north and south factories’ growth rates being less than 20%. The reason lies in the fact that Toyota underestimated the demand for small-displacement engines and inefficiently adjusted its production accordingly in a traditional Japanese way. Their main sales group mostly has large-displacement engines, for example, the Corolla, which had a rarity in reduced engine displacement to 1.8L at that time, still failed to make up for the shortfall in vehicle placement. From another perspective, this illustrates the effects of incentive policies.

In economic principles, people will respond to incentives. Everything else is a further explanation of this fundamental rule. Therefore, whether it is the auto rural policy or the local subsidy policy, there will always be a certain stimulus effect, and the issue is the input-output ratio. Similar stimulus policies have been implemented after 2009:

In October 2015, the tax rate for passenger cars with engines under 1.6 liters was halved, and a 5% vehicle purchase tax was levied until the end of 2016. The tax rate increased to 7.5% in 2017 and returned to 10% in 2018. Although there was a clear increase in efficiency in 2016, with small-displacement cars contributing 92% of market growth, the growth rate only returned to double digits by reaching 13.7%. Since the end of the stimulus in 2010, even in good years, the growth rate has not exceeded 20%. In 2017, the growth rate plummeted to 3%, and in 2018, it showed its first negative growth since 1990.

So, in February 2019, a new round of “Auto Rural” was launched, and the subsidy standard remained at 10% of the vehicle’s price, with 80% undertaken by the central finance and 20% by the provincial finance, specifically arranged by the local provincial financial department. The result was a lonely marketplace with a year-on-year decline of 8.2%.

In July 2020 and March 2021, two consecutive rounds of “Auto Rural” were launched again, but they were clearly aimed at new energy vehicles, with a different story to tell. From the 2015 stimulus to the 2019 stimulus, the two restorations kept the same strength as the 2009 stimulus, but the results were very different. The decrease in investment return was very significant, almost none of it was visible, and it dropped directly while kneeling. So, how effective would the 2022 stimulus be?

Is the Old Method the Best Method?

Looking back at 2009, we may need to reassess it.

The auto revitalization in 2009 was part of our response to the international financial crisis and a part of the “Four Trillion” initiative. The auto industry is always the vanguard of the nation-building movement because its production chain is long, its connectivity is high, its employment is broad, its domestic demand is substantial, and its tax revenue is diverse.The retail sales of automotive goods were once one time higher than the total retail sales of social consumer goods. Even with a cut in purchase tax, due to the soaring sales, the revenue of purchase tax increased by 17.4 billion yuan and drove a significant increase in the value-added tax, consumption tax, and income tax. Meanwhile, most industries related to automotive also achieved positive growth under this impetus.

It can be said that the automobile industry is the most valuable and shining expenditure of the four trillion yuan.

However, the four trillion yuan itself has become a case in economic history. Although it prevented massive unemployment and panic at that time, and pulled China back to the right track as fast as possible, many economists pointed out that it left negative effects on long-term development.

Especially, the excessive investment and financing brought out far more than the planned four trillion yuan, which was dominated by the government. From 2008 to 2010, the cumulative amount of RMB loans increased by 18.8 trillion yuan, social financing increased by 30 trillion yuan, and fixed asset investment exceeded 47 trillion yuan. The largest side effect brought about by this is the huge amount of debts. The total leverage ratio of the national balance sheet rose to 250%, with very high systematic risks.

The enterprise debt ratio has also generally increased, and the total amount of state-owned enterprise debts has doubled in three years. Geely is one of the very few companies that have taken the opportunity given by the era. In 2009, it acquired Volvo with a financing amount of up to 2.7 billion USD, with a large part of the capital from the private sector. One of the important backgrounds for its success is that there was plenty of money in society at that time.

This has also provided conditions for other capital operations. Beiqi also acquired Saab in 2009, and SAIC also acquired 1% of the equity of SAIC-GM in 2009. However, Saab did not succeed, and GM bought back the 1% equity, leaving no long-term legacy like Volvo.

Long-term negative effects do exist.

One is the overdrawn consumption, stimulating not the creation of demand, but the advance demand. In the following years, the automobile market was in a state of economic downturn coupled with the digestion of stimuli. Reflected in growth rates, in 2011, it dropped directly to 2.4%, a nearly 30% YoY decline. Except for 2013 and the aforementioned 2016, subsequent growth percentages did not exceed two digits.

The disturbance in 2013 stemmed from the groundwork laid in 2009. The Japanese brands finally bounced back after four years and fully recovered. To what extent? Among the five brands with the fastest growth in China that year, Infiniti entered, with a growth rate of 54%.

The second problem is overcapacity. By 2012, more than 30 automakers had completed capacity expansion or launched expansion plans. Not every expansion was blind, but especially for independent enterprises, capacity utilization was generally low. At that time, only four companies had utilization rates higher than the average level of 58%, and only SAIC Motor and Geely were higher than the reasonable level of 80%. Some even had severe resource waste below 30%.

Especially for some backward production capacity, they thought they were doing well in the market situation, plus overabundant capital love, relying on bank loans to obtain local funding and land support. Most of the industrial waste that you can’t imagine why anyone would buy is just an opportunity for time mismatch.

By the end of 2021, the total production capacity of passenger cars in China was 40.89 million vehicles, with a utilization rate of 52.47% (although the water is high, not all blame can be put on 2009). Idle production capacity is no foresight, but pure waste of resources. After the scale effect, the larger the production, the greater the loss.

Old production capacity needs to be reused, and the cost of investing in plant and equipment renovation is also high. Acquisition often involves cumbersome business negotiations and processes, which are sometimes less advantageous to companies than new construction that can generate tax revenue and land support.

Therefore, standing on the reflection of 2009, from the macroeconomic adjustment point of view, continuing to use investment and demand expansion to maintain growth has low marginal efficiency and high systematic risk. It is better to protect people’s livelihoods and employment and stabilize their lives first and allow the people to have some wealth.

What is the problem today?

Returning to the car market, what can 2022 stimulate?

You can always expect it to bring a small upswing, but don’t expect it to save the world.

The long-term growth problem of the automotive industry is not simply a consumption problem. We are accustomed to thinking that growth depends on “three horses” – investment, consumption, and import and export. Therefore, when the growth rate drops, we try to find solutions from the “three horses.” In 2009, the international situation dragged down exports, so we drove the two horses of investment and domestic demand. Many economists believe that this Keynesian package is a short-term solution and cannot be used as a long-term solution.

In the long run, healthy and sustained industrial growth always depends on improving efficiency. In the past, our efficiency depended on two paths: the Kuznets process brought about by industrial modernization and urbanization; and the direct efficiency improvement obtained through market technology exchange, importing foreign equipment and products. These two processes have basically reached a ceiling by the first decade of this century.

Therefore, in 2009, the shift to new energy was strategically providing an opportunity for efficiency improvement. Not to mention innovative efficiency, it is equivalent to re-acquiring an incremental market.Talking about the 2021 new energy vehicle promotion in rural areas, the government did not provide direct subsidies, but selected 68 small and micro electric vehicle models with a selling price of less than 100,000 yuan and a range of less than 300 kilometers. Within a year, a total of 1.068 million vehicles were sold, a year-on-year increase of 1692.2%, which is about 10 percentage points higher than the overall market growth rate, with a contribution rate of nearly 30%. Everyone is looking forward to 2030, when the rural areas will have 160 cars per thousand people and the potential for electrification will exceed 70 million vehicles, watching its growth.

However, this efficient development has encountered bottlenecks this year due to significant constraints in upstream raw materials and long-term chip supply chains, and there are no good solutions for the time being.

Therefore, for the long-term supply-side problems that have already emerged, the short-term stimulus policies on the demand side are almost irrelevant. In reality, subsidizing 3,000 or 5,000 yuan now cannot make up for the price increases in previous years. The greatest stimulus seems to be psychological.

Of course, for friends who are eager to buy cars now, they can still seize the opportunities of the times. After all, the earlier you buy, the earlier you can enjoy it. Waiting means no future.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.