China Boosts Auto Aid

New Program to Fight Slowing Sales, Foster Alternative Energy By NORIHIKO SHIROUZU BEIJING -- China announced measures to kick-start domestic automobile demand and to encourage the development of more environmentally friendly cars, the latest moves to bolster the Chinese auto industry amid slowing sales growth. The new package, which is supposed to supplement auto-industry stimulus steps announced in January, is designed to keep overall sales in the world's second-biggest car market growing at an average of 10% annually over the next three years, the government said. The 10% growth target is considered ambitious by some analysts, but if China succeeds, it would have auto sales of well over 10 million units this year, which could displace the U.S. as the world's biggest auto market by unit sales. Already, January sales in China exceeded those in the U.S., where demand is shrinking rapidly amid the downturn. Some analysts believe U.S. sales may fall to about 10 million vehicles this year. The latest measures, which also appear to be aimed at restructuring the industry over the long term, include 10 billion yuan, or about $1.5 billion, in research subsidies over the next three years to improve Chinese auto makers' use of safety, alternative-energy and other technologies. Wolfgang Bernhart, a senior executive at Roland Berger Strategy Consultants, said the plans highlight a shift in the country's industrial policy to encourage companies to focus on electric-vehicle technology. The government wants Chinese auto makers to use the relatively low barrier to entry for electric vehicles to narrow the gap with bigger foreign rivals and guarantee the industry's steady long-term growth, he said. The Chinese government over the weekend also released details of a similar restructuring and revitalization plan for the steel industry, although most of the contents of that plan had been reported previously. The new auto-industry plan, announced on the main Web site of China's central government, said China aims to create capacity to produce 500,000 "new-energy" vehicles, such as all-electric battery cars and plug-in electric hybrid vehicles. The plan aims to increase sales of such new energy cars to account for about 5% of China's passenger vehicle sales. Growth in China's auto sales slowed to 6.7% last year, ending a decade-long run of double-digit sales growth. Many observers expect sales this year to grow at about the same pace as last year. U.S.-based consulting firm CSM Worldwide forecasts China's overall vehicle sales to grow 6%-7% to about 10 million vehicles. Achieving 10% growth in overall vehicles sales this year "will not be so easy" given the slowdown in China's export-led economy, said Yale Zhang, a Shanghai-based senior analyst at CSM. Other recently announced measures to aid the auto industry include a 50% reduction in the sales-tax rate on smaller cars, a cut in retail prices for gasoline and diesel fuel, and plans for 5 billion yuan in subsidies to encourage rural residents to replace old vehicles. The government also has said repeatedly that it would encourage auto makers to make more financing available for vehicle purchases by consumers. The weekend announcement reiterated Beijing's determination to consolidate the country's fledgling auto sector, which has more than 80 auto makers across the country. The government wants a less-splintered industry with fewer auto companies each generating significantly larger sales volumes. The Chinese central government wants to consolidate the auto industry through mergers and acquisitions into fewer than 10 groups of manufacturers from 14 now, according to the announcement. It didn't explain which of the scores of auto makers and parts suppliers comprise the current 14 groups, nor did it offer details of how consolidation will occur. The announcement said the government would "encourage" FAW Group Corp., Dongfeng Motor Corp., SAIC Motor Corp., and Changan Automobile (Group) Co., among others, to "implement mergers and acquisitions" around the country to form large auto groups. It also said Beijing would "support" Beijing Automotive Industry Holding Co., Guangzhou Automobile Industry Group Co. and Chery Automobile Co., among others, to become smaller regional groups through mergers. It wasn't the first time China's central government voiced the need for consolidation in the country's auto industry. Over the past decade Beijing has been trying to create a small number of more efficient and technologically adept auto makers to better compete with the established car makers of the West, Japan and South Korea. But more often than not, those efforts have failed as regional governments rescue troubled companies with monetary and policy support. Write to Norihiko Shirouzu at norihiko.shirouzu@wsj.com