The government's subsidy policy has driven a year-on-year increase in sales of domestic micro-cars during the first half of the year, prompting automakers to rush into the micro-vehicle market. New investment projects, combined with the expansion of production capacity by existing major manufacturers, risk creating an oversupply in micro-vehicle production. Once sales growth returns to a normal level, it will be challenging for new entrants to compete with industry leaders like SAIC-GM-Wuling and Changan Automobile. **Rapid Expansion of Production Capacity** According to data from the China Association of Automobile Manufacturers, domestic passenger car sales reached 937,500 units in the first half of 2009, representing a 54.46% year-on-year increase—far outpacing the 25.62% growth in overall passenger car sales during the same period. This surge in micro-car sales has sparked significant interest among automakers to invest in this sector. Earlier this year, Chery and Haima both announced plans to launch micro-car brands and expand their product lines. Geely also expressed its intent to enter the micro-car market. The enthusiasm for micro-car investments remains high, as evidenced by Shaanxi Automobile Group’s announcement in late June to start construction on a new micro-car base. The company plans to invest 3 billion yuan to build an annual production capacity of 100,000 micro-vehicles by 2012, eventually reaching 300,000 units. Lifan Motors is also planning a production capacity of 150,000 to 200,000 micro-vehicles, with the first batch of products expected to roll off the line in October. BAIC Group has started developing micro-bus models, which are set to launch in two years. Meanwhile, established players like SAIC-GM-Wuling and Changan Auto have been expanding their operations. SAIC-GM-Wuling’s production capacity now stands at 900,000 units, with plans to exceed one million next year. Changan Auto has begun constructing a new micro-vehicle base in Chongqing, while its Hebei and Nanjing facilities are also expanding, aiming for over one million units in production. According to industry reports, the number of automakers producing micro-vehicles in China has grown from five to more than ten, with current production capacity around 2.3 million units. By 2012, this is expected to reach nearly 4 million. The market is currently dominated by SAIC-GM-Wuling and Changan Auto, which together hold nearly 70% of the market share, leaving the remaining 20% for other companies. Some automakers entered the micro-vehicle segment primarily to boost their overall production scale. According to Zhongshi, a well-known analyst in the automotive industry, micro-vehicles serve as an important filler for large automotive groups. They may not be highly profitable, but they help maintain a broad product portfolio. **Growth Rate Will Slow Down** According to sales forecasts for the first half of the year, micro-car sales are expected to surpass 2 million units this year, marking a nearly 50% year-on-year increase. However, this growth rate is significantly higher than the 10% average seen in previous years. CSC Securities analyst Chen Zheng noted that while the initial surge in sales was influenced by policy stimulus, the long-term growth is more reflective of the broader trend of automobile consumption becoming more widespread. Micro-vehicles are particularly suited for both urban and rural areas. The rapid development of the rural economy, urbanization, and increased purchasing power among farmers are continuing to drive demand. However, the sharp increase in sales is largely attributed to the booming sub-county economy and the return of migrant workers, which created a temporary spike in demand. This demand is expected to fade, leading to a slowdown in growth rates. Sales growth is projected to fall back to around 10%-15% next year, returning to a more normal pace. Zhang Baolin, general manager of Changan Auto, remains optimistic about the future of the micro-vehicle market over the next 5–10 years. However, he acknowledges that growth will likely remain flat, with no repeat of the 50% increase seen in the first half of the year. Market challenges could arise in July, traditionally a slow season for car sales, compounded by rising fuel prices after June 30. Sales of micro-vehicles may decline, and new entrants could face a drop in sales volumes in the coming months, potentially forcing them to reconsider their strategies. **Increased Market Barriers** While the micro-vehicle market is growing, the barriers for new entrants are rising. Although micro-vehicle design is relatively simple, the main hurdles lie in achieving economies of scale and effective cost control. With low selling prices (as low as 20,000 yuan for some models), profit margins are thin, and profitability is heavily influenced by fluctuations in raw material costs. SAIC-GM-Wuling and Changan Auto benefit from vertical integration, allowing them to control key components and reduce costs. New entrants, however, struggle to establish comprehensive supply chains and distribution networks, requiring substantial investment. Additionally, as emission standards become stricter, micro-vehicle manufacturers will face higher compliance costs. Improving safety and comfort features to meet consumer expectations also adds to expenses. With steel prices beginning to rise, and the need for improved emissions and vehicle quality, the pressure on micro-vehicle producers is increasing. For new companies, achieving profitability without a large-scale operation will be increasingly difficult.

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