The government's subsidy policy has driven a significant 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, along with the expansion of production capacity by existing major manufacturers, risk creating an oversupply of micro-vehicles. Once sales growth slows down, it will be extremely difficult for new entrants to compete against industry leaders such as 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, marking a year-on-year increase of 54.46%, far outpacing the 25.62% growth seen in the same period the previous year. This surge in mini-car sales has strongly motivated automakers to invest in this sector. Earlier this year, Chery and Haima both announced plans to launch micro-car brands. Geely also expressed interest in entering the micro-car market. The enthusiasm among automakers for micro-cars remains high, with Shaanxi Automobile Group starting construction on a new micro-car base in late June. 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 to expand its micro-car production to between 150,000 and 200,000 units, with the first batch set for release in October. BAIC Group has started developing micro-bus models, which are expected to hit the market in two years. Meanwhile, industry giants like SAIC-GM-Wuling and Changan have already significantly expanded their capacities. SAIC-GM-Wuling’s production capacity reached 900,000 units at the end of last year, with plans to exceed one million next year. Changan has also begun expanding its micro-vehicle bases in Chongqing, Hebei, and Nanjing, aiming to reach over one million units in capacity. According to reported statistics, the number of automakers producing micro-vehicles in China has grown from five to more than ten, with current production capacity at around 2.3 million units, expected to rise to nearly 4 million by 2012. The market is currently dominated by SAIC-GM-Wuling and Changan, which together hold nearly 70% of the market share, while other companies split the remaining 20%. Some automakers have entered the micro-vehicle market primarily to boost overall production and sales figures. According to Zhongshi, a well-known analyst in the auto industry, the micro-vehicle segment serves as a key filler for large automotive groups, offering no strong competitive advantage but serving as a strategic addition. **Growth Rate Will Slow Down** Sales of micro-vehicles are forecasted to exceed 2 million units this year, representing a nearly 50% year-on-year increase. However, in recent years, the growth rate was only around 10%. Analysts from CSC Securities suggest that the sharp rise in sales in the first half of the year is partly due to policy stimulus, but not the main driver. Monthly sales have repeatedly exceeded expectations, indicating a broader trend toward increased car ownership and a long-term prosperous auto market. Micro-vehicles are suitable for both urban and rural areas, and continued development of the rural economy, urbanization, and farmer purchasing power will keep driving demand. However, despite this, the rapid growth rate seen in the first half of the year is unlikely to continue. Much of the sales growth was fueled by the development of county-level economies, especially commercial sectors, linked to rural infrastructure improvements and returning migrant workers. This demand is temporary, and after the first half of the year, growth is expected to slow down, falling back to around 10%-15% next year—closer to a normal level. New entrants face significant risks, as it takes 1-2 years from project start to production. By the time they come online, the market may have already cooled down. Zhang Baolin, general manager of Changan Automobile, remains optimistic about the future of the micro-vehicle market over the next 5-10 years, but notes that growth will likely remain flat, without the kind of explosive growth seen in the first half of 2009. **Increased Market Barriers** While the market capacity for micro-vehicles is growing, the barriers for new entrants are rising. Although the design of micro-vehicles is relatively simple, the real challenges lie in achieving scale and controlling costs. With low selling prices (as low as 20,000 yuan), profit margins are thin, and profitability is highly sensitive to raw material price fluctuations. SAIC-GM-Wuling and Changan have established supply chains and cost control systems, making it hard for new players to match them. New entrants lack experience in product development, distribution networks, and component manufacturing, requiring substantial investment. In the first half of the year, low steel and rubber prices helped maintain stable micro-car prices and boosted profits, with gross margins reaching 7%-8%, up from 5% previously. However, steel prices have started to rebound since May and June, and with the recovery of the domestic economy, demand for steel is increasing, pushing prices higher. Emission standards upgrades will also add to costs, as many micro-vehicles still meet national III standards. Upgrading to national IV will require additional investment. Moreover, as rural consumers become more discerning, micro-vehicles need improvements in safety and comfort. While some models now include air conditioning, performance is often lacking, and interior quality can be poor. These improvements come at a cost, and without price increases, new entrants must rely on scale to absorb rising expenses.

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