Shanghai’s licence plate law is determining automaker strategy

37% of China’s new vehicles are sold in in Tier1 cities, and restrictions on licence plate quotas are shaping automakers’ strategies.

August 2019 , Featured:

Automotive World

August 2019 - Like many major Chinese cities, Shanghai imposes severe restrictions on vehicle ownership among residents. It does this by limiting the number of city licence plates issued every year, ownership of which is necessary to buy a car. Unlike that of the capital, which runs a lottery-style system for licence plates, Shanghai uses an auction-style system in which people bid for plates. Overwhelming congestion and dangerous levels of local pollution were the primary drivers for the system's introduction.

Individuals going for the prize, technically known as a blue colour licence plate, must be Shanghai citizens, or posses a resident permit and have paid their taxes in the city for three consecutive years. Furthermore, they are not allowed more than one, and their criminal record must be free of traffic law violations for at least a year.

Naturally, the auction has had the effect of making vehicle ownership extremely expensive. In 2018, the average plate price reached around Yuan 88,000 (US$12,800), which is pricier than the average domestic car. Nicolas Pechet is Senior Partner at YCP Solidiance, an Asia-specialist consultancy. As he explains, these incredible prices did not stop 2.3 million people applying through the auction system. Only 132,586 of these succeeded, amounting to a success rate of just 5.5%. Shanghai has a generally favoured public transport system, and almost the entire city is connected through a combination of metro rail and low-floor buses, with both systems growing each year. So why are private vehicles still objects of desire among the Shanghainese?

Just can't get enough

"People in Shanghai are still willing to spend liberally to get a licence plate for two main reasons," suggests Pechet. "First, locally registered plates receive access to the highways during rush hours, while out-of-town licence plates cannot enter the highways during this time. Secondly, having a Shanghai licence plate confers a superior social status upon an individual in China." The appetite is obvious. The question is, are the auctions working? China's National Bureau of Statistics reports that Shanghai had some 3.02 million private vehicles on the road in 2018. According to Pechet, the period between 2013 and 2018 saw an overall CAGR of 13% for private cars - 1.3% lower than growth of China's overall passenger car market over the same period, but by no means a declining market. 

"The private car population in Shanghai is still growing, and there is still congestion in some parts of the city during peak times," Pechet says, although admittedly nowhere near as bad as that of Beijing; according to official Shanghai data, the highway congestion index rose by 6% in 2018, while the ground road congestion index remained stable.

But where pollution reduction is concerned, Pechet feels there has been some progress. "The scheme has been very effective in reducing emissions from vehicles on the road, as most newly added cars are energy efficient with less or no pollution," he says. "The concentration level of pollutants like sulphur dioxide, nitrogen oxides and particulate matter decreased by around 10%. Carbon monoxide concentration levels remain the same."

What can we expect in the years ahead? Shortterm, Pechet expects the overall number of licences to hold steady for 2019, at under 135,000. "In the years ahead, we expect that the government might further limit the allocation of new licence plates with more stringent application requirements and a higher price range," he suggests.

Shanghai's system is not without criticism. The auction model has meant that prices have been driven sky-high, which has led some to reasonably conclude that driving is the preserve of the elite. Pechet argues that such consequences are unintentional. "The auction system is random and computerised," he explains, "and is not meant to benefit any particular group. Also, it would be hard for the super-rich to buy multiple licence plates for other people as the plates can only be transferred from one's parents, offspring or spouse, and only after the other party owns the plate for at least three years."

Green plates

The rollout of green licence plates has given some drivers a way in. These are free, but limited to vehicles that meet electrification requirements. Applicants must also prove they have access to a charging point close to where they live or work. Cars that qualify must fall under China's New Energy Vehicle (NEV) category, meaning full battery electric or plugin hybrid with sufficient range.

As NEV adoption rises, green plates could face restrictions in the future. "This would be similar to Beijing, where only a limited number of people get a green licence plate on a firstcome-first-served basis," says Pechet. "Residents sometimes wait years for their turn." This will no longer be the case, however: the Chinese government has said it will not allow cities to impose quotas on NEV plates. Any existing quotas will be cancelled.

Automakers adapt

How do these plates affect the way automakers are doing business in major Chinese cities, including Shanghai?

Beijing, Guangzhou and Shenzhen, all Tier 1 cities, enforce their own systems, and buyers in these cities account for a considerable portion of new vehicle sales. According to the China Association of Automobile Manufacturers (CAAM), out of the total number of passenger cars sold in China, around 37% are sold in Tier 1 cities. Meanwhile in 2018, China saw its new car sales decline by 2.8%, the first decline in 20 years. As such, Pechet affirms, licence plate restrictions are "absolutely impacting the growth and business of automakers in China.

"As a result, automakers are planning new business strategies for various cities," he continues. "Most automakers are expanding their sales networks in Tier 2, 3 and 4 cities, primarily focusing on low to mid-end traditional cars. For Tier 1 cities, automakers are focusing on developing NEV models, and for traditional car models they will focus on mid to high-end models. Consumers willing to pay a high price for a licence plate tend to prefer premium models." Manufacturing and marketing strategies will no doubt be adopted and shaped according to any further restrictions introduced over time.

Source: Automotive World

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