Despite the lackluster auto market, sales of cars with large engine capacities enjoyed an unprecedented high and selling prices have soared thanks to the vehicle consumption tax that began to take effect on September 1.

The Ministry of Finance announced the adjustment last month. It means owners of cars with engines above a 4-liter capacity have to pay 40 percent tax, double the original rate. Owners of vehicles with engines between 3 and 4 liters have seen a tax hike from 15 percent to 25 percent. Whereas, cars with engines below the capacity of 1-liter now enjoy a tax reduction from 3 percent to 1 percent.

As the Beijing Times reported, prices of the best-selling big cars, like the BMW 7 series, Benz S350 and Toyota Prado, have already surged, with the margin of the price rise lower than that of the taxation lift. However, those with cold market response or short supply, remain unchanged in their selling price.

German brands, like Audi, BMW and Benz, saw the price of their cars with engines above a 3-liter capacity increase half a month ago, and the growth rate stands at 70,000 yuan ($10,238.86) to 80,000 yuan.

A sales person from Beijing Betterlife Automobile Trading Co Ltd said the Audi A8 4.2LFSI Prestige is out of stock now, as customers snapped it up before the taxation adjustment came into effect. The supply is expected to resume next month.

An Audi dealer commented that the current surge in price is due to dealers hoping to obtain exorbitant profit before the implementation of consumption tax.

An Audi Q7 4.2L with the manufacturer suggested retail price of 1,232,000 yuan, sells at 1,432,000 yuan, up 200,000 yuan. "While after September 1, the price will probably rise to 1,472,000 yuan", said the dealer.

Japanese SUVs have followed the rising price trend. The Toyota FJ, Highlander, and Prado increased in price by more than 40,000 yuan.

A sales manager from Guangzhou Toyota said the discount on the Toyota FJ remained at between 10,000 and 20,000 yuan. However, it has been cancelled for the FJ4.0L which has a recommended retail value of 450,000 yuan, and its selling price has been marked up by 20,000 to 30,000 yuan.

A dealer from Faw Toyota said that they hoarded some vehicles upon news of the tax rise, and began to raise the price half a month ago.

The considerable discount of the Chrysler 300C 3.5L/3.7L and Dodge Caravan 3.0L has shrunk and a sales manager at a Chrysler dealership said that from September 1, all his vehicles will sell at prices after the tax rise regardless of their importation date.

It is not the first adjustment of consumption tax since its debut in 1994, however, judging from the extent of the tax rise, it is introduced this time, with a signal to curb consumption on big cars and to promote smaller ones in an effort to save energy and reduce pollution.

In a report in China Business News, both the auto importer Jia Bing and the industry analyst Zhao Ying agreed the rising cost of vehicle ownership will affect the market mainly in terms of consuming psychology. But they did not see eye to eye on the duration of the influence.

Jia, the auto importer expects a wait-and-see period after the adjustment after which the customer group will stay and adapt to the change and the market will recover 2-3 months later.

Zhao, the analyst from the industrial economy institute under the Chinese Academy of Social Sciences, believes that it will pose a lasting influence on the overall market as consumers may take the government’s subsequent policy into account.

The anticipated effect of the taxation adjustment to curb consumption on big cars while promoting smaller ones will be a limited one, believed Jia and Zhao.

It may restrain the overall consumption of big cars to some extent but as it works only on the purchasing phase, the effect will be narrowed unless the government carries out supportive regulations and measures, such as raising fuel tax, or introducing environment tax on SUVs.

The two experts also suggested extending the definition of “small engine capacity” to 1.6L, as this is the most salable engine capacity for consumers and is also favorable for energy saving. The importance of technical innovation to make better use of oil, was also stressed.

Auto manufacturers change their tempo in response to market situations, but as the experts added big cars take a relatively small slice of the whole market. They reckoned the partial adjustment will have limited effect on production and sales in the long run.

"A 10 to 20 percent rise in vehicle prices is acceptable to me, but it undoubtedly affected my purchasing plan," said Li Mo, a consumer. "I won’t give up buying a vehicle and I will make a decision sooner or later when I learned the market," Li added.

(China Daily September 2, 2008)