The capital's new vehicle and traffic regulations will likely steer automakers toward smaller cities, experts have said.

"The direct impact of cutting the annual sales from more than 700,000 vehicles this year to 240,000 next year will cause many 4S stores to shut down, causing high unemployment in the sector," Beijing-based independent auto analyst Zhong Shi said.

Zhong's remarks were echoed by Cui Dongshu, vice-secretary-general of the National Passenger Car Information Exchange Association.

"Suddenly cutting out more than 60 percent of the market without a transitional period will force out at least half of Beijing's car dealers and will exert the most impact on low-end domestic brands," Cui said.

Wang Changqian, general manager of a Chery 4S store in Beijing, called the regulations the "biggest challenge ever" to the sector.

"Beijing's car dealers are looking at a cold winter," Wang said. "Such strict limitations go against the economic imperative."

Gu Xiaohua, general manager of a Shanghai Volkswagen dealership, said: "The ways in which the new rules reshuffle Beijing's dealerships depend on their service capabilities. It will only kill the small players."

Zhong, the analyst, said dealers must strengthen their after-sales service to survive the slump and expand their distribution networks in second- and third-tier cities, and even rural markets.

Zhong said he believed other large cities will soon adopt similar restrictions to solve their growing traffic problems.

Bjorn Hauber, executive vice-president of the sales and marketing department of Mercedes-Benz (China) Ltd, said the future opportunities of the country's automobile industry will come from smaller cities.

China has about 300 second- and third-tier cities with an average population of 2 million each.

"We see huge potential from these cities, and even smaller cities, as we have only covered 80 cities around the nation," Hauber said.

Shen Rong, deputy secretary-general of the China Automobile Dealers Association, said: "The new policy may seriously affect the emerging secondhand car market, because few people will want to buy a secondhand car if their purchase and usage costs rise sharply."

Cui said the rules will have a negative impact on secondhand market in Beijing.

"There could be stagflation in the secondhand market, as secondhand cars with non-Beijing license plates can no longer be sold in the city," he said.

Auto industry expert Chen Guangzu said he believed the government should not resolve the traffic congestion problem by restricting vehicle sales.

"Policymakers should figure out how to manage transportation rather than just limiting the number of cars," he said.

(China Daily December 24, 2010)