Why China's bid to promote domestic brands will fail

China's drive to combat pollution is helping homegrown carmakers, which are boosting sales at the expense of Western brands.

But General Motors and Volkswagen -- the top-selling brands in China -- shouldn't worry: Changan and Great Wall won't topple them.

In October, China cut taxes on cars with engines of less than 1.6 liters to 5 percent of the purchase price, down from 10 percent. The tax cut reversed a decline in overall car sales and buoyed demand for domestic brands. Eighty to 85 percent of vehicles produced by local carmakers qualify for the tax break, according to Bloomberg Intelligence analyst Steve Man.

By January, Chinese domestic brands had a 41 percent share of car sales in China, up from about 38 percent a year earlier, according to data from Bloomberg Intelligence and the China Automotive Information Network.

China's auto sales had been falling until last summer as the economy slowed and the government's anti-corruption campaign ate into demand for ostentatious vehicles.

The tax cut raise passenger vehicle sales to 21.1 million units last year, up 7.3 percent from 2014. Car sales continued their rebound this year. In January and February, China sales totaled 3.61 million units, up 5.1 percent from a year earlier, according to the China Association of Automobile Manufacturers.

In addition to the October tax cut, local and national government subsidies for electric car producers can reduce a vehicle's purchase price by 50 percent or more.

The incentives have helped local brands to find a market for their electric cars. Last year, EVs accounted for 2.5 percent of cars sold in China last year, more than doubling EV sales in 2014.

But China's carmakers shouldn't get too comfortable. There are two reasons why Chinese carmakers may find their days in the spotlight cut short.

Conventional hybrids, the more pragmatic option for EV fans, are coming. The cities of Guangzhou and Tianjin are allowing foreign ventures to make them and Hyundai Motor Co. plans to launch sales this year, according to BI's Man. 
While growing fast, demand for electric vehicles has been restricted by a lack of charging stations, a problem that doesn't affect hybrids.

Secondly, the tax cut will be temporary. China last lowered the levy in 2009, briefly boosting the share of local brands before restoring the tax to 10 percent.

This time, the 50 percent reduction expires in December, barring a government extension. China's carmakers may be feeling a sense of deja vu.