Giving foreign automakers the keys to the car?
The Chinese authorities have whacked their auto-industry growth predictions for 2011. What was once imagined to be a 10-15 percent expansion now looks more like 5 percent. This is scary, because China had been seeing car growth in the superheated 20-30 percent neighborhood. So what happened?
Inflation, that’s what
The Chinese government is very worried about a bout of classic developing-world inflation hitting its torrid economy and creating all the problems one might usually associate with developing-world inflation, including massive social unrest.
Cooling things off has meant interest-rate hikes by central planners, which has in turn has suppressed vehicle sales. Unfortunately, inflation continues to accelerate — to 6.3 percent in June versus 5.5 percent in May, according to Reuters — and that invited another rate increase just this week.
Brazil is dealing with a similar dilemma — and struggling with having to deal with while not being China — but now it’s time to consider what will happen to the auto industry there if China experiences a crash. Not that I think such a Black Swan event is on the horizon — unlike Forbes’ Vitaly Katsenelson, who thinks the picture is dire.
Chinese losers, western winners
Western automakers have been treating China’s market as a gold rush. And who can blame them? China has passed the U.S. as the world’s largest car market, and the country seemingly has nowhere to go but up, up, up: there are only 50 passenger vehicles owned for every 1,000 citizens.
Some have argued that the Chinese market could be 40 million vehicles annually by 2020. At its peak in 2005, the U.S. was only at a mere 17 million. And in fact this year China was on a pace to do 12-13 million in new vehicle sales, which is a best-case scenario for the U.S. in 2011.
But the Chinese government is also trying to quash the gold rush, by reducing the number of enterprises involved in the auto sector by an astonishing 90 percent. This will take small players out of the action and leave the field to the big boys. And those big boys are the ones that have established joint-venture with western pros, like General Motors (GM) and Volkswagen.
Curtailed demand will flow to Buicks
As China acts to fight inflation, it will reduce demand. What demand is remaining in the auto sector is less likely to flow toward secondary carmakers. This will bolster the JVs and probably expand the rapidly growing luxury car and SUV markets. Well-established brands like Buick will thrive. Indigenous Chinese brands will not.
I know this sounds bizarre — why would China hand the keys to foreign carmakers? — but China wants to develop a mature auto industry in a hurry. What it loses in potential innovation by ridding itself of small companies it will make up for it what it learns about how to compete on the global stage.
So China has problems. But the outside automakers who are doing business there, on balance, do not. And they’re continuing to keep their eyes focused on the long-term growth trends, expanding operations and maintaining investment.
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