The auto craze continues – The WTO column

(Tomorrow in Chinabiz)

Last year I decided I should put a brake on my skepticism regarding the automotive industry and would allow myself only one rant for every one billion US dollar that would pour into the industry. With the industry exploding, I’m getting behind and the Beijing auto show should be enough reason to take off again.

The reports I got from the Beijing auto show reminded me vaguely of the mental institutions I visited in the past for professional reasons. There seemed to be two kinds of patients, the once who want to buy a car and those who wanted to sell them. Getting both groups of patients together seems a sensible idea as a therapy, since they can make each other happy. But the first signs show that the symptoms got worse during the heated exchanges at the show.
Some of my friends who follow my writings a bit longer argued that we journalists were also very skeptical when GM started in the second half of the 1990’s and transferred 140 US expats with their families, including dogs and cats to Shanghai. We indeed did not believe at the time GM would ever be able to earn back that kind of investment. The market size could not justify such investments, unless a miracle took place. They not only did earn money back, they now decided to reinvest a handsome three billion US dollar of those returns in China.
Why did that happen? A miracle took place. Not the number of cars justified the huge investment, but the high profit margin per car. What we got wrong at the time was that we looked at China as a market economy, while the automotive industry enjoyed heavy government protection and forced the customers to buy overpriced cars with a margin of 20 percent. The small group of people could afford to buy a car was very happy to be ripped off. In Shanghai they even paid the equivalent of a Volkswagen Santana for the governmental permission to drive a car.

Maybe we are wrong again, but it certainly looks that to make the automotive competitive not only the efficiency of the Chinese industry should go up, but the profits per car should to down. Both GM and Volkswagen have already started a minor price war that is – when we believe the assessment of some reports in the Chinese media – the beginning of much more. Xinhua even forecasted a buyers strike until the beginning of next year because buyers expect a more dramatic reduction in car prices.
That might be political wishful thinking, as the central government wants to cool down the economy. In any case, government policies seem less inclined to support the massive profits of the automotive industry in the recent past. To even marginally justify the current investment an unsustainable hike in sales seems necessary.

A city like Shanghai will have to decide how it will look like in ten, twenty years time. Will it take on the model of a city of Los Angeles, spreading out to cities like Ningbo, Nanjing and Hangzhou, incorporating them as suburbs in a metropolis that has been made to force its citizens into cars. Or is it going to be like New York, much more concentrated with an excellent public transportation system? I just toured a few days ago Shanghai with a friend from New York. She has a car, she says, but uses it only four, five times a year to leave the city.
Shanghai wants to equal New York it decided a few years ago, but I estimate it might in twenty years time look more like Los Angeles looking at the behavior of the patients at the Beijing car show. That might be too late for some parts of the automotive industry that need an earlier return on investment.

Fons Tuinstra