China starts to export cars, in bits and pieces – The WTO-column

(later also in Chinabiz, although I'm running now a bit ahed)
One of the more fascinating markets in China is that of the car market. Its size matters economically, of course, but also the way how overrated expectations play a key role among the producers, suppliers, government departments and last but not least among the users if absolutely fascinating. All parties involved tend to behave like pathological optimists, who have little room for doubts when it concerns the automotive industry.
Being an optimist myself, I saw all the dangerous symptoms among my fellow patients, and have been warning against it from the early start. After China entered the WTO, the sales of cars saw a stellar growth, which has caused an influx of investments that was almost unprecedented, only Brazil saw such investment in overcapacity.
Last year growth stagnated and only the most optimistic scenarios still predict growth this year. Domestic demand has slumped and the export of cars is an illusion that might take another decade to become really true, despite some high-profile cases.
It is not because China cannot make cars. They were also able to produce in the 1990s airplanes for McDonald-Douglas. It only took them a while to get the pieces together, because of the lack of economy of scale, lack of management talents and poor logistics. Making airplanes and cars has more to do with being able to get things organized than with producing high quality parts.
So, cars from Japan, Germany and the US can still be cheaper, because those countries have organized the automotive industry in a better way.

The large car producers have outsourced effectively all their risks to their suppliers and they find themselves now in an interesting dilemma that illustrates perfectly how China and globalization interact. The process happens in many more industries. The suppliers in the automotive industry have been blackmailed to come to China. They were often the global suppliers of key brand names, and could not stay out of China unless they risk losing their only client. Now China’s shrinking car market and its non-existing export do not offer the economy of scale these suppliers often need.
But if China is not able to produce enough affordable cars at a competitive rate those suppliers can still export their products, piece by piece. What we see is that while China cannot export cars, it is becoming increasingly better in exporting car parts.
The problem on a global market is of course that those often foreign suppliers in China are competing at the global market against themselves or their mother companies at home. The automotive parts that, according to the always optimistic Chinese media, are flooding the world, erode the markets in Germany, the US and Japan, and erode the suppliers’ profitability at home.
In struggling Germany trade unions have forced the automotive industry to keep on using a certain percentage of domestically made products. Trade unions might be able to get such an agreement from the industry, as Wal-Mart shows; the consumers would rather follow their own financial interests.

You do not have to be much of a fortune teller to see how the automotive industry will be forced into a new wave of consolidations, forced by Chinese products. In that way the Chinese automotive industry will get their export, will develop its economy of scale and might in a decade or so perhaps even start to export cars on a decent scale.

Fons Tuinstra