Red Car-nation

Stephen DeAngelis

May 13, 2010

One need look no further than the streets of China to see that it is emerging from the Great Recession. Consumers there are beginning to fancy their cars [“China embraces freedom of the road,” by Patti Waldmeir, Financial Times, 23 April 2010]. Waldmeir claims that “cars are liberating the country as they did in the US in the 1950s.” She reports:

“In the centre of Beijing, neon-bright against a misty night, the Feng Hua Yuan drive-in cinema appears like an apparition from 1950s America. It is a world of jalopies and ponytails, and waitresses on roller skates – and a vision of China’s future. For China is rapidly developing a US-style cult of the automobile that could have some profound implications for Chinese society. But the phenomenon will have huge implications too for the companies poised to make money from it. … Carmakers are cashing in, with sales rising 45 per cent last year, and 72 per cent in the first quarter of 2010, year on year. But the moneymakers of the future will be the many car-wash chains and chrome-wheel cover stores that have yet to be built, and the motor inns and farm-style restaurants that have begun to spring up in the nation’s countryside. With a highway network that could well rival that of the US within a decade – in part a fortuitous side-effect of the global financial crisis, which spurred Beijing to use stimulus cash to build toll roads – China’s car culture is on the route to rapid expansion.”

The car may prove to be one of the primary motivators of social change within China. As cars make Chinese citizens more mobile, regulations that currently limit their mobility inside the country will have to be reformed [“China’s Inward Mobility Problem,” by Andrew Peaple, Wall Street Journal, 10 March 2010]. Peaple reports that “the hukou, or registration, system—which divides Chinese citizens into rural and urban dwellers—is a festering anomaly amid China’s rapid economic reform in recent decades. A remnant of the 1950s planned economy, the system restricts labor mobility within China.” Waldmeir reports that “the first generation of Chinese car-lovers is rapidly falling in love with all that space” found outside of crowded cities. She continues:

“‘I like the speed, I like the freedom, I can’t imagine not having a car,’ says Hou Mingxin, 39, proud owner of a 2000 Jeep Cherokee, which he uses to drive to the wild grasslands of Inner Mongolia, and a two-door Volkswagen Golf runabout, for navigating Beijing’s urban wasteland. ‘It is the first time in their lives that Chinese people have individual mobility,’ says Ivo Naumann, head of Alix Partners in China, which advises many leading car companies. ‘It’s a piece of freedom for the Chinese people.’ Standing before a sign that says ‘Drive-In’, in neon retro letters several feet high, manager Liu Cunyu says 600 cars turn up most weekends at his theatre, and 200-300 on weekdays. He points out that attending the drive-in is fun for young lovers. The irony is that China is discovering the romance of the road just as Westerners seem to have lost it.”

Analysts have gone so far as to assert that it is “the younger generation that is defining the car market” in China. Waldmeir explains:

“Those youngsters want not just freedom through car ownership, but also friendship. … China’s car boom is very much a phenomenon of the internet age. In fact, think of it as Facebook, with automotive characteristics. Cars are liberating China in the same way that they did America in the last century – offering a kind of freedom that even Face-book-blocking Beijing can live with.”

In addition to bringing about social change, automobiles in China could bring about financial reforms as well. Because car loans are difficult to secure, 90 percent of the cars being purchased in China are paid for with cash [“Ford, GM Promote Loans in China as 90% of Drivers Pay in Cash,” by Tian Ying, Makiko Kitamura and Stephanie Wong, Bloomberg BusinessWeek, 28 April 2010]. As the headline states, the big carmakers would like to see that change. Not only could they sell more cars and profit from interest if loans were available, they could sell more expensive cars. “‘For the next 5 to 10 years, auto financing will be the biggest thing for the industry and the most important booster,’ said Yale Zhang, a Shanghai-based director at CSM Asia, an auto consulting company.”

Predictions are that “China could dominate the car industry” [“China in the Driver’s Seat,” by Jerry Garrett, New York Times, 26 April 2010]. Garrett reports that the clearest sign that automobile industry in China is taking wings was found at a recent auto show in Beijing.

“More than 1,000 cars were on display; some 65 concept cars made debuts as well as nearly 100 new or prospective alternative-fuel vehicles. That total was more than were unveiled at the most recent Detroit, New York, Chicago and Los Angeles auto shows combined. By the time Auto China reconvenes a year from now in Shanghai, the show could outstrip Geneva as the world’s most important auto salon. … Last year, China surpassed the United States as the world’s biggest automobile market, ending more than a century of American dominance. The swap in places was sudden and dramatic: China’s sales grew by more than a third to 13.6 million units in 2009, while the United States market plunged 21 percent to 10.5 million. Sales in the United States are expected to rebound to about 12 million units in 2010, after a disastrous two-year recession that helped to bankrupt the Detroit auto giants General Motors and Chrysler. But the Chinese market is not idling, waiting for the Americans to catch back up; sales to the increasingly car-crazy Chinese are forecast to continuing growing – perhaps to as many as 20 million units yearly by 2015.”

Garrett goes on to note that both local and international carmakers are trying to elbow their way into the Chinese car market.

“Home-grown Chinese autos are expected to proliferate and grow rapidly in sophistication; many Chinese automakers have announced ambitious plans to take leadership in hybrid and electric vehicle production. An indication of how China’s car manufacturers expect to quickly attain expertise in areas like greentech, and even safety, is underscored by Geely’s recent acquisition of Volvo and all its considerable intellectual capital from Ford. Ford, meanwhile, announced it was studying expansion of its partnership with the Chinese automaker Changan; G.M. already has in place a large-scale joint venture with China’s S.A.I.C. But automakers outside of China have also taken note of the potential to sell their own cars in Asia. Many, particularly German automakers, like Volkswagen, Audi, Mercedes-Benz, BMW and Porsche, presented vehicles at the Beijing show that were specifically designed with Chinese tastes in mind.”

Volkswagen recently announced that it will invest over $2 billion and build two new plants in China [“Volkswagen Invests Further in China,” by Christoph Rauwald, Wall Street Journal, 27 April 2010]. As optimistic as all this sounds, there are a few challenges lying in the road. For example, “suppliers are … aware of barriers to market entry and growth in China. Competition is perceived as being more intense than in their respective home markets, while labor costs are expected to rise significantly, and the majority of suppliers see weaknesses in the infrastructure and in legal protection” [“Survey shows bright outlook for China auto market,” by Cai Muyuan , China Daily, 28 April 2010]. There are also predictions that carmakers are being too optimistic and building too much capacity [“Carmakers ‘Unsustainable’ Growth in China Risks Overcapacity,” by Makiko Kitamura, Tian Ying, Stephanie Wong, Andreas Cremer, Stephen Engle, Bloomberg BusinessWeek, 28 April 2010]. At the moment, however, carmakers cannot build enough cars to keep up with demand.