China's love of cars - crisis or not?

We all know that as countries get richer then eat more meat and drive more cars. China is no different. In the expectation of the latter production has been ramped up to very high levels. And then came the financial crisis and the beginning of a global recession that could last for years.

As an economist who is pessimistic even by economist standards I suspect things will be bad. Very bad and China will also see its fair share of pain. It has, you could argue, grown too quickly and needs significant growth just to stand still now.

Social unrest is always lurking in the background as the inequalities caused by capitalism begin to play out. China's gradual acceptance of capitalism is what may save it as the state remains all powerful. They may well need to this power over the next couple of years.

But I digress. One manifestation of the possible fallout comes from looking at the automobile industry.

Two recent Bloomberg stories sum this up:

China's First-Half Vehicle Sales Growth Slows to 19% [Bloomberg 10th July]

China's vehicle sales rose 19 percent in the first half, slower than a year earlier, as inflation and natural disasters tempered demand in the world's fastest-growing major vehicle market.

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Still, vehicles are becoming affordable to more people in China because of the country's 10 percent economic growth rate and price cuts triggered by rising competition. The proportion of people owning vehicles in China is also only equal to that seen in the U.S. in 1925 and in the U.K. in 1950.

``Vehicle prices have been falling while prices for everything else in the country have been rising,'' said Yu, who expects full-year vehicle sales to hit 10 million.

Sales of cars and light trucks fell 10 percent in the U.S., the world's largest auto market, in the first half. Japanese vehicle sales, excluding minicars, dropped 0.9 percent.

Then we get:

China's New Vehicle Stockpile Reaches Four-Year High [Bloomberg 18th July]

China's stockpile of unsold new vehicles rose about 50 percent in the six months ended June, hitting a four-year high, as automakers expanded production and sales growth slowed.

The backlog reached 170,000 vehicles from about 110,000 at the end of last year, Cheng Xiaodong, head of vehicle-price monitoring at the National Development and Reform Commission, said by phone today. First-half sales totaled 5.18 million.

How did they not see this coming?

``Automakers were too optimistic when planning their capacity expansion and didn't expect the slowdown,'' said Tang Jun, an analyst at Guangfa Securities Co. in Guangzhou. ``Dealers are hit the most by rising inventory and may have to slash prices further to help with liquidity.''

Yet the investment continues - is this good long term planning or throwing good money after bad? There is no doubt that Chinese demand will continue and capacity expansion now is in a sense a loss leader. The company that becomes the "car of choice" could take all as dealerships and sparepart firms flourish.

GM, the world's largest automaker, plans to invest as much as $5 billion in China over five years through 2012, Kevin Wale, president of its China unit said in December.

Toyota is spending 3.6 billion yuan ($524 million) to more than double the capacity of a factory in Chengdu to 30,000 vehicles, it said on July 5. The work, which also includes moving the plant, will be completed by the first half of 2010.

Volkswagen, the largest overseas carmaker in China, plans to boost its capacity in the country from 1.08 million vehicles a year through efficiency improvements, it said earlier this month. The company took over a former Fiat SpA plant in Nanjing in April.

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