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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Fuel and Chinese exports

The rapid increase in the price of fuel has obvious knock on effects on transport costs. There are two issues here.

1. There will be an addition fuel cost per shipping container so price goes up

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2. The ship will go slower to conserve fuel but also resulting in higher transport costs in terms of time.

This has important implications for the study of international trade, offshoring, outsourcing and globalisation in general.

A recent China Economic Review article commenting on a Washington Post piece touches on this development:

China’s getting too expensive. Back to America! [China Economic Review]

We’ve heard plenty in the news this year about rising prices hurting export-oriented businesses in places like Guangdong and, more recently, Zhejiang. Clearly some areas of China that were once “workshops” for the world’s cheap goods are pricing themselves out of the market, with the slashing of export rebates, inflation, currency appreciation (though that appears to be slowing viz. the US dollar) and rising labor, material and fuel costs all playing a part. The next step for these areas, local governments hope, is to climb the greasy pole value chain and start producing higher-value goods.

So who’s going to make our cheap furniture and sleeping bags now? Americans?

Not as strange as it sounds. In some cases, according to this interesting article by the Washington Post’s Ariana Eunjung Cha, some low-cost American manufacturers are headed back home. Transportation costs are a big part of it, according to Cha:

With fuel prices at record highs, the cost of sending a standard 40-foot container of goods has gone from $3,000 in 2000 to about $8,000 today, squeezing profit.

So this summer Kazazian, chief executive of Exxel Outdoors, a Los Angeles-based maker of recreational equipment, did something radical: He moved the manufacturing back to Haleyville, Ala.

Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the “China price”– the 40 to 50 percent cost advantage once offered by Chinese producers.

The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley.

“Globalization has gone a little bit too far. It has overshot,” Jen said. “We’re not saying Asia is going to crumble, but we are saying Asia enjoyed extraordinary conditions in the past. Now the conditions are changing very quickly because of the energy shock, and Asia is coming under pressure.”

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Tony Blair on China

Tony Blair writes an interesting opinion piece in the Washington Post. We now have to hope that America reads it.

We Can Help China Embrace the Future [Washington Post]

On talking to young Chinese Internet entrepreneurs:

These people, men and women, were smart, sharp, forthright, unafraid to express their views about China and its future. Above all, there was a confidence, an optimism, a lack of the cynical, and a presence of the spirit of get up and go, that reminded me greatly of the U.S. at its best and any country on its way forward.

On some economic basics:

The Chinese leadership is understandably preoccupied with internal development. Beijing and Shanghai no more paint for you the complete picture of China than New York and Washington do of the U.S. Understanding the internal challenge is fundamental to understanding China, its politics and its psyche. We in Europe have roughly 5% of our population employed in agriculture. China has almost 60%. Over the coming years it will seek to move hundreds of millions of its people from a rural to an urban economy. Of course India will seek to do the same, and the scale of this transformation will create huge challenges and opportunities in the economy, the environment and politically.

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