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The Bleeding Edge of the Car Biz

Friday, November 23, 2012

Goldman Sachs thinks you can make 40% on Ford. I think that figure should be a lot closer to 400%.
China has finally, truly and wholeheartedly embraced "21st century American-style capitalism."
God help them.
Here's the headline that popped up on one of my news feeds a day or so ago: "Chinese Carmakers Record Sales."
That's right, in the middle of a yearlong global recession, China is selling more cars than ever before. Skimming down through the article, one notes that sales of minivans are up some 40% Q1 2008 to Q1 2009.
China's "Recession"
How can this be true? Isn't China suffering too as depressed American and European consumers decline to buy their cheap T-shirts and lead-painted gewgaws?
Actually, China's version of recession is a tad different than ours. It did indeed miss its target of a blistering 8% annualized growth rate for the first quarter of 2009, settling instead for a "mere" 6.1%, a figure for which most any Western finance minister would sell his children.

But even the threat of China's growth approaching the ever-so-sluggish global norm threw Beijing into a printing tizzy as early as last November. Now 4 trillion yuan (US$586 billion) might sound like a drop in the bucket compared to the hundreds of billions of dollars Washington is inventing on a weekly basis. But then again, Beijing is only trying to keep its ball rolling along, while Washington is trying restart a mired economy.
But it isn't just the fact that China is stimulating from the top down that is so fascinating. It is, after all, quite experienced at this whole centralized command economy idea that we are just cozying up to. It's how it is going about it that has me laughing into my morning coffee.
A Gift From Uncle
Last month, Beijing began disbursing some 5 billion yuan ($731 million) into the hinterland to encourage folks to purchase new minivans. Now to my wife, the phrase "minivan" brings to mind a 4,500 lb. monster with a large six-cylinder engine replete with a quality sound system, electric doors, seats, windows and mirrors. Oh, and maybe a DVD player (we didn't get one last time around, and they have been hassling me about it ever since).
However, when a Chinese family goes into their local dealership with their check from Uncles Wen and Hu, they find a remarkably different vehicle available to them. It generally has an engine half the size of an American van, which is okay since it hauls about half the curb weight.
If you are really lucky, the windows roll down by hand. Leather seats or airbags? As cousin Frank from Newark says, "Fergeddaboudem!" You want tunes? Learn to whistle. The good news is, these cheap little grocery haulers really are cheap. They only run about 33,000 yuan ($4,400) which comes to roughly 80% of the average Chinese citizen's annual wage.
But is this spike in the sales of cheap vans truly good news? Or are China's car companies traveling down the same road that brought GM and Chrysler to their corporate knees?
Death of a Thousand Cuts
In an attempt to increase fleet gas mileage and stretch its yuans a little further, Beijing is strongly suggesting that the checks be spent on smaller vehicles. It also has cut taxes in half on vehicles with engines smaller than 1.7 liters.
Unfortunately, as Mr. Xu Liuping, CEO of China's number four manufacturer, Changan Automobile Group, recently warned at the Shanghai Autoshow, "Small cars mean small margins. There may be vehicle sales growth for the industry this year, but revenue and profit may fall."
DongFeng Motor Corp.'s Liu Weidong further whined that "the auto industry no longer has extraordinary profit margins. Companies have been adjusting prices because of the government's industry stimulus policies and to boost sales."
"We Want a Piece of That Action Too!"
Yeah, that's right: The Chinese aren't making money selling small cars anymore than the Americans were. You want one more weird fold in the story? GM, who was so totally unprepared when gas skyrocketed here in the States, wants into the Chinese market in the worst way.