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Outlook 2011: China Says No More Cars, Down Goes the Auto Industry

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By Dian L. Chu, EconForecast

While the world is still unwrapping the surprise Christmas gift from China in the form of an interest rate hike of 25 basis points, this other piece of news with ample implications to the auto industry seems to have gone largely under the radar--The City of Beijing will limit the number of new license plates issued in 2011 to 240,000 to help control traffic congestion. Xinhua reported that car buyers in Beijing will have to draw lots before obtaining a vehicle license plate.

Beijing – An Auto Gold Mine

In 2009, Chinese government introduced tax incentives for cars with engine sizes of 1.6 liters or smaller. The move propelled China to the world’s biggest auto market that year, surpassing the United States. The trend has continued in the first 11 months of 2010--automakers in China shipped a total of 16.4 million vehicles, up 34% year-over-year.

Beijing is China's largest auto market and regarded by auto manufacturers as a gold mine. Statistics from the Beijing Municipal Commission of Transport show that the city's total number of automobiles stood at around 4.8 million, up almost 85% from 2005.

Carriage Before Horse

The problem is that the Chinese government is putting the carriage before the horse--encouraging consumers to buy cars without building enough roads and parking lots to support the auto boom. This problem is not unique to the city of Beijing, although it is the first resorting to this somewhat drastic measure to alleviate its horrendous traffic situation.

50% Drop in New Car Sales

With this new vehicle limit, China Automobile Dealers Association already came out with estimate that new car sales in Beijing are likely to decline 50% to around 400,000 next year.

Although this policy is only implemented in Beijing, it could have great influence over other large cities as Beijing is hardly the only city with poor urban planning suffering from the Great Traffic Jam, which could be a huge blow to the auto industry.

China – A Critical Auto Success Factor

China has been a major salvation to global automakers that are still struggling from a severe downturn in 2009 in the developed car markets. As such, position in China has become one of the most critical aspects of any auto company’s success. General Motor (GM), Volkswagen AG, Toyota Motor (TM), Ford Motor (F), and other industry heavy weights are all competing intensely for a bigger slice of the Chinese market (See China Car Market Chart).

Although China auto market is expected to slow down in the coming years (see Predicted Sales Chart) partly because the tax incentives that help drive the auto sales are set to expire on Dec. 31, 2010, the world’s top auto companies still have high hopes for China.

Great Auto Growth Sans Roads & Parking?

Bloomberg reported that world’s largest automakers-GM, Volkswagen, Toyota, and Nissan all expect sales in China to grow anywhere from 10% to 17% in 2011. While most auto companies commented that it is too soon to talk about the effect this measure will have on car sales, there’s no getting around the fact that without sufficient roads and parking spaces, any great growth potential (See Predicted Sales Chart) in China is basically meaningless.

Infrastructure Gap For The Next Decade

As discussed in my previous analysis, China has inadequate logistic infrastructure to meet the needs of its mass population and heavy industrial business, partly reflecting poor planning by the local and central officials. As much as the country has been racing to build and upgrade its transportation system, this new restriction speaks volumes that the deficiency most likely will persist in the next decade or so.

A Quinq Whammy

Conceivably, the new vehicle cap, the also new 4% increase on fuel prices, and the latest interest rate hike to rein in escalating inflation and asset bubbles would constitute a triple whammy to the already severely recession-hit auto sector.  Furthermore, since the automaker cost structure is heavy on the raw material, the global inflation pressure would hit input costs more so than other sectors.

Then, you also have companies already made resource commitments based on the prior robust China growth forecasts. For example, Ford will open 66 new dealerships in China by the end of the year, bringing its total to 100 new dealers in the country in 2010 and its total number of outlets to 340. Daimler AG also plans to invest €3 billion by 2015 to expand its production facilities in China.

Beware of the “Bullwhip Effect”

This suggests automaker stocks and/or ETFs, mutual funds with Chinese auto exposure, including but not limited to the aforementioned companies, could be subject to significant revaluation based on new tightening measures coming out of China, which could only intensify and likely extend beyond 2011. And this could also have a “Bullwhip Effect” up and down the entire auto supply chain.

Auto Sector Could Be A Short

Shares of Chinese (see China Car Maker Ranking Table) and German automakers like SAIC Motor Corp. (600104:SS), China’s largest automaker, Hyundai Motor Co., South Korea’s biggest carmaker, BMW, Volkswagen AG, are already seeing selling pressure after city of Beijing decision to impose the limit. Further selloff could be expected as fund managers and traders start doing some serious portfolio VaR shuffling after the start of the New Year.

Compared to its peer group, GM is probably the most vulnerable, as China has become the largest single market for GM since the first half of 2010, surpassing the home market.  So, it looks like American taxpayers would need to wait a bit longer for GM to pay off the taxpayer-funded bailout.

Nevertheless, look on the bright side--it is fortunate that GM’s IPO took place before these negative announcements came out, so GM was able to plow $1.8 billion of the IPO money back to the U.S. Treasury Dept.

Dian L. Chu, Dec. 27, 2010 | Mobile Reader, Website Google Profile

 

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Tue, 12/28/2010 - 15:50 | 834076 cosmictrainwreck
cosmictrainwreck's picture

like some folk earlier in thread alluded to... once the tipping point is reached with the young, single, unemployed males, there ain't much to do with 'em but put uniforms on 'em..... and I don't give it no 15 years, either. maybe 2 or 3. this will be fun for ZH to specultae on deployment of 100 million troops, or is that another 100 mil? can't believe wiki sez PLA = only 3 mil

Tue, 12/28/2010 - 14:32 | 833852 Kayman
Kayman's picture

Come on now Trav

They had a plan. And now they are planning to change the plan. Now, there's a plan for you.

 

Tue, 12/28/2010 - 13:26 | 833716 trav7777
trav7777's picture

But...but...I thought China always planned ahead and that they were just smarter and better.  You mean that they actually didn't PLAN and execute the infrastructure necessary to support mass car usage!?!??!

You mean that those cities meant to look like major western cities really AREN'T?!?!  Instead they resemble the congestion patterns of the 3rd world?  NO WAY.

Knock me down with a feather, because I thought China was supposed to be taking over by now.  I guess whoever was gonna do that got stuck in traffic and gave up.

Tue, 12/28/2010 - 13:00 | 833670 bankruptcylawyer
bankruptcylawyer's picture

EXCELLENT POST. THANK YOU ZEROHEDGE!

Tue, 12/28/2010 - 12:20 | 833547 BigCash
BigCash's picture

The progressives in this country probably have a rooomful of 100 year plans somewhere.

Tue, 12/28/2010 - 13:14 | 833696 Drag Racer
Drag Racer's picture

++

replace 'a roomful' with 'universities'

Tue, 12/28/2010 - 11:42 | 833420 rosiescenario
rosiescenario's picture

....and the iron ore and coking coal suppliers along with the copper miners will feel the effects of this as the year unfolds.

A few years ago it was apparent that China could either copy what happened in the U.S. with autos (a car for every citizen) and end up with a totally grid locked, polluted, unworkable outcome or they could use their ample intelligence and avoid just that by innovating and creating a new transportation paradigm.

........looks as though they were short on innovation....too bad for them and the entire world....here in sunny CA we are now getting their pollution fallout.

Tue, 12/28/2010 - 12:18 | 833473 TruthInSunshine
TruthInSunshine's picture

China tried to implement a 'Highway System to Prosperity' model, which featured employment from building autos, parts, roads & bridges, hoping it would lead to at least 50 years of residential, commercial, industrial and office development in 'satellite' cities (that are now poor villages), in just the same manner our growth model worked since the end of WWII.

But in China, implementing such a policy, modeled so closely on ours, and given the differences in demographics and current technology and consumption patterns, is akin to forcing a square peg into a round hole.

That dog just won't hunt, or if it does, will get really tired, really quickly.

Tue, 12/28/2010 - 11:40 | 833410 TruthInSunshine
TruthInSunshine's picture

The third outstanding article from Ms. Chu in 3 days, and one which contains specific, accurate and very relevant and action-worthy information that no other source I can find (other than Ms. Chu & Zero Hedge) has even referenced!

I love your analysis and the way you tie this government policy into the larger data set, Ms. Chu.

On a site filled with talented writers, pundits, economists and econo-journalists, Ms. Chu is doing some outstanding work in painting a moving, real-time picture for her readers as to what events 'on the ground' taking place now are likely to lead to later.

Thank you.

Tue, 12/28/2010 - 11:36 | 833390 JX
JX's picture

What's to say the guys rich enough to want a new car aren't going to figure out a way around this "limit"?  Next quarter, are we going to see headlines about mondo car sales in every other city?

 

On a side note, why is google one of the tags?

Tue, 12/28/2010 - 13:11 | 833692 Drag Racer
Drag Racer's picture

the more you mention G, especially in a link, the better G will rank that page. It's called self promotion...

Tue, 12/28/2010 - 11:18 | 833336 whether underground
whether underground's picture

"I wonder why a masochist would visit ZH ?  Oh yeah, that's why you are a masochist.

I operate in the real economy. "  +1

Tue, 12/28/2010 - 10:27 | 833177 No Mas
No Mas's picture

Well, let's go with the history of ZH posters and guess that auto sales in China will explode in 2011.

There is no single site on the Web that comes close to ZH in terms of incorrect predictions based on data or event evaluations.

I'm still looking for that $10 loaf of bread predicted on 11/4/10.  If everything here is meant to be hyperbolic, perhaps it should be explained in the TOS.  Otherwise, this place appears to populated by a band of fools.

Let me guess; futures are, mmmmm..... green?

The banks will be fine, there will be no recession in 2011, the PIIGS will not collapse (much less Europe) and do not fight the fed.  Seems like the ZH sheeple need to be reminded sometimes of reality. 

Here's hoping the hole you're digging out back is going well.  What with the cold weather and all.  Beans and bullets gold bugs; beans and bullets!

Tue, 12/28/2010 - 11:18 | 833327 Robert Neville
Robert Neville's picture

 

I would agree that a lot of what I read here is hyperbole but there will be a world financial collapse. We have run up unpayable debt and we are in the process of defaulting. Like any other time countries have printed money to cover their debt, the world will eventually lose confidence in the currency. We could play this game for a while but something will happen and people will panic. I can only hope that evil doesn't take advantage of the resulting chaos but I will still prepare for the worst case scenario. Maybe nothing happens and years from now I can laugh while I dismantle my preparations. I find that much preferable to watching my family starve because I failed to take a few precautions.

Tue, 12/28/2010 - 11:15 | 833314 Kayman
Kayman's picture

No Mas

I wonder why a masochist would visit ZH ?  Oh yeah, that's why you are a masochist.

I operate in the real economy.  Input prices are rising but cannot be passed on to a weak consumer. Some prices are up 20 to 50 percent already.

As for China- the macro problem is Duplicating 1950's America from an agrarian peasant base is not so easy.  The main thing China is doing now is dumping increasingly worthless USDs by buying things- commodities, companies, goodwill, etc.

As for not fighting the Fed- that may well be true for the short run, but in the medium to long run I am not so certain.  The "not fighting the Fed" hypothesis held a lot of water when the U.S. was the world's largest creditor nation replete with a manufacturing base, but now that the U.S. is the world's largest debtor nation, trying desparately to water down its debt, I don't now if I would rely on that fable for too much.

Good luck sucking on that hookah.

 

Tue, 12/28/2010 - 11:41 | 833417 TruthInSunshine
TruthInSunshine's picture

China has big problems on its hands; they may be a different set of problems that the U.S. and much of the west faces, but do not delude yourself into thinking they're not as daunting, or that China is even marginally more capable of solving them without major disruptions to its society and economy.

Tue, 12/28/2010 - 10:15 | 833131 steve from virginia
steve from virginia's picture

Best that China do an about face and halt all auto sales and crush what it already has on the streets. They could 'grow' another 10% a year for the next ten years tearing down the empty sprawl they have spent trillion$ to build and replace it all with places made up of destinations people can walk to.

On the way they can 'redevelop' their watersheds and agricultural lands so they have a chance of feeding and watering themselves. By pouring trillion$ more in credit into these endeavors they could increase growth @ 12% for even more years.

Auto manufacturers have had their fun. Time for them to take their toys off the stage and retire to well- deserved oblivion. The alternative is for these companies' 'products' to compete more actively with the 1.3 billion actual Chinese for out-and-out survival.

The contest has already begun. In the US the choice is between having a job or driving a car. What will it be in China?

Tue, 12/28/2010 - 12:14 | 833512 Ahmeexnal
Ahmeexnal's picture

China could also employ millions by building another great wall. They could build pyramids too.  Nothing new here, same cycles since the dawn of time. Thousands of years from now, when alien explorers dig up those empty cities they'll start hypothesizing about the primitive idolatrist religions that must have been responsible for the erections of cities nobody ever lived in.  They will find that other previously populous cities where millions of people did live were suddenly and violently abandoned for no apparent reason.  Hundreds of Ph.D. dissertations will address the mystery of the collapse this civilization. They will conclude somehow it was due to "primitive thinking" or some sudden "climate change" that could not be dealt with. They will sneer at our fate and in their puny little minds they will be convinced something like this could never happen to an advanced society like theirs.

Same stupid theories we have now about the maya, inca, anazazi, etruscans, etc.

Yes, that ancient idolatrist religion is still with us: the idolatry of money.

Tue, 12/28/2010 - 10:06 | 833117 Snidley Whipsnae
Snidley Whipsnae's picture

Another kick of the can down the road for those awaiting oil shortages to appear in developed countries.

Maybe the prices at the gas pumps will see a little drop in a year or two...or not.

Anecdotal aside: I ventured to the dreaded Wall World yesterday to pick up a sound bar for my tv (since the speaker/s that came with it is almost inaudible and rattles when turned up). The Sony Bravia that I purchased about a year ago for $648 is now priced at $798 with a sticker that says 'Reduced From $998'...WTF? Of course the NBER or some agency will notice that electronics is going up and factor it into the CPI? lol

Tue, 12/28/2010 - 13:10 | 833691 TruthInSunshine
TruthInSunshine's picture

I have never seen plasmas and LCDs (many LEDs, too, now) in 1080p as cheap as they are now (and it was expected, to be fair, as with all things consumer electronics).

There were major brand 1080p 46" plasmas and LCDs for $580 or less (Panasonic, Sharp and Samsung) and 1080p 42" plasmas and LCDs for less than $500 this year.

There were even some 50"+ LCDs in 1080p under $700.

Tue, 12/28/2010 - 10:07 | 833116 BurningFuld
BurningFuld's picture

Come on guys. All this means is you now have to pay someone off to get that car license. This isn't going to limit anything. Just another revenue stream for the government bureaucrats.

Tue, 12/28/2010 - 09:46 | 833065 John Law Lives
John Law Lives's picture

When will Robo post a message with a bullish stock chart?  Let the countdown timer begin...

Tyler, PLEASE give us an ignore button in 2011...

Tue, 12/28/2010 - 10:04 | 833113 RoRoTrader
RoRoTrader's picture

Boring.

Tue, 12/28/2010 - 10:31 | 833185 John Law Lives
John Law Lives's picture

Speak for yourself, troglodyte.

Tue, 12/28/2010 - 21:49 | 834886 RoRoTrader
RoRoTrader's picture

You made my point.......boring.

Tue, 12/28/2010 - 09:35 | 833049 Fake Jim Quinn
Fake Jim Quinn's picture

Sell your Palladium ETF right now

Tue, 12/28/2010 - 09:24 | 833031 Not Sure
Not Sure's picture

China is testing the indoor cigarette smoking ban with not much success. The Shanghai auto registration lottery is another matter. I always hear about 100 year plans; so, where does this fit?

Tue, 12/28/2010 - 09:23 | 833028 gookempucky
gookempucky's picture

Hence the upgrade of Junk Motors across the board---US automakers dont even come close to a 1.6 liter motor---all Junk Motors can push is a 800lb battery that runs for 40 miles in a controlled enviroment. By the way extension cords not included~~~~~~~~~~~~~~~~~~~~~~~@=

Tue, 12/28/2010 - 09:22 | 833027 whether underground
whether underground's picture

The big problem for the Chinese comes in about 15 years when they realize they have about 30 million more dudes than chicks because they murdered all their females prior to delivery...either LOTS of team switching or all out war.  Won't be so worried about their infrastructure gap, they'll be psyched to find ANY gap.

Tue, 12/28/2010 - 11:46 | 833433 Sean7k
Sean7k's picture

 A lot of overproduction of engineers as well. As anal as they are- that just might answer your question. Guess someone should do a study on birth control and homosexuality - cause/effect huh?

Tue, 12/28/2010 - 11:54 | 833459 ElvisDog
ElvisDog's picture

I read an interesting story (I forget where) that China graduates 1M engineers a year from university but there aren't anywhere near that many jobs for them. So there are large groups of engineers, named "ant colonies" by a Chinese sociologist, that travel together around cities looking for work. It makes those barista jobs at Starbucks not look so bad.

Tue, 12/28/2010 - 12:07 | 833494 Sean7k
Sean7k's picture

Last figure I heard this week was 3 million. The "ants" are a social phenomenon that include many different disciplines. When coupled with the male/female birth ration, it is a group that is watched by government for the potential problems they represent. They are also very internet savvy. This is further compounded by the expectations of families that saw them through a university education and the hopes of financial windfall.

Somehow, back to the farm to design better plows could be a problem.

Tue, 12/28/2010 - 13:25 | 833715 ElvisDog
ElvisDog's picture

And people in the U.S. think it's hard to find a job. Can you imagine a plum engineering job opens up at the Chinese Ministry of Whatever and you're competing with 300,000 other applicants?

Tue, 12/28/2010 - 08:27 | 833006 Mercury
Mercury's picture
China Says No More Cars, Down Goes the Auto Industry

Well, they must know best right? I mean, they are in charge.  At least they have a plan that can be executed from a single, central entity.

Tom Friedman at NYT must be sexually aroused by this.  He loves a sovereign with strong hands.

Tue, 12/28/2010 - 07:36 | 832991 gwar5
gwar5's picture

Go long asphalt? 

Tue, 12/28/2010 - 06:58 | 832983 VeloSpade
VeloSpade's picture

Buy a bike bitches.

Tue, 12/28/2010 - 06:51 | 832981 mt paul
mt paul's picture

cruise missiles ..

low blue book values... 

Tue, 12/28/2010 - 06:46 | 832980 Drag Racer
Drag Racer's picture

Looks like a great time for Vespa to expand into China, though they do have a Hong Kong office.

 

GM needs a war. Selling cars is such a hassle, especially since cruise missles settle lawsuits upon delivery...

Mon, 12/27/2010 - 23:24 | 832723 RoRoTrader
RoRoTrader's picture

Best wishes for 2011, Dian.

Tue, 12/28/2010 - 15:36 | 834044 asiablues
asiablues's picture

Thanks, and you too.

Mon, 12/27/2010 - 22:48 | 832672 max2205
max2205's picture

IPOs are timed for a reason. Now we know. Shocking

Tue, 12/28/2010 - 16:44 | 834216 asiablues
asiablues's picture

Well, the "quiet period" post GM IPO is apparently over. 

Tue, 12/28/2010 - 10:24 | 833164 unwashedmass
unwashedmass's picture

 

well now we know why bloomberg is breaking out the rah rah squad this morning....its a bargain! even tho it has bested its IPO price! It has held on! banks are "committed".....

no word that they are on the verge of losing a huge portion of their Major new profit opportunity.......

not a peep.

we need those peasants to run in and take this off our hands before it craters.

Tue, 12/28/2010 - 13:04 | 833680 Drag Racer
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