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China: A Mixed Bag Turns Very Ugly

testosteronepit's picture




 

Wolf Richter   www.testosteronepit.com

2010 was a magical year in China. Among the world records: 18 million new vehicles sold. Due to unprecedented stimulus, sales had skyrocketed 33% that year and 54% in 2009—mind-boggling growth rates which catapulted China to the number one new-vehicle market in the world, far ahead of the US which had never sold that many units in a single year, not even during the halcyon days before the financial crisis. In terms of passenger vehicles (excluding buses and trucks), 14.5 million units were sold in China that year, compared to 12 million in the US.

Exuberone, a hormone that governs industry thinking from time to time, had taken over. In January 2011 at the Automotive News World Congress in Detroit, Dazong Wang, president of Beijing Automotive, threw a number into a room: 40 million. That’s how many new vehicles would be sold in China by 2020, he said, roughly 30 million passenger vehicles and 10 million commercial vehicles.

People sucked in air. The number was beyond easy comprehension. But soon, it became a guidepost. Investment in manufacturing plants surged as foreign and Chinese automakers scrambled to get their share of that 40 million—and foreign automakers had to pay a steep price in terms of technology transfer, an inescapable feature of investing in China’s auto sector. For how automakers dealt with that last year, read.... China Puts the Screws to BMW.

Alas, in 2011, sales inched up only 2.5% to 18.5 million vehicles—though foreign brands still did well. 2012 may turn out to be even tougher. And now, the problem is production.

Automakers have ramped up at a torrid pace. In May, wholesale deliveries to distributors jumped 23% from prior year to 1.28 million units, higher than analysts had expected. Toyota and Honda, recovering from last year’s supply problems following the earthquake and tsunami, nearly doubled their sales to distributors. Ford pushed 23% more units into the pipeline, GM 21%. BMW announced on Monday that it had achieved record global sales in May, despite very tough conditions in some teetering Eurozone countries. Reason: China, where sales jumped 32%. And those are the sales that make their way into automakers’ financial statements.

Stunning as they may be, they’re wholesales to distributors, not to consumers. At dealerships, however, the scenario is turning from less rosy to gruesome—final sales in May were not robust enough to digest the flood of production. Inventories on lots across the country ballooned from 45 days’ supply at the end of April to 60 days’ supply by the end of May—a dizzying 33% increase in just 30 days.

And the ballyhooed 23% increase in wholesale deliveries that got analysts drooling all over themselves? Unsold. Added to inventory. Channel stuffing. Testimony of rampant overproduction. And it has turned into an inventory glut. Yet, not a week goes by without a major automaker announcing starry-eyed plans of investing in new plants or expanding existing ones. As these plants come on line, their production washes over the market, adding to a market that is already saturated.

The auto industry—not just manufacturing vehicles and components but also building plants and the infrastructure to supply them—has been a driver of economic growth. And it’s still playing that part, just like building ghost cities is contributing to growth. But for how much longer? [Bubbles can last far longer than reasonable observers might expect. For one of those, a bit off the beaten path, read.... Now They Have another Speculative Bubble in China: Art.]

Perhaps the People’s Bank of China saw a thing or two beyond publicly known data when it announced a 25-basis point rate cut last week, the first since 2008, because so far, economic data has been a mixed bag of decent numbers. Exports were strong, up 15.3% in May over prior year. Retail sales rose 13.8%, lower than expected, but still. And industrial production grew 9.6%, a healthy clip—but ominously, it included hundreds of thousands of new vehicles that have been overproduced and are now piling up on lots around the country.

And so there are divergent scenarios: automakers under the influence of euphorone are building plants, adding capacity, pumping out units, and stuffing channels with all their might—while dealers, who are forced to take their quotas, are unable to sell about a third of the new production. For them, it will turn into a nightmare as they drown in inventory, the costs of carrying it, and the losses inherent in selling vehicles that have been sitting on the lot too long.

Their only hope is that the government or automakers will introduce incentives to lure people into dealerships. Some are already underway, such as a subsidy for vehicles with engines of less than 1.6 liters. But vehicle sales to consumers would have to skyrocket to meet the phenomenal and still growing production. Unlikely. Next step will be production cuts and layoffs. When that proves insufficient, expansion plans will be trimmed. Another sharp hissing sound from the China bubble.

Populist and nationalist movements sweeping the world are another threat to China, globalization’s biggest winner, and are a visceral rejection of China as the world’s biggest exporter. For a fiasco in the making, read.... Death Of Globalization Will Shatter China.

 

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Tue, 06/12/2012 - 06:32 | 2517236 Element
Element's picture

For a fiasco in the making, read.... Death Of Globalization Will Shatter China

 

China will have its ups and downs just like every other communist ... sorry, ... every other market-economy.

They will not 'shatter' they will develop in fits and starts because they must.  It's 1.3 billion industrialising people so that's going to be an economic biggie even if they 'collapse' ... pausing ... for a bit ... like the rest of us.

Wed, 09/05/2012 - 08:52 | 2764037 redd_green
redd_green's picture

Communist?  Hehe, good joke, Element.   There's nothing Communist about China or the Chinese government.   It is a bruital, corrupt dictatorship.      "Industrializing"?   Sorry, it has industrialized, past tense.  

Tue, 06/12/2012 - 05:40 | 2517221 ebworthen
ebworthen's picture

You mean socialism hand-in-hand with crony capitalism doesn't work?

Better send a wake-up call to America, STAT!

Of course, the bankers and politicians and the indolent would like to bleed this beast as long as possible but it can't hurt to try and wake up the slumbering sheeple, can it?

Wake up you Republicrats and Demicans!  We are China.  The banks are our government.  The Kleptoligarchy reigns supreme!

Turn off NPR!

Turn off Fox!

Turn off the MSM!

Your chains of servitude are being forged!

Kill the beast!

Tue, 06/12/2012 - 02:52 | 2517163 asxguru
asxguru's picture

The article seems a little far fetched to me but then I keep thinking about Japan and what happened to their economy in the late 80's. Are we going to see a repeat here?

Tue, 06/12/2012 - 02:50 | 2517160 AurorusBorealus
AurorusBorealus's picture

You have the right of it.  Overproduction... The properly Marxist-educated Chinese technocrats understand overproduction.  They will enforce wage increases in yuan... (the gold is in their pockets to play the currency devaluation game... because they can win the end-game in terms of global trade).

Tue, 06/12/2012 - 02:15 | 2517138 q99x2
q99x2's picture

'Populist and nationalist movements are sweeping the world'

Can we impeach Obama now?

Tue, 06/12/2012 - 00:28 | 2517025 Yen Cross
Yen Cross's picture

 China is not going to lose " FACE".

   3 Trillion yuan, and a bunch of ass holes @ the top!
Mon, 06/11/2012 - 22:45 | 2516815 Lord Koos
Lord Koos's picture

China has 500,000,000 people in poverty. The US would be good with half that amount of growth.

Mon, 06/11/2012 - 23:45 | 2516968 masterinchancery
masterinchancery's picture

The correct number is about 900 million, and with global demand starting to contract, and Vietnam having a superior workforce, don't look for that to change anytime soon.

Mon, 06/11/2012 - 22:16 | 2516732 andrewp111
andrewp111's picture

Cars piling up in dealer lots. That is reminescent of scenes in an old British TV show on the Great Depression. Such things preceeded the Great Crash of 1929.

Mon, 06/11/2012 - 21:40 | 2516638 Yes_Questions
Yes_Questions's picture

 

 

I have an old truck, about 160k miles on it.  She needs a fraction of the cost of a new vehicle, even one of those new beaters, to buy another 100. 

Maybe the US auto market is mature enough for me to do this, but, I have no motivation to buy a new vehicle.

 

Mon, 06/11/2012 - 21:37 | 2516632 acaciapuffin
acaciapuffin's picture

and when will these Chinese cars be coming to a wal mart near you?

Mon, 06/11/2012 - 21:34 | 2516624 Zero Govt
Zero Govt's picture

Wolfy, China is still growing (allegedly) at over 7%

i'm still hugely cycnical of Western scribes knocking Chinas growth when 7% in the West would be our wildest and wettest of dreams

why are we/you knocking them for such stand-out performance?! 

Mon, 06/11/2012 - 23:47 | 2516976 masterinchancery
masterinchancery's picture

Because it is bogus--building empty cities, useless infrastructure, and cars that can't be sold is not GDP, it is accounting fraud.

Tue, 06/12/2012 - 01:20 | 2517087 Poor Grogman
Poor Grogman's picture

Central planning 101...

Mon, 06/11/2012 - 21:43 | 2516648 acaciapuffin
acaciapuffin's picture

Sure that would be amazing in the west, however our markets are larely tapped out. There are only so many more flat screens, cars and ovens people want or need to buy. Where as China is still trying to buy these items. This is why they are growing at the rate they are and lets not forget, not having any enviromental regulations, social safety net, massive military (?) and dirt cheap labor. Could you imagine the rate of growth the US could have if we didn't have to have envirometnal regulations or pay FICA?

Mon, 06/11/2012 - 22:10 | 2516720 Zero Govt
Zero Govt's picture

i can imagine America (and the whole planet) without enviromentalists ..i've been dreaming of their taking their own lives to reduce population stress for a decade now ;)

and yes i can imagine the growth rate without Govt intervention, another dream of mine for 2-3 years... i can imagine zero Govt and the simply massive and immediate benefits of free markets and no legions of parasites sucking society dry

one day we'll get there after 2,000 year of repeating the same mistake

Mon, 06/11/2012 - 22:48 | 2516823 Lord Koos
Lord Koos's picture

Simple answers to complex problems, don't think so...

Mon, 06/11/2012 - 21:30 | 2516618 pasttense
pasttense's picture

Anyone have any numbers on the number of automobiles per capita in China vs the U.S.? I expect the China number is a very small fraction of the U.S. number. Thus there would be room for explosive growth. I expect the problem is the vast majority of the Chinese simply can't afford them.

Mon, 06/11/2012 - 23:28 | 2516870 Taint Boil
Taint Boil's picture

 

 

 

They can’t afford them and they certainly can’t drive them.

Beware Of Drivers In Asia

Let's not leave out India

 

 

Tue, 06/12/2012 - 00:39 | 2517037 Yen Cross
Yen Cross's picture

 It is really nice to have you back!

Tue, 06/12/2012 - 00:28 | 2517028 walküre
walküre's picture

Nice compilation.

Good economy for body shops over there?

At that rate they will be burning through the inventories quickly.

How can they afford insurance and how can the insurance afford to deal with all the accidents? They must have a deductible min. 50% of the value of the car.

Mon, 06/11/2012 - 20:56 | 2516530 reader2010
reader2010's picture

An oil-dependent China has been one of long cherished dreams of Standard Oil, and one of the most important calculations for the Pacific War against Japan. Now it has almost come into a reality,  thanks to those cooperating Party bosses since 1978. 

Mon, 06/11/2012 - 20:21 | 2516419 curly
curly's picture

The TV show Top Gear (the British one, not the terribly bad American knockoff) did an episode supposedly in China, on Chinese clones of cars designed elsewhere.  Hilarious and insightful as usual.  I'm surprised they made it out of China.

Like macroeconomics and CxO spreadsheets, it's only about units and minimizing direct costs, only the things that you can easily "measure".  especially when model doesn't fit w/reality -- just interchangeable transportation units, interchangeable currency units, and interchangeable employee units.  Never mind about that quality and value thing.  A Trabant counts the same as a BMW, a BYD F8 or Lifan counts the same as a M-B.  And we're all interchangeable worker units, comrade.

 

Mon, 06/11/2012 - 19:55 | 2516403 azzhatter
azzhatter's picture

I worked in China for a number of years and one stat that amazed me was private auto ownership growth. I believe the story was in Beijing circa 1995 there was a total of 4,700 private autos owned. By 2009, it was was like 4 million. 

Mon, 06/11/2012 - 20:48 | 2516508 testosteronepit
testosteronepit's picture

In 1996, first time I was in Beijing, the new expressways they’d just finished were just about empty! Now they’re parking lots.

Mon, 06/11/2012 - 19:46 | 2516376 Stuck on Zero
Stuck on Zero's picture

China may buy more cars than Americans but I'd wager that the bunch of our vehicles outweigh theirs 2:1!  Hell, a Ford F-350 maximum hauler outweighs three of their dinky little Lifans and Great Walls.

Mon, 06/11/2012 - 21:45 | 2516651 acaciapuffin
acaciapuffin's picture

ALso you could look  up their abysmal crash records. There are a couple of Videos on Youtube that show what happens when you crash in a little Chinese made car.

Tue, 06/12/2012 - 02:23 | 2517141 ThirdWorldDude
ThirdWorldDude's picture

All the vehicles made in China and/or India have horrible crash test results. I'd rather drive a Trabant.

 

Chinese:

http://www.youtube.com/watch?v=LmpDM8wVrUQ -  limousine Brilliance BS6 (the name tells it all);

http://www.youtube.com/watch?v=g5SRyG6UR2A - another passenger car;

http://www.youtube.com/watch?v=D827IxEJVS4 - a small truck, my all-time favorite and a definite proof that the Chinese consider themselves expendable.

 

Indian:

http://www.youtube.com/watch?v=D827IxEJVS4 - Tata SUV;

http://www.youtube.com/watch?v=tSs7pf5uqZY - Zenn passenger vehicles;

Mon, 06/11/2012 - 23:45 | 2516966 Freddie
Freddie's picture

They are made like paper mache.   The question is in such a crowded but still big country - where do they park all those cars?

Mon, 06/11/2012 - 19:45 | 2516373 shovelhead
shovelhead's picture

This calls for STIMULUS!

Renimbi for rickshaws!

Mon, 06/11/2012 - 19:22 | 2516324 Uchtdorf
Uchtdorf's picture

Well, rots of ruck.

Mon, 06/11/2012 - 18:57 | 2516288 Snakeeyes
Snakeeyes's picture

As ug;ly as OUR mixed bag? See Fed income report!

http://confoundedinterest.wordpress.com/2012/06/11/fed-survey-median-fam...

Mon, 06/11/2012 - 18:57 | 2516286 nmewn
nmewn's picture

Blobbing up and popping.

Mon, 06/11/2012 - 21:18 | 2516595 TheFourthStooge-ing
TheFourthStooge-ing's picture

nmewn said:

Blobbing up and popping.

Quite true for the road of Chinese citizenism; for the roadside of Chinese citizenism, blobbing up and plopping. But hey, with eternal nature of Chinese citizenism, you have to take the good with the bad.

As Confusious say, "smelly tongues look just how they felt."

http://www.youtube.com/watch?v=mUxN4gyarEw

Mon, 06/11/2012 - 22:04 | 2516709 nmewn
nmewn's picture

lol...Agent AnAnus say...man who eat jelly beans, fart in technicolor. I gotta hand it to our resident boiler room commie...he stays on message.

Tue, 06/12/2012 - 00:32 | 2517031 walküre
walküre's picture

What's AAA for Chinese road side "assistance"? Something that comes and wipes?

 

Mon, 06/11/2012 - 18:50 | 2516275 SaveTheBales
SaveTheBales's picture

Sounds like someone needs to pray for hail.

We should probably buy them and give them to Brussels and the District of Criminality.  Its apparently a long way back to Sanity from Brussels, and I've been told you can't get there at all from DC.

 

Mon, 06/11/2012 - 18:35 | 2516242 Omen IV
Omen IV's picture

i wonder what the average price per vehicle is compared to usa small car 4 cylinder - price?

Mon, 06/11/2012 - 19:19 | 2516316 mjk0259
mjk0259's picture

More in China. Camry 29K vs 21K.

And Chinese buyers generally pay cash or almost all cash.

Tue, 06/12/2012 - 05:50 | 2517226 ebworthen
ebworthen's picture

You mean they have jobs and money ;-)

Tue, 06/12/2012 - 00:34 | 2517033 walküre
walküre's picture

They got money to burn that's for sure. Pay cash for that new car that depreciates 40% in a year!

I wondered already what that interest rate decrease is going to accomplish. People that get credit don't need it and people that need credit don't get it. What difference does the rate make?

Mon, 06/11/2012 - 18:13 | 2516191 zorba THE GREEK
zorba THE GREEK's picture

It seems to me, the half-lives of bubbles are declining at pace.

Tue, 06/12/2012 - 02:04 | 2517124 DoChenRollingBearing
DoChenRollingBearing's picture

MANY, MANY automotive bearings coming out of China very cheap....

Tue, 06/12/2012 - 03:32 | 2517179 Uber Vandal
Uber Vandal's picture

Usually not a good sign when you dip your finger in the hub to check the lubricant level, and it comes out a gray, silvery color.

 

 

Mon, 06/11/2012 - 18:12 | 2516189 mjk0259
mjk0259's picture

Considering they went from nearly zero to 18 million in 25 years, 40 million by 2020  is still a decent guess.

Don't forget the government can MAKE you buy a car if they feel like it.

 

 

Mon, 06/11/2012 - 21:03 | 2516550 Manthong
Manthong's picture

Aw.. even the most economically deranged socialist or communist system in the world wouldn't think of making you buy a car any more than they would think of making you buy health insurance.  

Mon, 06/11/2012 - 21:30 | 2516613 Zero Govt
Zero Govt's picture

Yeah imagine that, being forced to buy health insurance

..or forced to buy car insurance

..or forced to pay taxes to a Govt you don't support one iota on any issue under the Sun

..what kind of a world would that be eh?

Mon, 06/11/2012 - 21:41 | 2516643 fourchan
fourchan's picture

i see what you did there.

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