The Sky Is Falling! China Grows “Only” 9%!

Bloomberg reported today that “China's economy, the biggest contributor to global growth, expanded at the slowest pace in five years as the financial crisis cut demand for exports. Gross domestic product rose 9 percent in the third quarter from a year earlier.”

Economy caught SARS?

To juice up the news, Bloomberg said that “China's expansion was the weakest since the severe acute respiratory syndrome, or SARS, epidemic slashed growth in the second quarter of 2003.”

To old China hands, this conjures up some of the worst memories, when China came to a grinding halt for months, while everybody had to stay home and was allowed to go to the shop once a week with guns pointed at you, worn by soldiers in HAZMAT gear. Can’t get any worse than that.

Only 9% growth?

The New York Times rightly said: "Policy makers in almost any country except China would be delighted with 9 percent growth, particularly given the financial turmoil that was worsening at the end of the third quarter." Well, maybe not: A 9% rise of GDP would make the rest of the world scared that central bankers will raise interest rates to stem off inflation.

Only 9% growth? China simply goes from an unsustainable, unhealthy and inflationary double digit growth to a healthier level.

Sure, export growth in China slowed substantially. It had to. Since the second half of 2007, the Chinese government tried everything to push down exports to a more sustainable level.

However:

- Retail sales in China rose 23.2 percent in September from a year earlier, matching the gain in August and close to the fastest pace in at least nine years.

- Urban disposable incomes for the first nine months rose 14.7 percent to 11,865 Yuan from a year earlier. Rural cash incomes climbed 19.6 percent to 3,971 Yuan.

- The formerly red-hot Chinese light vehicle market (which includes passenger vehicle and light commercial vehicle segments) is expected to slow in 2008, but it still will grow at very healthy rates. J.D. Power expects Chinese light vehicle sales to come in at 8.9 million units in 2008, which would be an increase of 9.7 % compared to 2007.

- Much of the decline in exports had been caused long before the U.S. meltdown. The cause was the appreciation of the RMB, which was actually a reflection of the rapid depreciation of the USD which took place until July 2008. As gasgoo.com said, "For most local auto parts makers, the impact on exports brought by the demand slowdown of the global market triggered by the financial crisis will be less than that of the RMB appreciation." It’s just that nobody was looking.

The stock market knew it long before.

The Chinese stock market could crash from 6000 at the beginning of 2008 to around 2000 now without anybody outside the country batting an eye. Since January, the Chinese stock market lost more than 60%, and nobody wanted a bail-out.

The Dollar comes back. The Yuan barely moves.

If anybody has noticed, the USD took a sharp turn and appreciated dramatically since July. Now is this reflected in the USD/CNY currency pair? Have a look at the chart:

Until July, the Yuan pretty much appreciated against the USD as the Euro did. The Dollar went down, the Euro and the Yuan went up.

What happened when the USD started rising like mad, starting in July? The USD/CNY rate barely budged. The EUR/CNY rate did move.

Bloomberg says that the Chinese "central bank has stalled gains by the Yuan against the Dollar since mid-July, protecting jobs in export industries."

Hmmm. The chart says they did just the opposite. When the Yuan should have gone down sharply against the USD along with the other currencies (except the Yen, but that's a different story) the Yuan barely moved.

The chart says that the Chinese central bank may have propped up the Yuan against the US Dollar. China also took other measures to cool down their overheating export machine, such as not refunding parts of the VAT for exports, and actually charging export tax on certain items.

Yuan due for a fall.

Expect the USD/CNY rate to change radically within the next months, latest after the U.S. elections. We expect the Yuan to drop against the USD, the easiest way for the Chinese government to make Chinese exports more attractive. In the first half of 2008, this would have been a rather unpopular move. But now, the world has other problems than watching the CNY/USD currency pair. The New York Times opined: "With the United States heavily dependent on China to buy the Treasury bonds needed to finance a bailout of the American financial system, the Bush administration has stopped criticizing China’s trade and currency policies."
If anyone does complain, the obvious explanation is that in light of the strength of the Dollar, the Yuan must follow suit and go down.

And when the USD will drop when America will crank up the presses to print money to finance the bailout and two wars, the Chinese can keep the USD/CNY level, and make their goods even cheaper in Euro terms.

More toggles to be switched

Likewise, the tax measures designed to dampen exports are expected to be lifted. Sharply lower commodity prices and equally lower transport prices make low wage countries like China even more competitive.

China is the country that keeps the world economy alive. The Chinese have the incentive and financial wherewithal to keep it that way. They have nearly unlimited room to grow, while Western markets are saturated and while especially European and Japanese demographics indicate shrinking markets. Like it or not, out of this recession, China will emerge stronger than ever.

Chinese Car Exports: A Non-Starter?

For the past years, auto makers in Europe and the U.S. looked to China with hope, and with trepidation. They hoped the booming Chinese market would lift their worldwide sales. It did. They feared the Chinese would export cars en masse, swamping Europe and the U.S. with cheap vehicles. They did not. China didn't ruin Western markets. Western banks and brokerages did.

Weapons of mass destruction.



Nevertheless, red alert was sounded each time a Chinese car appeared at an auto show in Frankfurt, Geneva, Paris, or Detroit. Weapons of mass destruction were deployed to ward off a Chinese invasion: Chinese cars were crashed, and grisly results were published, sometimes coincidentally timed adjacent to those auto shows. An insider close to the matter said: “If you have a lot of money, you can crash a lot of cars. There’s always one crash that looks real horrible. That’s the one you will see on YouTube.”

What you see here is the infamous Landwind test by the German AUTO Club ADAC. The test was rumored to have been under the influence of German auto makers, and that the impact was at a higher speed than necessary. A later test by TÜV confirmed that the Landwind met all mandatory safety criteria according to ECE R94. But the damage was done, sales of the Landwind remained in the doldrums.

This time, the markets crashed.

This year, also quite coincidentally, there were no terrifying crashes of Chinese cars before the Paris Auto Show. Likewise coincidentally, Edmund’s AutoObserver reported from the show: “The era of Chinese car exports may have ended before it even began.”

Only two Chinese auto companies showed up for the show. One was Brilliance, BMW’s joint venture partner in China. The other was the French distributor of Shuanghuan Automobile. Neither garnered a lot of attention.

This time, no cars needed to be crashed. What did crash, were the auto markets. Auto sales in the U.S. were down 26 percent in September. In Japan, car sales are at their lowest level in more than thirty years. European markets are faring poorly.

Chinese new car exports drop.

This was immediately felt in Chinese new car export numbers. August witnessed the first monthly decline over recent years in China's car exports, due largely to shrinking demand overseas. According to the China Association of Automobile Manufacturers (CAAM), China sold abroad 44,400 motor vehicles in August 2008, down 22.18 % from the previous month, or 11.29 % from a year earlier. Analysts see this trend to accelerate as the full impact of the market crash is being felt, and as the cars in the pipeline from China remain unsold.

In 2007, China had exported a total of 612,700 vehicles, up 78.95 % from a year earlier. For the first eight months, the total Chinese auto export value rose 36.5 percent year-on-year. Experts expect a decline for the rest of the year.

Parts fare better.

For auto parts, the picture is not as grim at all. Sure, according to Gasgoo, Chinese parts makers who focused on foreign new car manufacturers, saw their sales “drop significantly this year.”
Manufacturers who target the after-sales market fare much better “with many people preferring to maintain cars rather than buying new ones.” The semi-official newspaper China Daily said: “the US and the European customers' preference for China-made auto parts, which are more competitive in price, provide much better opportunities.”

How to Survive the Great Depression. Again and Again

This auto parts store made the New York Times . The paper made the store an example of how to survive tough times.

A reporter went to the wheat country in northeastern Colorado, in search for businesses that are immune to the slowdown.

He found, Marsau’s, an auto parts supply shop that opened right before the Great Depression in 1928. 80 yeras later, the store is still going strong. “Everybody else quit, or died,” John C. Wray II, the owner of Marsau’s, said to the New York Times.

This store is a perfect example that auto parts are recession-proof. Marsau's survived all depressions and recessions since 1928.

While U.S. new car sales dropped to historic lows, the U.S. after-sales service market maintained 5 % growth in the first half of the year as more and more people preferred to maintain cars rather than buying new ones. This trend will increase dramatically as new car sales drop dramatically.

Worldwide Auto Sales: The Good, the Bad, and the Downright Ugly.

J.D. Power and Associates, one of the few reliable sources on worldwide automotive data, have released their forecast for 2008 auto sales. Executive summary: It won’t be pretty.

All corners of the world will be affected by the slowdown. But not all corners will see equally dismal sales. The mature and saturated markets will be hit hardest by a sudden lack of appetite for new cars. Emerging markets will continue to grow – albeit at a much slower pace. The after-sales business will profit from people holding on to their cars.

The Good: China.

The formerly red-hot Chinese light vehicle market (which includes passenger vehicle and light commercial vehicle segments) is expected to slow in 2008, but it still will grow at very healthy rates. J.D. Power expects Chinese light vehicle sales to come in at 8.9 million units in 2008, which would be an increase of 9.7 % compared to 2007. Still, the number will be much tamer than the 24.1 % growth achieved in 2007. (The Indian light vehicle market will remain in its infancy. 1.8 million units are expected to change hands in 2008, nearly the same as in 2007. Considering that India has approximately the same population as China, 1.8 million units are pretty much a non-event when measured with a global scale.)

The Bad: Europe.

Light-vehicle sales in Europe as a whole are projected to fall to 21.3 million units in 2008. This would be a rather tame 3.1 % decline compared to 2007. For Western Europe, where markets are more saturated, J.D. Power forecasts a decline to 15.6 million units sold, which would be 7.5 % less than 2007. Eastern Europe will still see growth. Eastern European unit sales are anticipated to be 5.8 million in 2008, a surprising (giving the circumstances) jump of 11.3 % compared to 2007. However, growth in Eastern Europe is also forecasted to slow significantly.

The Downright Ugly: U.S.

J.D. Power and Associates forecasts total U.S. new light-vehicle sales to plummet to 13.6 million units in 2008, a 16 % decline from the 16.1 million units sold in 2007. For 2009, J.D. Power and Associates sees even lower numbers: 13.2 units. J.D. Power says the numbers may be 200,000 lower, depending on how the 4th quarter of 2008 may play out.

Net/Net.

J.D. Power doesn’t think that the market will recover anytime soon. Jeff Schuster, executive director of automotive forecasting for J.D. Power and Associates, said that “any truly pronounced recovery appears to be more than 18 months away.” And it may get worse before it gets better: “While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse,” Schuster said. “While mature markets are being impacted more severely than emerging markets, no country or region is completely immune to the turmoil.”

No crisis for after-sales.

Like other analysts before, J.D. Power observed that “approximately two-thirds of the decline in retail sales can be attributed to consumers delaying vehicle purchases.” People are keeping their vehicles longer. Keeping their vehicles longer means more parts and labor are needed to keep the vehicles running. Buying a new car or even a used car can be delayed. But if the brakes fail, it’s either buy new ones or walk. One of the few recession proof segments in this collapsing economy appear to be parts and services.

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GM wants their money back

Bob Lutz, GM's vice-chairman, said GM is making plans to move money from Chinese operations to the U.S. in order to to compensate fo North American losses. Since nobody seems to want to buy the Hummer brand, which GM put up for sale, repatriating profits from China is one of the few options left for GM.

Desparate times.

Draining the huge, vibrant and growing China market of funds while the rest of the world tanks doesn't sound like such a good idea, but these are desperate times. "We do not rule out such a possibility under current conditions,” Lutz said. (Translation: We are already preparing the transfer.)

GM had been doing really well in China since they started producing vehicles here in 1999. This has changed. The Volkswagen Group again is China's market leader in passenger vehicles. GM is also being outsold by Toyota in passenger vehicles. The gap may widen if Detroit pulls out marketing and development funds from China.

Already, General Motors Corp. Asia Pacific President Nick Reilly said the company's vehicle sales in China fell in August and September from a year earlier. He also isn't too sure about GM's previous forecast of of 11% to 12% overall sales growth in the Chinese auto market for 2008. "The market is too unpredictable to forecast with any credibility," Reilly said. (Translation: Prepare for the worst.)

SAIC won't like it.

Their joint venture partners will not be amused by GM wanting their money back when cash is king and credit is an endangered species.

General Motors has several JVs in China through mergers of local companies jointly held with the Shanghai Automotive Industry Corp (SAIC) - one of China's top three automakers. SAIC is also an important JV partner of Volkswagen, and if the money flows back to Detroit, SAIC may like the Germans even better. Volkswagen doesn't need the money, their stock is skyrocketing (see real time chart on the left) while the rest of the world is going to the toilet.

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Chinese Numerology: Complicated Car Ban in Beijing

In the last few years, Beijing became more famous for its thick smog than for the Imperial Palace. Not wanting to be embarrassed during the Olympics, and after a lot of head-scratching, the City of Beijing had resorted to what insiders called the “Nigeria Solution:” Cars with license plates ending in an odd number were allowed to drive on odd days, cars with even numbers on even days of the month.

The Nigeria Solution.

In the 70’s, the same had been tried in Lagos, Nigeria. The city of 7 million suffocated in gridlock. Lagos instated the odd/even rule. A friend of mine, who was sent to Lagos by Volkswagen to help launch their new plant in Nigeria, called the rule “the best marketing campaign we ever had – and it was free.” People who had the money simply bought a second car and kept on driving.

Beijing’s car dealers hoped the city would keep the odd/even rule after the Olympics. Instead, China’s capital came up with a rule that could have been invented by Kafka:

• Cars with a license plate ending in 1 or 6 are not allowed to drive on Mondays.
  


• Cars with a license plate ending in 2 or 7 are not allowed to drive on Tuesdays.
  


• Cars with a license plate ending in 3 or 8 are not allowed to drive on Wednesdays.
  


• Cars with a license plate ending in 4 or 9 are not allowed to drive on Thursdays.
  


• Cars with a license plate ending in 5 or 0 are not allowed to drive on Fridays.
  


• Cars with temporary plates, or with plates ending with a letter, are treated as “0” cars: No driving on Fridays.
  


• Police, ambulances, fire trucks, busses, taxis and other public transport vehicles are exempt.
  


• On Saturday and Sunday, everybody may drive.
  


• The rule applies only within the 5th Ring Road.
  


• The rule applies to privately owned vehicles from 6am to 9pm.
  


• For company-owned or government-owned vehicles (except for the ones mentioned above) the rule applies around the clock.

Nightly mysteries.

How the authorities will notice whether a car is privately or company owned is anybody’s guess. My car is owned by my company. But they would have to pull me over and check my registration to find that out. Or will they follow motorists at night, call in their plate, and pull them over if it's a Friday, if the plate ends in a 5, and if the vehicle is registered with a company? They might just do that in Germany. But TIC: This Is China.

It gets even more complex: Each month, the deck will be reshuffled, and new days will be announced that are off-limits for certain numbers. By end of October, a Beijinger with a 1 as the last number on his plate has hopefully gotten it in his head that on Mondays, he has to take the subway or hitch a ride with his neighbor. Come November, he will have to unlearn everything. In November, it could be a Wednesday. And it could be a Tuesday in December. Or a Friday. Nobody knows. The traffic bureau will announce the new days a week before the start of a new month.

Numerology gone wild

It is no surprise that Beijing is a bit overwhelmed by the scheme. One would think that the Chinese are more attuned to numbers. Numerology is big in China. Vanity telephone numbers are unknown in China, because Chinese supposedly remember numbers better than letters. But even to the numerically superior Chinese, the scheme appears to be a bit too much. On Monday, I saw many cars with 1 or 6. On Tuesday, I saw a lot with 2 or 7. On Wednesday, many cars with 3 or 8 were on the road. They weren’t just on the road, they were on broadcast television. Footage of scofflaws who ignored the new rules ruled the airwaves. Nevertheless, I had to tell my driver that he would not be allowed to pick me up at the airport on Thursday, because of the number 4 on our plate. He never had heard of the rule, and he looked at me as if I'm a "250" - that's what the numerically superior Chinese call a daft person.

Beijing’s car dealers have new hopes that people will find an incentive to own a second car once the rules sink in. But what happens to the poor folks who have the bad luck of owning one car that has a 1 as the last number of the license plate, while their second car has – dammit – a 6?

Now you really need a second car.

Many had acquired a second car before the Olympics and had made sure that the plate ended in an odd number if the first car’s number was even. And now the investment is supposed to be for naught? The Traffic Bureau has mercy with these poor souls. They can go and trade in their license plate for an non-conflicting number. And with two cars, they can happily drive on all days of the week.

According to just released figures, 2 million more cars are expected to take to Beijing’s roads by 2012, bringing the total to 5.4 million. If the numbers-scheme stays in place, we could see 2 million more new cars by next year.

PS, Oct 17,2008

Shanghai will adopt a watered-down version of the capital's traffic restrictions, Gasgoo says. Starting in November, vehicles belonging to the government or state-owned enterprises will be banned from the roads on one out of five weekdays in a system based on license plate numbers. Privately owned cars will be unencumbered.


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China’s auto parts export recession-proof, rises 34.9%.

What slowdown? Parts power ahead. By Bertel Schmitt, CEO Sinamotive Group (HK) Limited.

Despite the global slowdown, the Chinese auto parts industry powers ahead. In the first seven months of 2008, the value of China's auto-parts exports grew by 34.9% year on year (y/y) to $8.88 billion, China’s customs bureau said. From January to July 2008, China exported $ 8.73 billion worth of auto-parts.

Foreign invested companies and joint ventures exported $4.56 billion auto-parts, up 31.6% y/y, accounting for 51.4% of the total.

The three major destination markets of China-made auto parts are the U.S., EU and Japan. Parts for $2.69 billion (+8.8%) were sold to the U.S.A., parts for $1.6 billion (+39.2%) were sold to the EU, and parts for $1 billion (+36.8%) were shipped to Japan. These three markets contributed 59.6% to the total value of China's Jan-Jul auto-parts export.

This validates my company's previous analyses:

1.) The parts market, especially when targeted at after sales, is recession-proof.

2.) After diminishing growth in the U.S.A., more and more Chinese parts go to Europe.

3.) The main drivers of this growth are foreign companies, who use China as a low cost production base and sell the product under their own brand name at high margins. Bosch China for instance reported that their sales are expected to reach 2.3 billion Euros, which would be a 30% increase over last year. Jay K.Kunkel, President Asia Continental AG, said that the only risk is "not investing in China."

4.) With lower raw material prices and lower shipping costs, we expect further increases, especially in the after sales segment. The OEM segment should also grow, because the world’s auto makers try to off-set their lower sales by purchasing lower cost parts in China.
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About the author: After having worked as a Marketing Consultant for Volkswagen AG for three decades, Bertel Schmitt changed sides in 2005 to found Hongkong, Beijing, and Hamburg based Sinamotive, a company specialized in sourcing low cost high quality auto parts in China. The company sells to major wholesalers in Europe.