China Car Buying Woes

Jim Brown
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Just wanting a car in China and having the money to buy it does not guarantee you a place in the drivers seat.

Back in May four friends each put down the equivalent of $7,500 for a deposit on an Audi Q5, which sells for the equivalent of $72,000 in China. Now in late December only one of those friends has gotten a car. He paid the dealership an additional $5,700 to expedite delivery and got his car within a week.

The growth in auto sales in China is nothing short of amazing. In 2000 China's auto sales were one tenth of U.S. sales. Today they are 50% higher than U.S. sales. The result is permanent traffic jams and roadblocks to sales at every turn.

Beijing announced last week they were going to limit the number of license registrations to 240,000 per year. This is down from 780,000 in 2010. The average car license sells for $7,200 on the secondary market.

China put a sales tax on SUVs and sports cars with low gas mileage of up to 40%. They are increasing the sales tax from 7.5% to 10% on cars with small displacement engines. They had cut it to 5% in 2009.

Auto sales have been growing at a 25% annual rate for the last decade. In 2010 that spiked to 34% and automakers have been running manufacturing plants 24/7 to keep up with demand. Analysts believe growth will decline to 10% in 2011 because of the restrictions on licenses and the high tax rates.

While first tier cities are working to curb the growth of autos and the permanent traffic jams the second and third tier cities are still promoting autos or at least not restricting their sales. Traffic is not yet a concern in the smaller outlying cities. People want the cars so they can go where they want, when they want and not be dependent on public transportation schedules.

Industry experts worry that once production catches up to demand, China will favor domestic producers and add rules that discriminate against foreign producers like Mercedes and Audi. For companies who have joint ventures in China they are not allowed to have more than a 50% stake.

China already strategically manipulates almost every other relationship with outsiders. They have done this in the solar power sector and they are doing it now in the rare earth pricing and exports.

China is expected to develop significant overcapacity in auto manufacturing by 2015 and you can bet they will be undercutting everyone on price in order to accumulate market share. Let's hope there is enough oil left in 2015 to keep those cars running.

With China already producing more than 12 million cars a year and very few old cars being removed from the roads it is hard not to expect China's oil demand to continue growing rapidly. Their oil consumption is on track to grow +12.5% in 2010 and another +12.5% in 2011. They currently consume 8.9 mbpd, second only to the USA.

In the U.S. we are also producing over 12 million vehicles per year and growing. Only our favorite vehicle is the SUV with an average MPG of 15. Only about 5% of the U.S. market is committed to the green revolution. SUV sales jumped +41% in the first 11 months of 2010 while sales of energy efficient cars declined. The sales of the Toyota Prius hybrid declined -1.7%. Sales of the Corolla and Honda Civic also declined. Sales of cars and light trucks rose +12% year to date.

Americans are fond of big cars and big engines. This does not bode well for sales of the Chevrolet Volt and the Nissan Leaf, both electric hybrids.

President Obama and Nancy Pelosi have both said higher gasoline prices over $5 would be beneficial because it would force Americans to be more energy efficient. I find it strange that he would rather the economy fall back into recession on $5 gasoline than see a few Volts remain unsold. The government is offering $7,500 tax incentives to purchasers of the Volt.

The government is going to make us all fuel savers by 2016 because the new mileage standards will require an average of 34 mpg. The SUVs are going to be powered by smaller and smaller engines so be prepared to go slower and carry less.

Jim Brown

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