TREND #2: Global Redistribution of Assets by Non-Chinese Companies to Capture China Market Growth

August 8, 2009

by Bill Russo

As noted in the introduction to this series, I believe we are witnessing the early stages of an economic revolution: a shift of the global center of gravity of economic strength towards the east which will result in profound changes in numerous industries. As an economic bellwether, the automotive industry captures a great deal of interest.

We are fortunate to be living in historic times. While in the grip of the most severe economic contraction since the 1930s, it is in such times – and only in such times - that truly transformational structural change is possible. The global car industry has long suffered from overcapacity resulting from overly ambitious assumptions for market growth combined with optimism surrounding whatever product or technology was being offered. Ambition and optimism are the first victims of a recession as businesses struggle to realign to a new world economic order. This translates into a major redirection in capital spending and asset reallocation as businesses attempt to reconfigure themselves in order to regain a profitable footing. Many businesses are reallocating assets from slower to higher growth markets, or otherwise selling assets or disposing assets deployed in their weakened home markets.

It is interesting to note how the financial crisis – while impacting the entire global economy – has been felt to varying degrees in different markets. While negative GDP growth is anticipated for 2009 in the Euro Zone, the US, and Japan, stimulus measures taken in China have yielded remarkable growth in many sectors of its economy. China's stimulus plan provided UD $588 Bn of investment, of which 45% was targeted at infrastructure development. The Auto Industry Revitalization Plan implemented in March 2009 included specific measures to spark consumer demand for automobiles, including:
  • Establishment of eight development goals for the industry from 2009 to 2011 to ensure domestic growth of automobile production and sales
  • Reduction of half of sales tax for 1.6 liter or smaller cars
  • Implementation of policies to boost auto sales in the countryside including subsidy for new minibus or light truck sales for rural residents

All indicators point to the likelihood that China will exceed its 8% GDP growth target in 2009. Taken in the context of a longer time horizon, it is also apparent that in the past three decades, the major Asian growth economies of China and India are in fact returning towards their historic share of world GDP. The net result of these developments has been a significant redistribution of the relative strength of the global automotive markets.

In fact, China has surpassed the US in automotive sales for each of the first 6 months of 2009, selling 6.1 million vehicles over this period compared with 4.8 million new vehicles in the US. In fact, since 2003 China’s vehicle market has more than doubled in size from 4.56 million units to 9.67 million units (in 2008). Of this total, 61%, or 5.91 million units, represent passenger vehicles (extract the buses, trucks and other commercial vehicles). The China Association of Automobile Manufacturers forecasts sales for 2009 will top 11 million vehicles, revising upward its prior forecast of 10.2 million vehicles. Given recent developments, and barring a sudden and unexpected recovery in US demand, China will likely surpass the US market in sales for the overall calendar year 2009.

Looking forward, Global Insight has forecasted that the Asian markets represent the largest growth potential in the global auto industry…with a combined 4.7% compound annual growth rate over the next 10 years (compared with 2.9% in NAFTA). Within Asia, 54% of that growth is expected to come from China. As a result of these developments, the global automotive industry must fundamentally rethink its structure in terms of regional allocation of capital investment and capacity.

Global automotive companies have been forced to radically and often involuntarily rethink their global footprint. For example, General Motors is in the process of completely unwinding its European operations with the sale of its Opel, Vauxhall and Saab brands. In their North American operations, GM is in the process of selling its Hummer and Saturn brands, and terminating the Oldsmobile and Pontiac brand. At the same time, GM has continued to invest in expanding its capacity in the rapidly growing China market. Similarly, Ford has sold its Land Rover and Jaguar brands to Tata Automotive, and is in the process of selling the Volvo brand while simultaneously expanding their China product portfolio.

Perhaps the most impressive example of this trend is seen with Volkswagen AG. Historically the market share leader in China, the world's third largest automaker recently announced that it sold a record 652,222 vehicles in China and Hong Kong in the first half of 2009, up 22.7% year on year. For Volkswagen, this makes China its biggest auto market worldwide for the first time. VW has achieved these results by bringing their most advanced vehicle and powertrain technology to the China mark, having recently launched their 1.4 - 2.0L TSI engine family. With additional plans to introduce their DSG gearbox, VW is poised to take full advantage of the growth in sales of compact cars. VW will continue to bolster their strength in the market this year, with plans to introduce the all-new Volkswagen Golf, along with plans to start manufacturing two new SUV models in its plants in eastern Nanjing and western Chengdu. In May, Volkswagen formed a partnership with China's BYD Co. to jointly develop hybrid and electric vehicles powered by lithium-ion batteries, becoming BYD's first industrial partner.

Clearly, the global center of gravity of automotive strength has shifted east. Those manufacturers who have anticipated this trend and are providing market-relevant products will continue to reap the benefits as the China market continues its inexorable expansion.

In the next posting in this series, I will describe the trend towards "Acquisition of Foreign Assets and Key Development Competencies by Chinese Companies".

Click here to read this article on GLG News
Click here to view article published in Gasgoo.com China Automotive News

Cash-for-clunkers program keeps rolling

Xinhua News Services, August 7, 2009

www.chinaview.cn 2009-08-07 16:05:31

by Jing Zhao Cesarone

CHICAGO, Aug. 6 (Xinhua) -- As a huge hit with consumers and generating about 250,000 incremental sales, the "cash-for-clunkers" incentive program received a new boost of 2 billion U.S. dollars on Thursday night after the U.S. Senate voted 60 to 37 to approve the measure.

Last week the federal government nearly suspended the cash-for-clunkers program because consumers had burned through the budgeted 1 billion dollars in only four days.

Administration officials said that the extension will subsidize the sale of another 500,000 new vehicles. Consumers can get a rebate of up to 4,500 dollars if they trade in gas guzzlers for fuel-efficient vehicles at least through Labor Day in early September.

The White House also supports the extension of the popular program. President Barack Obama has already said he will sign it.

According to government and industry officials, the consumer response had been overwhelming since dealers began offering "clunker" rebates in July.

Across the country, auto dealers have reported a greater rush to stores and rapidly growing sales numbers.

Bill Russo, president and founder of Synergistics Limited, has over 15 years' experience as an automotive executive. "The initial one billion U.S. dollars invested in the program generated approximately 250,000 incremental sales, or an increase of about 20 percent from the normal selling rate. The seasonally-adjusted sales rate was over 11 million units in July, the best performance this year," he told Xinhua in an exclusive interview.

"Companies like Ford and Hyundai saw year-over-year sales increases for July. Others saw improvements over prior-month selling rates," Russo added.

According to U.S. officials, sales under the cash-for-clunkers program have hit 180,000 vehicles so far. The star seller of the "clunker" program was Toyota's Corolla Sedan, which surpassed the Ford Focus as the best-selling vehicle. The Honda Civic came in third.

Under this program, the new vehicles sold average 25.3 mpg, while those traded in only got 18.5 mpg.

Talking about other benefits, Russo pointed out that the program was encouraging American consumers to trade in their cars for smaller, more fuel efficient ones.

"The consumer movement toward more fuel efficient cars may outlast the program, and this will lower fuel consumption and provide environmental benefits," he said.

The majority of the U.S. Senate supports the program. U.S. Senator Debbie Stabenow called the program "one of the most important and successful stimuli we have had. It has not only boosted auto sales but the overall economy as well."

However, other senators disagree and have asked for amendments to the program such as excluding richer consumers and increasing the amount of vouchers to help lower-income Americans purchase vehicles.

Arizona's Republican Senator John McCain, who led the charge against putting any more money into the program, blasted it as an unfair giveaway of taxpayer dollars.

He criticized the program for increasing debt in an unfair effort to subsidize the car industry over other small deserving businesses.

Despite the popularity and initial success of the cash-for-clunkers program, some experts have also voiced concerns.

Russo pointed out that the money allocated to the program will run out very quickly. He said although the cash-for-clunkers program has given the U.S. auto industry a much-needed boost, the sales increases might not last long after the program ends.

In addition, "dealers have complained that the program was very cumbersome and bureaucratic," Russo told Xinhua. "The process for determining (the) rebate level and applying for reimbursements from the government is very difficult. In comparison, China's method of lowering the consumption tax rate was very simple to implement."

Bob Confer, an opinion columnist for the Niagara Gazette, pointed out that cash-for-clunkers will create a temporary bubble very similar to the housing bubble, the bursting of which helped spawn the current economic recession.

Editor: Deng shasha
Click here to view original article posted at www.chinaview.cn


Synergistics blog promoted on sourcing-asia website, targeting German top firms

Sourcing Asia Blog, August 2009

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