China is now the biggest auto market in the world.
In 2009 sales of passenger cars, buses, and trucks grew by 49% to a total of 13.6 million units. With U.S. sales falling 21% in 2009 to 10.4 million that pushed the United States to No. 2.
Three things you should know about the Chinese auto market as you start looking for a play on the growth in this market.
First, some of the acceleration in sales growth this year was a result of government stimulus programs that are set to be reduced in 2010. In 2009 China cut the tax on new vehicles to 5% and offered cash bonuses—to the tune of a total $732 million—to anyone who bought a new car to replace an old one. (If it sounds like the U.S. cash for clunkers effort, it’s because the two very similar programs were both designed to goose auto sales.)  In December Beijing announced that it would increase the tax on new vehicles with engines of 1.6 liters or smaller to 7.5%.
Second, China had 117 automakers at the end of 2008. With many of the industry’s biggest companies, such as Volkswagen and Hyundai announcing plans for major expansion by 2011, the sector is ripe for consolidation.
Third, the vehicle mix in China isn’t the same as in the United States. For example, sales at General Motors’ (GM) joint venture with SAIC Motor, China’s biggest domestic automaker, are dominated by minivans that sell for as little as $4,000 each. Minivans made up about 60% of sales at the GM/SAIC Motor joint venture.
Purchasing tax for small cars (smaller than 1.6cc) will increase from 5% to 7.5% in 2010; 2) Subsidy for the old-for-new scheme will increase to RMB 5-18K/unit from the current RMB 3-6K/unit; 3) The subsidy to Auto-to-rural scheme will be extended to end of 2010. Such a stimulus policy is expected to continue to support the domestic car sales market in China. Most of China’s auto demand is for new cars instead of replacement.
“…it would increase the tax on new vehicles with engines of 1.6 liters or smaller to 7.5%.”
Jim; I think you meant 1.6 litters or larger.
This is the “Guilded Age” of China. But who is their Mark Twain and who will write their “Theory of the (Chinese) Leisure Class”? I imagine that Thorstein Veblen’s theories roughly apply to the Chinese nouveau riche with some modification to take into account different Chinese cultures. And they are probably as susceptable to conspicuous consumption as anyone else.
One of the fastest growing companies that manufactures cars in China is BYD. If anyone remembers a year or two ago Warren Buffet made an investment in this company and purchased it a $0.50 a share. Present share value is $8.75 (BYDDF). You can also purchase this company as an ADR as BYDDY, but it is seriously expensive at over $85 a share. I own personally own BYDDF. Buffet invested in this company for their ability to produce electric batteries for electric vehicles. They also do batteries for cell phones. He hasn’t sold yet so their is probably still alot of upside to this stock. One thing to note with BYD is they make everything for the car. The manufacture the airbags, steering wheels, and most of their own components. It is a complete vertical integration.
As far as diamond dust, please come see China. They are eating our lunch across the board. Also, they are the owners of all our debt. As far as cars, the quality can improve as complete assembly of the car (gap tolerances that those of use who work in the industry notice). Their tolerances are not as tight on the local products, but Volkswagen, Ford, and all the major players have good quality. Local players such as Chery, BYD, and Geely all have acceptable quality for the actual price of these cars.
All my local friends want cars. It doesn’t even matter if they use the cars sparingly. Having a car is a status symbol, even if it is just used on the weekends. I know some very frugal people too, but the car is on the top of the list. I personally do not have a car or driver. Public transportation is excellent and cheap (less than $0.43 per ride). Coming from the US, I am tired of car payments, car insurance, etc…
The insurance companies are the same for all the basic insurance type policies and include PNGAY, LFC, & insurance broker CISG. There are more but these are the basic ones I know. Most friends use Ping AN (PNGAY).
Well, Jim is being a bit sensationalist here, since he clearly implies (without just saying so) that while Chinese unit volume has increased to #1, there’s a ways to go before the value of US vehicle sales is approached. Hence, the market leader remains the USA.
If you sell a ton of diamond dust for $500 and I sell one .2 gram diamond for $1000, my diamond sales still surpass your diamond sales and I remain the leader.
How will this affect the price of NEP?
Hmmm. What about insurance companies? Also, if an automobile is seen as a “must have” for an increasing number of middle-class families, this might drive an uptick in domestic consumption.
Dave,
Thanks! Very nice. Evidendently Jim isn’t the only brain around here….
Outstanding point Dave! I think you just made the important connection.
I’m more interested in seeing how this will affect oil consumption and demand …
Jim,
Would you then invest in a company for example like China Automotive Systems (CAAS), an automobile parts supplier…since they have exposure to pretty much every automobile company whether domestic or foreign inside of China?