China will stay the world leader in cars

Last year, some adventurous analysts predicted that China might be the world’s largest auto market in 2010. I said it will happen “quite sooner, if the slowdown in Japan and USA continues.” Sadly, I was right.

Why sadly? We all know that China’s parts industry is still highly export dependent. While we celebrate China’s new leadership role, factories all over the country close, because their traditional export markets evaporate. After some consolidation, it will be time to re-open them, simply based on domestic strength.

We all know what happened. While Japan and the USA are still in free-fall, China’s vehicle sales surpassed the tally in the U.S. by about 27 percent in the first half of 2009. China’s first-half vehicle sales rose 18 percent to 6.1 million. Sales of passenger vehicles climbed 26 percent to 4.53 million. In the same first six months of 2009, U.S. vehicle sales dropped 35 percent to 4.8 million.

Reacting to this, the CAAM said total vehicle sales in China for 2009 would exceed 11 million units, compared with a forecast of 10.2 million units made earlier this year. By all accounts, US auto sales will be anywhere between 9 and 10 million units in 2009.

Unless the sky will fall in the second half of 2009, China will solidly dethrone the USA as the world’s largest auto market. Contrary to what many predict, China will remain number one. Personally, I am convinced that the CAAM is conservative and diplomatic. If Chinese consumers continue buying cars at the current pace, total vehicle sales in China for 2009 will greatly exceed 11 million units.

There are many who warn that this is a temporary thing. The naysayers claim it is a win because the opponent is weak, not because China is strong. They also say that the reason for the unprecedented growth in China is to be found in stimulus policies.

I don’t believe it. Compared with the stimulus packages in other parts of the world, the measures in China are benign. The USA has dumped hundreds of billions of dollars into stimulus programs, and the market is still going down. After years of complaining about unfair trade practices in other countries, where governments own parts of automakers, the U.S. government has done the same and nationalized two of its three large domestic automakers, GM and Chrysler. It did not stop the bloodletting.

In Europe, huge amounts of money are spent to stimulate the market. Nevertheless, in the first five months of 2009 (the June numbers should be out this week) the European market contracted by 13.9 percent. The numbers would have been worse, would Germany, Europe’s largest economy by far, not have offered 2500 Euros to its citizens who retire their old car and buy a new one. 2500 Euro, one can nearly buy a small car in China for that. This huge stimulus (costing the German government 5 billion Euros) boosted Germany’s sales. Instead of 3 million cars last year, Germany expects to sell anywhere between 3.6 million and 3.8 million new cars this year. In 2010, there will be a rude awakening. The German government announced that the stimulus program will not be extended. The German sales rocket will plunge back to mother earth in 2010, it will leave a big hole with sales of around 2.6 million, experts expect. If this comes true, Germany will be down 30 percent next year.

Nobody in his right mind imagines that the USA will come back to its old 16 million cars per year anytime soon. As Japan ages, it will never come back to where it was. Europe likewise has a demographic disadvantage, its population is getting older, there are fewer and fewer new young customers. Europe will normalize, and then it will slowly fade away over the next 10 – 20 years. Worldwide production capacity is currently estimated at 90 million units per year. Only approximately 50 million units are currently sold. As much as governments may prop up their national auto industries, drastic consolidation in saturated markets is a given.

In front of this backdrop, I don’t share the opinion that China’s leadership in cars is short-lived. In the contrary, I am convinced it only has begun.

According to Credit Suisse research, car ownership in China is just 2.9 percent of the population, or 29 cars per 1000 people. This is one of the lowest rates in the world. In the USA, car ownership is an amazing 80 percent of the population, 800 cars for 1000 people. In many developed countries, car ownership is between 500 and 600 cars per thousand. According to accepted industry metrics, market saturation starts at around 500 cars per 1000 people. China can power ahead for decades without reaching saturation.

China is already the world’s third largest economy, and it is a huge untapped market. Credit Suisse expects car ownership in China to surge fivefold in the next decade to reach 148 cars per 1000 residents by 2020. I believe this is a conservative estimate. 148 cars per thousand, this is approximately where Russia stood in 2003. I am convinced that China’s car ownership will grow much faster. And this time, it will make me happy, not sad.

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.