China Continues to Ride the Tiger

Analysts are predicting a significant drop in European auto sales in 2010, possibly by as much as 10.4 percent according to J.D. Power. The drop, however, will not come because Europeans have lost interest in cars, or because the economy is expected to further worsen. It will come because of incentive schemes that pumped up 2009 sales. (Financial Times, "Carmakers Plan for Slow Year as Incentives End".)

While we can debate the merits of incentivizing major consumer purchases as a tool for jumpstarting an economy in recession, many auto analysts feel that such tools only amount to a shell game in the auto industry. An auto analyst with whom I met in Shanghai earlier this year tells me that these kinds of incentives (such as tax cuts and "cash for clunkers" schemes) only pull future planned purchases into the current period. The inevitable result will be a dip in future sales.

While it appears the Europeans are prepared to stop robbing Peter to pay Paul, the Chinese are preparing to double down. According to a report from Reuters, China's Vice Minister of Commerce announced yesterday a continuation of one of the schemes that provided a boost to 2009 sales. These schemes provide a rebate to consumers who trade in old cars and household appliances for new ones.

In addition, the Finance Ministry and National Development and Reform Commission have apparently agreed to extend this year's 50 percent sales tax cut on vehicles with 1.6 liter and smaller engines.

But that's not all! According to this report in Automotive News China (free sub. required), the tax cuts will be extended to ALL passenger cars in 2010.

Rather than take the chance of a significant slowdown, China is apparently counting on the size of its auto market to continue expanding so rapidly as to wash out any potential future drop in sales.

More info on whether analysts find this plausible as I find it...

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Edit:

Well, we have an explanation from one of China's top auto industry experts already! Please see Bill Russo's comments below. As I suspected, there seems to be the hope that the rapid pace at which China's auto market is growing will largely make up for the eventual drop in sales that would occur when (if) incentives are removed.

(Thanks for the comments, Bill!)

As the World Turns: Geely and Volvo

Plenty of ink has been spilled and pixels lighted covering the potential purchase of Volvo from Ford by Geely. A quick Google search will turn up more than enough material about this merger that simply refuses to be consummated, so I won't even attempt to link them.

Today, however, there was finally a fresh piece of news on this story in the Wall Street Journal's "China Real Time Report". WSJ's China auto journalist, Norihiko Shirouzu reports that a "knowledgeable person" close to Geely is expressing doubts that the merger will ever happen -- at least not in the way it has been presented over the past several months. Apparently there has been a last-minute request from the government to let one of the state-owned auto companies in on the deal.

“Whether the deal can be made or not now depends to some extent on the attitude of the government. Geely fears there may be troubles ahead, especially when it goes through the approval process for the Volvo deal,” says the knowledgeable person.

“The government thinks that the future belongs to state-owned companies,” the person said. “China’s quick recovery from the financial crisis gives them more confidence and justification to favor state-owned companies.”

This is a charge we have begun to see more of in recent months.

As the Economist recently reported, there is a move in Shanxi Province to nationalize many of the hundreds of privately-owned coal mines. The ostensible reason is to curb the massive number of deaths that occur in these mines, but as John Garnaut of the Sydney Morning Herald reports, there also appears to be an undercurrent of a desire to bring these mines permanently under the control of the state -- to the extent that the private owners are being personally bankrupted in the process. (Though I must admit that I shed few tears for the private owners given their deplorable safety records. Let us hope the government will be more concerned with the lives of the miners.)

Is this the beginning of a trend away from private ownership back toward state control? China would not be alone. Such discussions are doubtless being held within governments all over the world as people seek to find a scapegoat for the global financial crisis.

Government takeovers of private industry aside, I see even more reasons to doubt the eventual takeover of Volvo by Geely.

I visited a Ford dealership in Beijing this week where I was told that the new Fiesta and the Focus are flying off the lot. These are Ford's hottest sellers in China. They are both (in my opinion) sporty and attractive cars that have a good reputation for quality.

One thing I noticed immediately upon seeing these cars is the striking similarity of their hood lines with those of recent Volvos. And while I'm not an engineer, I wonder if this demonstrates the difficulty Ford would have separating the Ford and Volvo entities. The reports that Ford has IP (intellectual property) concerns with a potential sale do not appear to be unfounded.

Furthermore, GM has also recently backed away from its previous decision to sell Opel to its "preferred bidder" Magna. And Ford, being in far better financial shape than GM, may also find it easier to just keep Volvo and turn it around than to take a multi-billion dollar loss on the sale.

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Compare the hood lines on these pics of the Volvo S80, the Ford Focus and the new Ford Fiesta: