Tuesday, July 14, 2015

China Auto-Makers Find Out the Answer to the Question: "What Could Go Wrong?"

The mainstream media is beginning to write about China in a more desperate tone.  A recent USA Today article on auto sales in China is an excellent example.
For the last 20 years, China has been the auto industry's promised land. A population of 1.4 billion, a growing middle class and projections that sales would continue to soar created a "what could go wrong?" attitude.
The China Association of Automobile Manufactures reduced the sales forecast for 2015 from 7% to 3%.  The year is half over, how can they already be off by half?  General Motors, the second largest auto-maker in China after Volkswagen, is discounting models by up to 20%, yet growth for the first half of the year was only 4.4%.

Not only is the auto industry having a demand problem, it is having a supply problem.  The China auto market is a classic example of mal-investment supplying artificial demand.  According to the same article, "Manufacturers have been engaged in a massive race to boost production that has outpaced demand and dented profits." Car markers built 270,000 more cars in 2014 than they sold, the widest gap since 2007.  General Motors sold 246,066 vehicles in June in its largest market.  On top of deep discounts to drive current demand, car makers will have to reduce production to burn off inventory.  That is bad news for commodities and wages.