China on Track - The Car Industry

In my last post of just a few days ago, in a broad (and rather rambling) review of the world economy, I discussed Chinese mercantilism, and also the shift of wealth to the East. One commentator quire reasonably pointed out that I was lumping together too many economies, which is entirely fair. However, within the discussion, I did single out China, and that is because the economic power developing in China is founded, in part, upon mercantilist policy. This, and the rise of China, have been longstanding themes, and I have sometimes faced criticism, in particular the size of the US economy in relation to China is given as a reason for my over-egging the pudding.

There is little doubt that, per individual, the average wealth that remains in the US far exceeds that of China, though the current economic adjustments are seeing that differential shrinking (and the full impact has yet to be felt - see previous articles for the underlying real size of the US economy). However, having said this, the speed at which China's economy is growing is quite astounding. I return to this subject, as a couple of articles captured my attention in my general browsing of the economics/business news.

The first comes from the Telegraph, and has the following to say:

Monday's data echoes figures released last week from Global Trade Information Services which showed that China shipped products worth $957.7bn in the first 10 months of 2009, while Germany sold goods worth $917.7bn.

"One thing is for sure, China is the leading exporter globally," said Zhang Yansheng, director of the Institute of Foreign Trade of the National Development and Reform Commission, to the state media.

However, analysts cautioned that the strong year-on-year growth in Chinese exports should be put into context: the comparison month of December 2008 was a dire one for trade, as the economic crisis brought factories and shipping companies to a standstill.

There are caveats within the report, and I deliberately included these. However, the trajectory is firmly upwards. I suspect that the improvement in the position of China for exports (relative to the rest of the world) is set to accelerate, unless of course a new era of protectionism commences. At the moment, this is a hunch based upon the ongoing importation of technology into China, the diffusion of that technology, the growth in the number of graduates entering the labour market (both from internal and overseas universities), and the mercantilist policy of currency manipulation.

The other related piece of news that grabbed my attention is the matter of China becoming the world's largest car market. This from the Times:

There have been few worse years for the US motor industry than 2009. Sales plunged, two of the big three — General Motors and Chrysler — went into bankruptcy and now it emerges that the US market was outstripped by China for the first time.

The China Association of Automobile Manufacturers revealed yesterday that a record 13.6 million light vehicles were sold in China in 2009, compared to around 10.4 million in the United States.

Small wonder then that carmakers gathered in Detroit for the city’s Motor Show — widely considered the most important on the world circuit — are increasingly looking to China for sales growth.

This is not the end of the story, however, as the wider story also supports the idea of the accelerating rate of China's development. Again, from another article in the Times:

Chinese automakers have already begun to signal their ambitiousness. Geely’s recent takeover of Volvo, Beijing Automotive’s purchase of technology from Saab and Sichuan Tengzhong’s impending purchase of the Hummer brand are viewed as mere appetizers for more extensive M&A as the decade unfolds.

Whether these purchases will make money in their own right is questionable, but these kinds of purchases will serve to accelerate the technical capability of Chinese car manufacturers. We should remember that it was not so long ago that South Korean cars were viewed as poor quality, and also that Japanese cars were once considered to be very poor quality. In isolation, these purchases are not that meaningful, but I suspect that we will see more and more companies with strong technical bases appearing on the shopping list of Chinese companies - in many, many sectors.

In some respects, this is just an acceleration of a process of learning that has long been played out. For example, when I first arrived in China, I met a person from the UK who was literally teaching a Chinese company the basics of effective ceramic manufacturing. I forget the name of the company, but suspect that many of us will probably have the products from the company somewhere in our homes.

As a summary, China is learning fast, and is putting in place the necessary antecedents to move up the value chain. A few years ago, the prospect of China developing a competitive homegrown car industry would have been seen as wildly optimistic. However, it is very likely that, as the Chinese car industry consolidates, grows in experience, it will emerge as a serious competitor. China is increasingly securing the resource, training the people, and importing the technology to take on the best of the rich world. It has some way to go, but we should not underestimate the potential for rapid development - in all sectors.