Auto Industry Risk: Keeping Cars off China's Streets

The municipal government of Guangzhou will use lotteries to lower the number of cars in the city, according to the New York Times. It is the third largest city in the People’s Republic. If the action spreads to most other large, highly populated areas of the country, the attraction of the world’s largest automobile market to the world’s largest automobile manufactures will fall off. Or at least their profits from China will. And that, as much as another recession, will hurt their profits.

The collapse of the U.S. car market during the recession and the increase in sales in China due to the size of its population pushed North America into the number two spot as the world’s largest region for car and light truck sales. Sales of cars and light vehicles in the People’s Republic are as high as 18 million a year now, compared to estimated U.S. sales, which will be no better than 14 million in 2012. But the situations in the two huge markets have flip-flopped. The Chinese market was growing in the double digits until last year. Sales in the United States were falling, but they have surged since late 2011. American car sales numbers for August were impressive. For some manufacturers, they were the highest in five years. Virtually every major car maker had improved sales in the U.S. compared to August 2011.

China’s vehicle sales have leveled off for several reasons. The most obvious of these is that the government’s incentives for citizens to buy new cars lapsed in 2009. The incentives were set primarily to get people to trade in older, less fuel-efficient models. So far in 2012, cars sales have barely risen at all, according to the China Association of Automobile Manufacturers.

China was supposed to save the car industry. Almost every manufacturer that does business in Europe loses money there. General Motors Co.’s (NYSE: GM) earnings have been repeatedly crippled by red ink from its Opel and Vauxhaul divisions. Like many of its rivals, the largest car company in the world by unit sales faces powerful unions and local governments that have reason to keep as many workers employed as possible. The market in Europe likely will not recover for years.

The United States was almost a lost cause for car companies when sales of new vehicles dropped below 10 million in 2009. But, with leaner operations, many manufacturers make money in America as sales have rebounded. That will not be enough to balance trouble in Europe and trouble in China — if its gets worse. The Chinese trouble is compounded by the fact that every car maker of significant size has piled into the People’s Republic because of the magnitude of the market. The battle for share has become vicious.

China has decided, at least in Guangzhou, that it is better to let people breathe relatively clean air than it is for everyone to have a car. If the policy becomes a national one that covers all of the countries large municipalities, the auto industry in the People’s Republic will take a powerful blow.

Douglas A. McIntyre