The New York Times has a story today about the troubles in the Chinese automobile sector and how they’re affecting the Big Three. If you’re in a hurry, the chart above sums it up very succinctly: China’s production capacity is only half used. That’s really ugly. And as the market is currently in decline, that looks to get worse.
There’s a number of reasons, and we’ll touch on them. But here’s the one that hits close to home: The Big Three are getting hit disproportionately hard. If you want to know one good reason Ford stock is in the toilet, here’s this tidbit: “Ford sold 70 percent fewer cars in China in January than it did in the same month a year earlier”.
The issues negatively affecting the overall market are a combination of a general slowdown of China’s economy, thought by many to be worse than the official statistics. January sales were down 18% from a year ago. Also, younger Chinese are turning away from buying private cars to increasingly embracing mobility services:
The ride-hailing business has dealt automakers an unexpected blow. The global auto industry has worried for years that companies like Uber and Lyft could eat into demand, particularly among young customers. That appears to have happened in China, experts say, where dense urban cities have enhanced the appeal of Didi Chuxing, the Chinese ride-hailing giant. Didi now carries twice as many riders in China each year as Uber carries in the rest of the world combined. “None of the multinational automakers foresaw how disruptive that would be to demand,” said Bill Russo, a former chief executive of Chrysler’s operations in China.
Most American brands are getting hammered because of the same reasons elsewhere in the world: they fall in between the still-desirable German luxury brands and Tesla and the cheaper domestic, Japanese and Korean brands (Cadillac is so far still doing quite well). Younger Chinese car buyers are increasingly turning to domestic brands as quality improves and as a reflection of national pride.
As an aside, it’s important not to assume that Chinese consumers are not discerning about quality. The biggest single reason Jaguar Land Rover (“JLR”) has taken such a terrible tumble in recent months is because of consumer backlash due to quality issues. There have been protests at dealers, and outcry on social media.
Obviously the only solutions to the massive overcapacity are exports or shutdowns. The Chinese have been eying the American market for years, but the current political climate over tariffs makes that almost impossible. And the same applies to the Big Three using their excess capacity with their joint ventures to export back to the US. Buick’s Envision CUV comes to the US with a 25% tariff:
Exports from China to the United States of Detroit-brand cars are “a no-fly zone,” said Michael Dunne, the chief executive of ZoZo Go, an automotive consulting firm in San Diego. “It’s just too politically sensitive.”
Detroit’s fortunes in China could still improve. A final trade deal could leave the door open to Chinese exports. The Chinese government could take steps to rev up domestic growth or empower its consumers to buy cars.
“A stronger economy will lead to stronger auto sales,” said Irene Shen, a General Motors spokeswoman.
But for now, Detroit’s Big Three are struggling in China — particularly Ford.
nyt: China Shifts and Detroit’s Big Bet Goes Sour
Look like it’s the Chinese equivalent of the 1920’s for their auto industry. Makes me wonder how many Chinese marques will still be producing by 2025.
It could also be the Chinese equivalent of the 1950s with some acquisitions or mergers who made it like Nash and Hudson who formed American Motors and other who failed like Packard-Studebaker.
China is such an odd combination of capitalism and communism and not the kind of relatively free market as is found in other industrialized countries. Will China be willing to let its auto industry shake itself out like young auto industries did in the US and Europe many decades ago? I kind of wonder about that, and a government like Chinas has all kinds of tools in the kit to make sure that the brunt of a slowdown hits foreign makers before it hits domestic ones.
As I recall Ford got a really slow start in China so when things get rough it does not surprise me that with the shallowest roots it will have trouble getting through this storm.
YAY Cadillac!!!
With that much excess capacity, manufacturers will resort to the old standby, competing on price. In that case, the ones with the deepest pockets survive. Some, like SAIC and FAW are government owned, so, presumably, their pockets are as deep as the government’s checkbook.
What will probably happen is the Chinese government will gift the surplus cars to any country that does not have an internal auto industry to protect. I wouldn’t give a plugged nickle for the future of any non-Chinese car operation in Africa, because they will not be able to compete.
I think you’re right about the Africa angle, whether as assistance or actual trade. 50 million capacity is madness for that market, even as incomes rise. One of the big challenges is for all the central government’s power, it still has to deal with the provinces, each of which has its own automotive interests. Shutting down unproductive state-owned industries has proven very difficult, especially outside the high-growth East coast.
Such a crazy market. When I lived there in 2001-03, it was still mainly business cars – the extended rear Passat I had was a big seller – but personal cars were popping up. You had odd situations, like the fact VWs were built by 2 different JVs – Santanas and Passats by SAIC, Jettas by FAW. Made for some very interesting branding.
Hard to believe, but the ENTIRE African new vehicle market is less than 1.5 million. When the excess capacity in China exceeds the entire capacity of North America, no market can absorb the extra units.
What will probably happen is the Chinese government will gift the surplus cars to any country that does not have an internal auto industry to protect.
Not. China doesn’t give stuff away. Not their MO.
Seriously, these car companies are each businesses. The government can’t (and won’t) just tell them to send free cars to Africa or anywhere else. It’s not how things work there.
Not sure about that. ‘One Belt One Road’ would appear to be giving under-developed countries much needed infrastructure, ostensibly for free although it is said this will come with certain debt obligations on the part of those recipient countries. Roads need cars, and I’m not sure some of these countries would have rigorous enough anti-dumping laws – let alone negotiating clout – to resist the influx. Maybe not free, but supercheap enough to sustain a level of Chinese production during a domestic cyclical lull.
And this is not an anti-China comment nor a partisan dig, when we enter these sorts of discussions realpolitik cannot be left as the unspoken elephant in the room.
Many good points. But keep in mind that China’s huge overcapacity in automobile production is not a new or temporary phenomena; it’s been that way for some time. State owned auto companies used cheap debt to keep expanding, on the assumption that demand would continue to grow rapidly. it’s quite a lot like the “phantom cities” that were built with assumption that folks would move in from the countryside. Which largely has happened, because they were forced to.
Production over capacity is an issue in many industries, based on very cheap credit. Which is one of China’s major risk factors: massive debt by the various local regions. The decisions to expand are typically based mor eon local political considerations than on demand.
To get to the point: yes, the whole gist of the article is that China wants to expand export sales of cars. But unless the government directly subsidizes them, these companies are not likely to gift them.
There’s a difference: these massive infrastructure projects are financed initially by the state, with expected benefits. Such as selling cars to these countries, which they already do anyway.
it’s one thing to stimulate demand for car exports with infrastructure; it’s another thing to gift the cars after building the roads.
Possible, yes. But I haven’t ever read about any such thing.
I had to put it out there, but I’m not sure myself.
China’s overall plans need growth of at least 6.5 – 7%; very hard to sustain in this era of relative stagflation. Plus the way they play their currency produces short term benefits, but longer term no-one knows because… this is all a completely new economic paradigm.
President Xi has only this week called an emergency meeting of party higher-ups because things are not going well domestically, tariff wars being only part of the problem. Desperate times call for desperate measures, particularly as he is trying to entrench himself as leader beyond the statutory two terms.
It is gobsmacking, as others have mentioned here, that China’s manufacturing capacity is so enormous. Definitely appreciate you putting these newsstands pieces up, and the CCommentary is, as ever, equal to the task.
I’m not sure some of these countries would have rigorous enough anti-dumping laws – let alone negotiating clout – to resist the influx. Maybe not free, but supercheap enough to sustain a level of Chinese production during a domestic cyclical lull.
Quite right. China has a long history of dumping product on export markets to keep it’s factories humming. I have lost count of how many times the US has filed a dumping complaint with the WTO.
So the Chinese trade representative walks into the office of the trade minister with a proposition: “those Toyotas and Nissans that are imported make your trade deficit worse. We will ship cars to your country at a 50-70% discount to a Toyota. That would help your trade deficit and, as the cars are so much more affordable, more of your citizens can buy a car and improve their standard of living.” If there is no domestic auto industry to push back, it’s a win for the country. If the trade minister isn’t sure, then the Chinese can add “we will donate school buses, police cars, fire trucks, any sort of vehicle your government needs but you don’t have the budget for”.
Do that in enough third world countries and the Chinese would move a lot of metal.
It’s funny, I think the Fiesta seems like a fine car, but I guess the Chinese are as unenthusiastic about it as Americans. How is it selling in Europe?
Don’t know about the rest of Europe but the Fiesta’s been Britain’s best selling car each year since at least 2015 (and probably a long time before too).
I actually meant Focus, not Fiesta, but it’s probably true for both cars.
Thanks for this. One of my favourite YT Channels is Winston Sterzel’s ‘SerpentZA’. He’s been living in Shenzhen for a number of years, and has produced a few clips on Chinese cars and car culture. His videos offer lots of fascinating insight into the national psyche.
https://www.youtube.com/user/serpentza/search?query=chinese+cars
I like his channel too, but his video of the Chinese asking a “fake Mercedes” van told me he either doesn’t know enough of what he is talking about, or didn’t care.
A couple of thoughts from my experiences with the Chinese primary aluminum industry 10-15 years ago:
When aluminum smelting took off in China, companies built smelters willy nilly all over the place. There was huge overcapacity, and a shortage of alumina (raw material to make aluminum which is not found in China). Maybe they’re making too much over the oversupply of auto capacity, things seem to go that way in China. Witness the shared bicycle debacle.
When I was there in the early 2000’s there were French cars everywhere. I asked my translator “Where did all these French cars come from?” and he told me that the French companies got into the domestic manufacturing game early, and were initially popular but the brands were in serious decline at that point. Big bosses wanted Audis, and middle managers wanted Jeep Cherokees. There’s not the same level of brand loyalty, if Audi’s weren’t cool the next year and Cadillacs were then great for GM, but that is also a double edged sword.
So this doesn’t really surprise me, the overcapacity will get built then absorbed or abandoned. North American manufacturers will do great until the next big thing comes along, and the domestic industry will steadily improve.
Yes I bought Chinese manufactured brake rotors and pads for my Citroen Xsara several years ago the rotors are still on it, the PSA/Dong Feng parts seem ok to me.
It seems like China is where the U.S. was 30 years ago.
Paul, there are big changes happening in China as I write this. All my clients in Vancouver are wealthy Chinese real estate developers. The bubble in China has burst. It is only a matter of time for this to spread. For example, my business is way down this year over last.
The Chinese government has made it very difficult to export money. Finally, Chinese don’t like being bullied by your president. This accounts for the drop in Ford sales.
Except that this doesn’t seem to have curbed their appetite for Cadillacs.
>>But for now, Detroit’s Big Three are struggling in China — particularly Ford.<<
Kudos to Ford. I read that those great GM sales translate into not very great profits. It seems the GM plan was to make their money shipping Chinese product to the US, like Apple did.
Not gonna happen. So GM is now heavily committed to China just when the world knows or should know, that China will do to them what they did to Apple – steal their tech and then watch the Chinese buy similar "indigenous" product.
Ford would be foolish to spend its US billions to try to buy share in a market that is destined to be dominated by Chinese manufacturers.
Super interesting chart. I imagine it will involve a further push for export conquests, specially in countries without a loca industry, like Chile. On top of Chinese brands, Chevrolet sells Sail, Cavalier and N300 importa from China here, for instance. Maybe others will join.