CC Newsstand: Trouble in China – Running Half Empty – Detroit’s Big Bet Goes Sour

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