The global car industry is likely to begin a second round of bankruptcies as the current economic upturn falters, says the carbuyers’ Dog & Lemon Guide.
Editor Clive Matthew-Wilson says:
“Those who optimistically see the green shoots of global economic recovery should take a look at the motor industry for a reality check. While it's nice to be optimistic, it's better to be realistic: for the last three or so years, the economic pessimists have been consistently right, while the economic optimists have been consistently wrong.
“Take a look at the motor industry, for example, which directly and indirectly employs more than 50 million people and contributes US$2.6 trillion annually to the world’s economy. The motor industry, even in good times, has about 60 million customers a year for its new cars. The problem is, current global capacity to produce cars is about 90 million. The two figures didn’t stack up even before the recession; they stack up even worse now.
“Currently, the optimists in the motor industry are pointing to the fact that, after a period of severe slump, sales are improving around the globe. However, this ‘economic turnaround’ isn’t an economic turnaround at all; it’s simply that governments are paying people to buy cars. As soon as governments stop paying people to buy cars, the sales will stop.
“The government-sponsored ‘Cash for Clunkers’ scheme has just ended in America, after generating 700,000 sales in barely three weeks. Car companies are very pleased indeed. However, analysts at edmunds.com have pointed out that America’s car industry is now ‘likely to experience a painful hangover.’
“This hangover is already being felt in Australia, where the government offered major incentives for businesses to buy new vehicles; sales leapt, until the subsidies for larger businesses stopped. Then sales started nosediving again. Official July sales figures revealed the market dropped almost 27% compared with June. Just over 75,000 vehicles were sold in July, a 10% reduction on July last year. A second Australian government subsidy, this time for small businesses, finishes at the end of this year, meaning the slump in sales is likely to be far more extreme in 2010.
“The same pattern is being repeated all over the world: China’s car sales are also booming, thanks largely to government help. Like their Western counterparts, the Chinese car companies are clearly hoping for a quick end to the recession, then business as usual. However, there’s a global capacity to produce 90 million cars per year but less than 60 million customers. No amount of jiggling the figures can alter this basic fact. Like a pin and a balloon, this oversupply of cars must eventually meet the harsh reality of an undersupply of customers.
“Many Western car companies are cutting back on production, but the Chinese are going full steam ahead, apparently with great success. However, one must be cautious about taking Chinese government statements at face value; the Chinese government lies about everything, including economic data.
“Many Western economists accept Chinese government economic figures as gospel because they want to believe them. The Chinese figures are economic good news in a world that’s awash in bad news.
“The Chinese government knows that a serious economic downturn would trigger massive unrest, so the Chinese government, along with the companies it owns or controls, has been pumping the economy like there’s no tomorrow. Ultimately, this pumping has to stop, and when it does, the bubble must burst, probably with catastrophic consequences.
“Shanghai–based Andy Xie, one of the few economists who accurately predicted the economic bubbles that triggered both the 1987 Southeast Asian financial crisis and US sub-prime financial crisis of 2008, has described China’s current economic policy as a ‘giant Ponzi scheme.’
“Nor is Xie alone in his views. Hans Redeker, the global head of foreign exchange strategy at BNP Paribas, says, ‘Shanghai equities have reached the same extreme as in late 2007. The country will have to cut credit growth, and when this happens, Shanghai equities and commodities will suffer. That is what could bring this global rally to a halt.’”
Matthew-Wilson adds:
“The recent sudden drop in exports to the West triggered a rash of bankruptcies in China, but these were mostly among independent entrepreneurs. Most large companies in China are run by the government or by businessmen with strong links to the government. Thanks to government assistance, these businesses have been largely protected from China’s recent economic difficulties. Thus, Chinese steel mills are pumping out steel and Chinese car factories are pumping out cars, whether they have customers or not.
“News of a recent rush of new car sales in China should be treated with suspicion, because it’s not uncommon for Chinese businessmen and bureaucrats to heavily exaggerate sales, while unsold vehicles gather dust in some Shanghai warehouse. Some of these sales are real: large numbers of Chinese people are buying cars, thanks to a government that has been loaning money freely to practically anyone. This type of sub-prime (meaning dodgy) lending is exactly what triggered the current American collapse.
“China's two top banks have recently started to rein in credit in an effort to halt excessive speculation, but their efforts may be too little, too late; China’s bubble may deflate or burst; in the end, the outcome will be much the same.
"Cars are a luxury item in China. As soon as the everyday Chinese realise their economy is in trouble, private car sales will stop overnight. The massive Chinese car industry, which currently relies on local sales for its survival, will fall into crisis. So will the steel mills that supply these car companies. So will the Australian mines that supply the iron ore to China. So will small countries like New Zealand, which rely heavily on both the Chinese and Australian economies.
“Since the end of World War II, the world’s economy has enjoyed an unprecedented period of sustained economic growth. Most people, including most economists, now regard this style of economic activity as normal and correct. History suggests otherwise: economic growth in the last sixty years has been the happy exception to a very grim economic rule. This unprecedented period of sustained economic growth was sustained, to a large extent, by a sea of cheap oil.
“Most people don’t want to consider what will happen when the law of impermanence kicks in and this endless growth goes into reverse. Currently, the world, and especially China, is geared up for an ever-growing expansion of the supply of goods and services. Unfortunately, the best current scientific figures suggest that there’s neither the cheap energy nor the customers available for this growth to continue. Therefore, it seems that the economic pessimists are going to keep being right for the foreseeable future.”
Car industry facts:
- Auto manufacturing has a global turnover of around US$2.6 trillion (1.6 trillion pounds), more than the gross domestic product (GDP) of France but less than that of China, Germany, Japan, or the United States.
- The auto sector contributes 3-4 percent of the total GDP of the United States, and over 6 percent of EU-15 GDP, according to consultancy Frost & Sullivan.
- Around 9 million jobs worldwide, or over 5 percent of the world's manufacturing workforce, are directly linked to making vehicles and parts. Each direct auto job supports at least another 5 jobs indirectly, with many more people employed in related service and manufacturing jobs, meaning more than 50 million people earn their livings from the industry.
- The U.S. automotive industry employed 850,000 people in manufacturing jobs at the end of 2008, according to Frost & Sullivan.
- Japan produced over 11.5 million vehicles in 2007, and accounts for around 725,000 jobs. Japanese car industry body JAMA estimates 2009 domestic demand for passenger cars and commercial vehicles at 4.86 million units, which would mark a fifth successive year of decline.
- Before the crisis hit, Russia -- where around 755,000 people are employed in the auto industry -- had been widely forecast to overtake Germany as Europe's biggest market in 2009, with car sales now expected to fall by around 50 percent in that market this year. Around 3.2 million automobiles worth a total of US$69 billion were sold there in 2008.