By on February 5, 2010

Yesterday, we reported that China wants to be a market of 20m cars in 2012. We didn’t predict that, just reporting the news, ma’am.

A hue and cry ensued:  “Can’t be!”

Commentator ohsnapback, who’s forte is lawyering, a much more complex field than economics, prognosticated an immediate burst of the Chinese bubble, with a mega tonnage of more than 100 times of our housing bubble.  The argument was promptly defused. After all, China doesn’t borrow money. They lend it. Mostly to the U.S.

Then, commentator ra_pro rolled out the really big ordnance: “As I said many times previously: Demography is Chinese destiny as it is Japan’s.” If people would only stop prattling on about demographics, and would check their data first.

Kindly compare age distribution Japan 2020 with age distribution China 2020.

For a real shock, compare age distribution Japan 2050 with age distribution China 2050.

For added spice, factor in that the last Chinese census (it was taken in 2000 and never really finished) is considered as deeply flawed.

Conservative estimates say that around 200m people are living off the books in China, more than the whole population of Japan.

A huge chunk of children have not been reported at all, wrote Daniel M. Goodkind of the U.S. Census Bureau. A correct count of births is the lifeblood of demographic projections. If you miss more than a quarter of the children born in any given year, your projections will be off by 25 percent for generations to come.

Not to worry: If China has something in abundance, then it’s people.

The population bomb turning out as a dud, the sustainability squadron was launched: “There isn’t enough space, water, air or oil to sustain Chinese expansion of 20 million cars per year for a very long time,” quoth ra_pro.

Funny, when Americans bought 17m cars a year, where were the people who said “there isn’t enough space, water, air or oil to sustain expansion of 17 million cars per year for a very long time?” Actually, that number still is a wet dream in Detroit and DC. Our own Ed Niedermeyer pointed out in the New York Times: only if the “salad days of 2000″ are bested, the tax payer will ever have a chance to get his or her money back from GM. Dream on.

Now, for the really scary part. There are more than 800 cars per thousand people in the U.S., more cars than people with drivers’ licenses. In China, there are only some 76 cars per thousand in China. In most developed countries, the number is between 500 and 600 per thousand.

“They’ll never get there,” I hear someone say. “The poor farmers will ride bicycles and oxcarts forever.”

Not so fast.

In Poland 20 years ago, a car was something for the powerful party elite. Today (actually, by end of 2008) there are 420 cars per thousand in Poland.

So for when will we grant China the same standard of living (or at least driving) as the people in Poland? Many Chinese would object at this point. I have to go to Poland on occasion – not that I’m looking forward to it – and last time I was there, the mayor of a good sized town complained that they didn’t have the money to light the Christmas tree on central square. The local KTV in any Chinese village is an orgy of neon all year round.

420 cars per thousand, in China that comes out to a total of 550m cars on the road, if the 1.3b population is correct. Or 630m cars, if the more likely 1.5b population is right. Let’s stick with 1.3b pop and 550m cars, in order to avoid even more anxiety.

How many cars do Chinese have to buy to get to the level of Poland in a reasonable amount of time? Let’s ignore popular wisdom that Chinese cars fall apart the minute you drive them off the lot, and let’s assume a really low scrapping rate. To make calculation easy, let’s call it 500m more cars needed.

(Don’t hyperventilate. That’s only twice the number of cars on the road than in the U.S. and the U.S. has only 1/5th or so of the population of China.)

So how much time do we give China to reach the same standard of living (or driving) as Poland in 2008? 10 years? (Many Chinese would loudly object.) That’s 50m cars per year. Yes, 50,000,000.

You think that’s impossible? Ok, then let’s give the Chinese 20 years to catch up with Poland. (Many Chinese would take to the streets at this point, something the Chinese government really would not appreciate.) That’s 25m cars per year.

Still impossible?

Hint 1: Beijing, a city of 17m people, already has 4m cars. 240 cars per thousand. Poland had 265 cars per thousand in 2000. Shanghai has so many cars that the city has to limit growth by auctioning off license plates. People want to drive so badly, that they pay more for a plate in Shanghai than for some new cars. By the way: The population of Beijing and Shanghai, added together, roughly equals the population of Poland.

Hint 2: A gallon of gas of dubious quality costs $4.45 in Beijing. Using the ever so popular purchasing power conversion, it would feel more like $8. (The junior secretary, who gave me the 8 RMB/liter rate, makes $300 a month – I’m no slave driver, it’s the going rate.) And nevertheless, they are buying cars like there is no tomorrow. An unsaturated market does that.

But what about the gasoline? Ecogeek.com, a publication definitely beyond suspicion of promoting worldwide wastage, recently pointed out: “The president of China’s Innovation Center for Energy and Transportation has said that Chinese officials are drafting new mileage standards that would require an 18 percent improvement in fuel economy by 2015. New cars in China already average about 35.8 mpg and under the new rules, would be required to get 42.2 mpg by 2015. The new U.S. standards require an average mgp of 35.5 by 2016.”

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26 Comments on “The China Syndrome: 50 Million Cars A Year?...”


  • avatar
    Znork

    Yup.

  • avatar
    FromBrazil

    And it’s not just China. My city in Brazil w/ a population of about 3 million has about 1 million cars registered. About 333 per thousand. So even going up to Polish levels would mean sales of around 5 million cars per year (right now they’re at 3). And in my city the rate of ownership is 1 car in 3. In the whole country it’s more like 1 car per 9 people. So when the rest of the country catches up to my city’s relatively low levels it means what? 9 million cars sold per year.

    Anyway all this goes to show why makers are so interested in markets like China, Brazil, India et al.

    • 0 avatar
      Facebook User

      I think you are right.

      My father/mother-in/law (decently well off) in SJC, SP have 2 cars for 3 people….

      My uncle/aunt-in-law that I’m closest with (also in Brazil, also SJC) have 2 cars, 1 motorcycle for a 3 person family (2 adults, 1 10 year old).

    • 0 avatar
      FromBrazil

      Thanks Facebook User for your comment.

      In São Paulo the levels are even higher and are approaching Western European and Japanese standards. The last I read it was at something like 2.4 cars per 1 person.

      In Argentina the level is 5 people per car and in Mexico about 8 per person. But Argentina’s population is 40 million, Mexico’s about 110 million and Brazil’s 190 million. So imagine all the pent up demand.

      In my immeadiate family and ring of friends, just about everybody has a car. My mother and father have 3, my married brother and his wife have 3, too, my single brother has one (supplied by Dad), my sister and her husband 1. My wife and I have 2. So in my family it’s more than 1 per person.

      On the other hand my in-laws don’t have as much luck. Only my father-in-law has one. But mother-in-law and 2 brothers-in-law are carless. Anyway, car ownership used to be a distant dream for the C class in Brazil, and unbelievably impossible for D class members. Now, even C class people can set themselves up to buy a car (even if its usually a secondhand car). And D class people are buying motorcycles in record numbers.

      Anyway it’ll be a challenge to find space for all these new cars. Who knows a virtuos cycle might be in the making.

  • avatar
    rnc

    Bertel –

    The argument was completely diffused once you started using micro examples and started applying them to macro situations. Ex: Japan is expensive, people have nice things, rent is high. All of which is true, they also have a national debt that is twice GDP and is funded almost completely by japanese savings and pension and that dempographic is getting ready to retire w/o replacements to generate future revenues (yes robots can replace people put they don’t buy anything). Yes china has huge foriegn reserves, so does japan.

    The chinese have huge savings, the government has huge reserves (the national does, they don’t report regional government debt (for some reason) and the regional governments are the ones charged with making sure economic growth occurs, how do they do that when the rest of the world is contracting, miricles? No they are juicing the economy and like what bush and greenspan did in 2001-#### the end result will be a massive contraction (for every action there is an opposite and equal reaction), and there will be a correction. Which brings us back to the chinese reserves, if they had any sort of social net comparable to the G7 type economies, those reserves wouldn’t exist. That is why they are juicing the economy, it is cheaper/easier than dealing with the social issues that exist, but what happens when the correction comes?

    Yes china is comparable to the US in the 1850′s (exports based on cheap labor and creditor of the developed world), but the US only had millions of people and immense room to grow and when our correction came in the 1930′s look at what followed with no safety net.

    • 0 avatar
      BDB

      Yeah, I visited my sister in NYC last week. New York is still a beautiful city, rent is high, they have nice stuff, but it doesn’t change the fact we’re in a bad recession.

      Oh, and you know what other country had huge foreign reserves and lent to all the other Great Powers? The USA in 1929, neither of those things helped much after the crash.

  • avatar
    Contrarian

    It’s hard to believe there are enough resources for that many cars. And if the roads are so clogged that they are undrivable (as they clearly would be), then people will stop buying cars and use alternative transportation.

  • avatar
    chuckR

    There is car ownership and there is car driving. At 550million cars, where will they drive? And on what? Do they have enough roads? Do they have reason to drive like we in the US do or will their driving patterns be more like the Europeans or the Japanese?

    • 0 avatar
      ttacfan

      One of the important measures of the rate of the infrastructure development is consumption of concrete. China is so far ahead of other countries on that metrics, it’s hard to fathom. Even India is breathing into USA’s neck.

    • 0 avatar
      John Horner

      They will build them. One advantage of a command and control style economy is that things can get done very quickly.

    • 0 avatar
      BDB

      @John Horner–

      That’s right, but command-style economies grow quickly in the first stages of development and then stall out the more complex (and therefore harder to run) the economy becomes as it develops.

  • avatar

    I thikn this vastly overestimates the number of people–or families–wealthy enough to buy cars in China. Anything resembling our middle class in China consists of about 100-200 million people, or 30-60 million families. see http://www.businessweek.com/globalbiz/content/may2007/gb20070509_866451.htm

    • 0 avatar

      Businessweek. May 2007. That says it all.

      Everybody knows: If Businessweek calls a trend, bail.

    • 0 avatar
      ohsnapback

      The average employee working full time in China makes the equivalent of around $2,100 USD, and even the well heeled in Shanghai make about $3,200 USD.

      But don’t worry, the Chinese will still keep spending the equivalent of 2 or 3 times their annual salaries to buy the basic (Geely or similar) car available to them, nevermind the 6 to 9 times their annual salaries to buy the more advanced and larger cars we call compact and midsize cars in the U.S.

    • 0 avatar
      FromBrazil

      A high level employee of a very large steel maker w/ factories in both Brazil and the US told me recently that labor costs are at about 100 000 USD per employee in the US. And at about 35 000 USD per employee in Brazil. This rings as about right.

      And what he was trying to say is that Brazil no longer can depend just on cheap labor to get by. More technology and productivity (not to mention education) is needed.

      But at 35K there’s a mass of people w/ the financial means to buy a brand new (albeit) small new car. That’s what gets the car makers attention.

    • 0 avatar
      charly

      You can’t use average in a country like China were there is a very large difference between the poor and the rich.

      ps. Didn’t mr. Schmitt claim to pay the going rate of $300,- a month for what sounded to me like an average job.

  • avatar
    John Horner

    Most people think they understand how money works, but don’t.

    Money is not going to limit the growth of China’s auto industry or consumer spending. As the productive capacity and demand continues to grow, the Chinese government has the responsibility and power to create the money supply required to support it. Those who think lack of money at the macro (country) or micro (individual) level is going to be a check on the growth of China’s auto market are quite simply wrong.

    Bertel’s argument for the demand scenario is completely sound. Additionally, there is no doubt about China’s willingness and ability with which to build the required production capacity.

    The only thing which might be a tough thing to come up with are the requisite resources, particularly fuel. But, humanity has a long history of dealing successfully with that problem through both discovery and substitution.

    China’s auto market is going to get monstrously huge quickly. The only point of reasonable debate is how big, how fast, and what the limiting factor will be to that rate of growth.

  • avatar
    Martin Schwoerer

    I think very many people just cannot wrap their minds around how big China is, and how big its going to be. This kind of clear and concise article should help them.

    There are two things I find significant about the China syndrome. Without C. and the other letters in BRIC, we’d have had zero growth for the longest time. And secondly, oil (and other resource) prices will grow parallel to China’s growth.

    I’m a broken record on this, but I hope it bears repeating that anybody who buys a gas-guzzling car nowadays is either rich, or betting on China not growing like it did in the past. In which case that’s a person against whom I’d like to play cards.

  • avatar
    PeriSoft

    “Then, commentator ra_pro rolled out the really big ordinance…”

    Unless you’re making an intentional faux pas to complement ra_pro’s confusion of democracy and demography, or you’re thinking that ra_pro unveiled strict legislation, I believe that the word you’re looking for is ‘ordnance’.

  • avatar
    ohsnapback

    It’s official then. Bertel, John and Martin will be proven correct.

    Disregard the multitudes of economists and market makers who have modeled China and see palpable signs of looming implosion (people like Jim Chanos).

    TTAC has spoken.

    p.s. to Bertel – I am not a “personal injury” lawyer. Despite having some knowledge of recent ‘tort reform.’ I am a commercial law/transactional attorney.

  • avatar
    Lokki

    I don’t have a lot of faith in economists’ models… never have frankly, and the last decade hasn’t helped.

    However, I am also a little cautious about extrapolation. My favorite example of the danger of this exercise is:

    “I gained 5 pounds over Christmas – if this keeps up by 2012 I’ll weigh 650 pounds!”

    So, having sneered at the experts, here’s my uneducated guess:

    The Chinese truth is somewhere inbetween unbridled growth and collapse. Right now, they’re the manufacturing center of the world. I don’t see any other location on the horizon to shift that away from them. Yes, they will have to fix their currency advantage. Yes, labor costs will rise, and safety and pollution controls will raise their costs. However, India isn’t quite ready to take their place yet. India has focused on IT rather than manufacturing so far. If you want to build something to sell, China is the only game in town. As long as that remains true, they’re going to sell a hell of a lot of cars to newly middle-class workers. (See Detroit 1920 – 2000 for an prototype).

  • avatar
    Dimwit

    What China and the other BRIC countries need is their own Eisenhower. The US Interstate was as much a driver (pun intended:) as anything else in the continuing accumulation of vehicles. The ability to go anywhere, whenever made for very itchy feet and empty wallets.

    None of these countries have the infrastucture necessary to support that amount of growth. Whether it’s in China’s interest in letting unfettered mobility available to its citizenship is a whole other blog.

    Can Bertel report on what is being built outside the hyperdeveloping “Economic Zones”?

    • 0 avatar

      China is pouring untold amounts of concrete, steel and money into roads and railroads. I have to go to strange, out of the way parts of China on a regular basis to visit factories. 3 years ago, we drove down rural narrow roads, chasing chicken and bicyclists. Now we are on highways that would make Germany proud. They build them so fast that even Google maps can’t keep up. Increasingly, the GPS dot on my HTC wanders across uncharted territory as we zip down the Chinese Autobahn. I ask the driver: “When was that built?”

      “Last week.”

      The “economic zones” are a thing of the past. Whole China is an economic zone, with a drive to move industry away from the densely populated coastal strip and further inland. “Go West, young man.”

  • avatar
    Martin Schwoerer

    ohsnapback,
    in reference to your words about TTAC authors insulting their readers, I for one sure didn’t mean to sound arrogant or unfriendly. I’m sorry if I did. Sometimes a spirited discussion gets a little too heated; I’ve certainly been guilty of that in the past, so thank you for telling me when things are getting out of hand. Please continue to contribute your counterpoints.

  • avatar
    european

    ill just say this

    2002-2007 everybody was WOOOWing @ dubai.

    2007 and later, how did that end?

    • 0 avatar
      Dimwit

      OTOH Dubai is a Field of Dreams scenario while China’s is catchup. They’re trying to compress the 20th century into a decade. Whether it will work, can they sustain it without spinning out of control or will it collapse like a house of cards from political instability and poor QC is something to watch. The big variable is the rest of the world. Will they continue feeding the dragon or will they starve it as it matures?


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