By on May 30, 2012

The fact (if you can call it that) that China’s government will bring back a Cash-for-clunkers program caused headlines around the world. It also spurred news writers to new peaks of creativity. At the same time, Chinese farmers could protect GM’s honor. Let’s investigate.

Bloomberg reports from China that the government agreed on a plan to “revive financial incentives for consumers to trade in their passenger cars.” No details are available, because the “relevant ministries” are still hashing out minor details, such as which cars, how much, and for what. That lack of information does not deter from creative writing.

Never mind that the program is uncooked, CNBC already “heard” that China might spend “about 1 trillion yuan — $157 billion — or at best half the stimulus China got to recover from the credit crunch” on the cash-for-clunkers program. Is there a doctor in the house? Bloomberg writers got creative with the history:

“Government officials are under mounting pressure to revive consumer demand after the economy grew slower than forecast and vehicle sales slumped. China in 2009 rolled out a cash-for-clunkers program to counter the global financial crisis, spurring 49.6 billion yuan ($7.8 billion) in new car purchases the following year.”

Indeed, car sales in China did leap to a record 18 million in 2010. However, China’s 2009 cash-for-clunker program hardly caused the run-up to 18 million units in the following year.

Actually, China’s cash-for-clunker program was a dud. One year after its start in May 2009, only 1.7 billion yuan ($250m) were handed out, with 3.3 billion yuan ($486m) left in the kitty. It probably was the first time in China where money was given away, and there were no takers.

A second round of Chinese cash-for-clunkers, announced in June 2011, was quickly forgotten. It didn’t move the needle either and Chinese car sales ended the year 2011 flat.

Creative writers forget that China is not America. America is a land of clunkers. Half of the cars on America’s roads are over 10 years old.

The fleet in China on the other hand is very young. 10 years ago, the new car market in China was a little more than 2 million units per year. 10 years later, a used car market is just beginning to come into existence.  People usually buy new or not at all. A back of the envelope calculation shows that half of the cars on China’s roads are not older than 4 years.

In any case, assuming $1,000 per car (it was a sliding scale), the remaining budget would have paid for some 500,000 cars, and not for the approximately 5 million more the Chinese car market had grown in 2010.

What was more successful in 2010 was a little known (at least in the West) program called “cars to the countryside” which gave money to farmers who bought a car. Millions  of cheap Wulings and other minivans found their ways to places that did not even have car dealers.

The market for three-wheeled vehicles in China is estimated at 50 million per year. If only fractions buy a cheap car instead, the market is affected greatly.

In that regard, it is good to hear from Reuters that an unspecified round two of cars to the countryside is under consideration in China. Reuters was told that this program also has a cash for clunkers component, but I don’t think so. There are no clunkers in China’s countryside.

A revival of cars to the countryside would be a boost for an American car company, at least on paper. General Motors counts all of Wuling’s cars as made by GM. A few hundred thousand Wuling Sunshines more could help GM defend its rank as world’s largest carmaker in 2012. If those Chinese farmers won’t come back buying cars, then GM could lose the crown to Toyota.

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12 Comments on “Cash For Clunkers Won’t Turn Around The Chinese Car Market. Chinese Farmers Might Save GM Though...”

  • avatar
    Cammy Corrigan

    Asians, in general, are very prudent savers. Which is why I’m surprised that they fell for the first “Bangers for Cash” plan. I can’t see a real merit for it.

    1. Environmental: Cash for clunkers isn’t really that environmentally friendly as the carbon footprint for the new car, far outweighs the potential fuel savings of a new car in comparison to a clunker’s fuel economy. However, if you are trading an SUV for a Prius or Volt, then maybe you could justify it. Maybe….

    2. Economic: On one hand you have a car which runs fine with no outstanding loans. On the other hand, you can get a brand new car, which you didn’t need, and a debt to pay for the car, which you CERTAINLY didn’t need. Better to run the clunker into the ground. It saves money. If you have a clunker which is on the verge of dying, then, yes, you could use the programme to your advantage, but if your car is still running fine…why bother?

    3. Taxes. Cash for clunkers, being a government programme, means YOU are ultimately paying for it. So be under no illusions, if you take the offer up, you’re ultimately paying for the whole car. You lose, either way.

    In short, the fact that China are mulling this programme, tells me that an economic slowdown may be on the cards and this government programme is just trying to boost a market which may need a slight correction. There’s nowt wrong in driving a clunker. I’m driving my 8 year old clunker and I wouldn’t trade it for anything. I owe nothing on the car, I still get 35mpUKg in the town and 42mpUKg on the motorway and, because it’s a Toyota, it’s very reliable (one water pump and one wheel bearing in 8 years). In fact, it gets more character the more I keep it.

    To all Chinese people, keep saving. Don’t be fooled into buying rubbish you don’t need. We, in the west, made that mistake and are paying for it dearly….

    Disclaimer: I appreciate I have a reputation for talking utter twaddle, but if Bill O’Reilly and Glenn Beck get to voice their opinion, then so do I…

    • 0 avatar
      Secret Hi5

      “Asians, in general, are very prudent savers.”
      –Perhaps more so in the older generations who had to deal with tough times (much like Americans who went through the Depression). The materialism bug has afflicted the younger generations, especially in the more Westernized/developed regions.

    • 0 avatar

      The Cash-for-clunkers program was primarily done to prop up the auto sector during the economic crash. And it has done so successfully. The key to the program was the scrappage of the old cars. Not only were they scrapped- but the engines were destroyed. The whole point was to take old cars off the market to make room for new cars. To that end it has succeeded. The prices for used cars have gone way up, and new car sales have been very healthy as a result.

      Telling the chinese people to ‘keep saving’ is precisely the wrong message. Saving money is a selfish, destructive behavior. If nobody spends money, the economy would collapse. If you are saving money- that means you are freeloading off of other people’s spending activities, while failing to contribute yourself. This is the reason why the study of macro-economics is fundamentally different than the study of micro-economics. What makes sense for an individual, could end up being counter-productive for the society as a whole.

      • 0 avatar

        Your completely reasonable argument that those who don’t consume and waste as many of the earth’s resources as they can get their hands on – even if they are working hard to produce goods for others or to improve their community – are selfish and destructive means that we must need something better than this debt-based economy if humanity is to have a decent future. Because, in reality, the opposite is true. The world only has so much to give, and it can only take so much abuse.

        Tonight, I will go out and smash a bunch of windows to do my part for our economy!

      • 0 avatar

        “The Cash-for-clunkers program was primarily done to prop up the auto sector during the economic crash”

        That’s true! The unintended consequences were (1) that more people bought foreign or transplants cars than cars from GM or Chrysler which the C4C program was intended to prop up;

        and (2) C4C destroyed a large number of salable cars which resulted in the dire shortage of used cars on the market for under-served demographics in the US.

        I could have been in favor of C4C had the cars traded been released for sale on the used-car market. As it was, the poor and/or illegal-alien communities were robbed of transportation and the price of used cars has gone through the roof.

        And as far as saving vs spending money? You keep spending yours, I’ll keep saving mine.

      • 0 avatar

        Cash for Clunkers was a stupid, short-sighted greenwash waste. A slap in the face. A kick in the balls to everyone who could’ve driven those cars another 10, 15, 100 or 200,000 miles.

        The first time I saw a video of some kid at the junkyard destroying the engine of a Toyota 4-Runner with something like 130,000 miles, I was physically sick. Cars with 30 and 40,000 on the odometer going into the crusher. Criminally stupid. Made me want to go out and run every Prius with a temporary tag I could find right the hell off the road.

        I think it’s repulsive to front the idea that personal fiscal responsibility is somehow bad for the country.

        My car is 17 years old, 220,000 miles, and in virtually perfect running order. I haven’t had a car payment for nearly a decade. And I’ll be damned if I’d just toss it in the garbage to pick up three or four miles per gallon.

        I’d put that right up there with someone abandoning their 10 year old German Shepherd because they thought a Chihuahua would be cuter.

    • 0 avatar

      “3. Taxes. Cash for clunkers, being a government programme, means YOU are ultimately paying for it. So be under no illusions, if you take the offer up, you’re ultimately paying for the whole car. You lose, either way.”

      Well, sort of. The people in general pay the taxes that fund the program, but the slice of the individual customer’s taxes that go to fund the program is going to be far, far less than the payout they’d see if they took advantage of the program. Socializing costs like that so that individuals don’t get hit in the wallet all that hard is how tax-funded social programs are supposed to work.

      I’m not addressing my opinion on Cash For Clunkers with this statement one way or the other, mind you.

    • 0 avatar
      Robert Gordon

      “Asians, in general, are very prudent savers.”

      Really? Which ones? Are you talking about Indians, Isrealis, Iraqis Iranians, Turks, Chinese, Mongolians, Pakistanis etcs? Wow thats a long bow to draw.

  • avatar

    One of the major reason why Chinese cash for clunker doesn’t work is that they have much lower labor cost and standard of living in the lower end of their market. It is more profitable to part out and repair old cars than to crush a working car. The only cars that they would probably be worth junking rather than fixing is the soviet era jeep equivalent military vehicles and tractors used for civilian transportation purposes in the farming villages.

  • avatar

    It’ll be another 20 years or so before a plan like this will ever work.

  • avatar

    This is part of a bigger stimulus package somewhere in the 158 billion dollar range. Basically they are doing it for 2 reasons to show that the party is strong and stable during the change in leadership AND because they are worried at how the economy didn’t grow as expected.

    China is basically betting on growth to keep civil disruptions down across the country. Bloomberg and New York times and a few other places have a great breakdown of this. Including analysis that this is only holding off and inevitable slow/negative- growth period.

    I see this stimulus as yet another way to cause inflation here in China. I wonder if the central government will be able to keep it under control this time.

  • avatar

    Please excuse the analness, but half the light vehicles in the US are not “over 10 years old”. The 10.8 figure from Polk is an average, not a median. There are 39% of US light vehicles are 10 or older according to the DoT. Even less for cars only.

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