Wednesday, May 30, 2012

Cash For Clunkers Won’t Turn Around The Chinese Car Market. Chinese Farmers Might Save GM Though

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 Bloomberg from creative writing:

"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 leaped 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.

from The Truth About Cars

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