China Finally Has a Good Excuse to Streamline Its Auto Industry
Just about everyone in the car business would take a 6.7 percent monthly sales increase -- unless it happened in China. That was the number for July, and it stoked ongoing concern that China's booming auto industry, so accustomed to double-digit growth, is running out of gas. It isn't, but as business gets tougher, the Chinese government has a good chance to get strategic.
Picking winners -- and losers
China wants to reduce the number of automakers doing business inside its borders buy a stunning 90 percent. That sounds like a huge number, but China's auto sector has been the Wild Wild West. There has to be a shakeout at some point.
That point may have arrived. This is from AP:
Producers are being squeezed between high manufacturing costs and intense competition that is pushing down prices, said Zhang Xin, an auto industry analyst for Guotai Jun'an Securities in Beijing.I was concerned when I first learned of China's plan because I thought it might impede entrepreneurial progress and set China's car market up as the happy hunting ground of well-established global giants, like General Motors (GM) and Volkswagen."Some smaller companies will make less and less money and then have not enough funds to research and develop new technology," Zhang said.
But Zhang Xin is talking some sense. You can have all the innovative verve in the world, but if there's not money to fund it... you lose anyway.
The problem of innovation in China
China has everything it needs to be an industrial powerhouse -- especially cheap labor -- and its auto industry, given the way that it can involve the emerging middle-class consumer, deserves to be at the center of that.
Unfortunately, China's finance sector isn't nearly as well-developed as what exists in the West, especially in the U.S. Capital is allocated reasonably efficiently in the direction of innovation in America, so the government doesn't have to worry about smaller, disruptive companies getting killed by competition. Venture capitalists can keep them afloat.
Disruption isn't the Chinese game plan
China has emphasized electric cars, but when you get right down to it, what it aspires to is being a dominant exporter of old-fashioned autos that run on gas. There isn't much space for innovation in this space -- at least not innovation that the Big Boys haven't already thought of -- so China needs to un-level the playing field.
So who wins? Here's who:
- The major global automakers. GM, VW, Ford (F), Toyota (TM)-- these carmakers are all planning to expand in China to make up for lost growth in their home markets. China wants them to succeed -- because they're in joint ventures with Chinese carmakers and can contribute expertise and technology, which of course the Chinese will... well, you know, copy.
- Larger Chinese carmakers. They have the economies of scale to enable survival through this period. All of them are also hooked up with Western automakers in JVs.
In the end, it's not as if 9 of 10 Chinese auto companies will disappear. Many will be absorbed. This may help take the edge of the innovation assassination that will be the inevitable result of creating a car industry that's streamlined for global competition.
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