Thoughts on the Chinese Automobile Industry

Sep 29, 2011 by Adam C. Powell, Ph.D.

This week, I discussed my investment strategy for the Chinese automobile industry with one of my readers. Through the discussion process, I realized that it may not be clear as to why I got into the sector in the first place, or why I remained in the sector after it performed poorly.

Why I got into the sector
I began investing in the Chinese automobile industry in 2009. China has a growing domestic ability to buy automobiles, and several companies made decisions that I thought would help them sell to the global market. Specifically:
BYD Auto (比亚迪汽车): BYD has been an innovator in producing hybrid and battery-powered cars. It began selling its first mass-produced hybrid car in 2008. I invested in it, as I thought it could potentially be a powerful entrant into the U.S. market, as it has advanced battery technologies. Its parent company is a rechargable battery maker.

Zhejiang Geely Holding Group “Geely” (吉利控股集团): Geely bought the Volvo brand from Ford in 2010, enabling it to potentially sell cars more readily on the global market. Furthermore, Geely acquired a joint venture with Manganese Bronze, so it also now is able to sell London Black Cabs to the UK.

Great Wall Motor Company (长城汽车): Seller of the 2nd most purchased SUV series in China, Great Wall also has a substantial export business. It exports vehicles to 60 countries. Furthermore, Great Wall will be entering the electric vehicle market in 2011.

The downturn in the Chinese automobile industry
China has taken two measures that have reduced demand for automobiles. First, Beijing has lowered its quota in 2011 for the number of license plates it will issue. The quota was capped at 240,000 in 2011. Shanghai has likewise instituted a quota system, and only sold 9,000 license plates in June 2011. These quotas have been tightened and the cost of license plates has risen as China attempts to reduce traffic by regulating the number of cars on the road. The government has restricted exports to encourage domestic brands to mature before hitting the international market. As a result of these restrictions, large scale exports may not be feasible until 2015. As a result of artificially reduced domestic demand and international exports, Chinese car companies have suffered in the stock market.

Why I still invest in the Chinese automobile industry
Although the share prices of Chinese automobile makers have dropped, I believe that their future is bright. Strategic acquisitions have been made, and poor sales have been more a result of restrictions than the underlying product. As Chinese quality and technology improves, export restrictions will surely be lifted. Since several of the companies have already purchased global brands, when they start exporting, they will not have the difficulty of marketing unfamiliar products to consumers. Thus, I believe that the Chinese automobile industry is currently in a development phase, and will ultimately be very successful.