China, Autos, and Oil

Stanley Crouch insists that a fine way for the world to kick its oil dependency is for the Chinese government to greatly restrict the use of gasoline powered automobiles:

But rethinking is what we need, and we need it now. Even the Arab oil states are concerned about their ability to supply the world with enough oil, now that China has stepped into the industrial ring and needs that black gold like everybody else.

China can, therefore, do something that it has not had the actual power to do for hundreds of years. It could turn the entire world around and take the lead in settling this oil problem by relying on the profit motive to inspire a completely new direction.

How? The Chinese could turn to the automobile industry and say that since it has great pollution problems already, it would greatly prefer an automobile that did not use gasoline.

This would get an immediate response. Why? Because China could guarantee sales of at least 500 million automobiles over the next decade.

500 Million?

An estimate of 500 million new automobiles over the next decade seems rather high to me, considering the recent slowdown in sales.

In the first half of 2004, Daimler, GM, and others had record sales, with triple digit increases year-to-year. But auto sales in China have been declining for the past several months, hitting the small players more than Volkswagen or GM. That's because the big buys are selling the quality and luxury cars. See also this nonrespresentative sample of Chinese consumers who are not that confident:

In one of my speaking classes, the topic of car ownership came up. When I asked how many of the 20 students' families owned cars, two students very shyly raised their hands, clearly fearing they would appear boastful. When I asked who expected their families to have cars by the year 2010, two more students raised their hands. Now admittedly that's a doubling of the number of cars, but still only 20% of the families represented in my class.

Incentives and Cost Burden

Anyway, I won't contest his assertion that a no-gas or little-gas requirement will create massive incentives for automobile manufacturers to final alternative power sources--and right quickly.

But frankly, I'm dumbfounded that he seriously expects the Chinese to bear the tremendous cost of conversion for the entire world, while we enjoy cheap gasoline.

After all, the Chinese already have plans for tougher emissions standards than the U.S. does, and are already investing heavily in fuel cell technology. (I'm not certain how much of this is just a rip-off of other companies' ideas and technology).

Perhaps Crouch asumes that the benefits of lesser pollution will more than pay for the added costs of lower emissions automobiles; unilateral Chinese action would benefit them more than it would cost. But if this is true in China, why is it not also true in Europe, the US, Japan, or Korea? Since per-capita income in the relatively propserous regions of China is about $4,000 a year and far higher in the developed countries, why should those with lower incomes subsidize the gas-guzzlers and pay the costs of cleaning their air? Crouch writes: "At the moment, no one can imagine China being that farsighted or that bold. " Nor could I imagine them that generous or stupid. Their automobile production and consumption has already started expanding...

Partially Sunk Investment

The costs of conversion might seem to be lower in China, but American and European automakers have already sunk, and are planning to enter into, massive investment in plant and equipment to meet the growing effective demand for privately-owned automobiles in the coastal cities:

This acceleration in the adoption of privately owned cars has sparked a �gold-rush mentality� which manifests itself in tremendous investments on behalf of European and American car makers in on-the-ground production capacity through joint ventures with local manufacturers. These joint ventures are currently supplying roughly 90 percent of the new cars bought�largely due to import restrictions. Automotive trade publications in Europe and the U.S. expect China to be the world�s largest market for cars in years to come. Volkswagon for the first time sold more cars in China than in Germany this past year.

Credit Markets

Note also that credit markets are just getting started in China, so increasing the costs of production makes it even relatively harder for regular Chinese to afford non-gas cars:

Only 15 to 20 percent of all cars currently sold in China by General Motors are financed through car loans, with 15 percent being the national average. The remainder of the cars is paid in full at the time of purchase. This compares to a financing rate of roughly 85 percent for all GM cars sold in the U.S., 70-80 percent in Germany and the UK, and an average of 70 percent in the entire developing world. This low borrowing rate is simply due to the historical lack of a borrowing culture in China, both on the supply and demand side. Several insurers guaranteeing car loans to bank lenders
have recently suspended these policies, due to the large share of non-performing loans

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This page contains a single entry by Kevin published on August 21, 2004 4:12 PM.

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