China Using Government Muscle to Turbo Charge its Auto Industry

By: Money_Morning

Jason Simpkins writes: Having already supplanted the United States as the world's largest auto market, China is on the fast track to becoming the global leader in hybrid and electric cars.

General Motors and Chrysler were forced into bankruptcy largely because they failed to pursue more fuel-efficient models. Indeed, GM and Chrysler looked wholly unprepared as gas prices soared over $4.00 a gallon in 2008.

As GM emerges from bankruptcy - having been bailed out by the U.S. government - it will put a renewed focus on alternative energy. Unfortunately, it's too late to make a difference. As U.S. car companies sputtered amid the country's economic collapse, carmakers in China raced ahead. And with billions of dollars in government backing, they are the companies that will set the pace for the global auto market.

China topped the United States in auto sales for the first time ever last year, with 13.6 million vehicles sold. Roughly 10.4 million light vehicles were sold in the United States in 2009 - the lowest total since 1982 and a 21% decline from 2008. China last year sold more cars than the United States in every month except for August when the popular "Cash-for-Clunkers" program bolstered U.S. sales.

That trend has continued this year. China's vehicle sales surged 30.45% in the first half of the year to 7.18 million units, compared to 5.6 million for the United States. Industry-wide vehicle sales in China could reach 16 million this year, but not without a little help from the government.

After leaping 63% in March, China's auto sales dropped slightly below par in June and July, increasing by 19.4% and 17%, respectively. That's strong growth, certainly, but not "China strong." So, Beijing offered a spark by renewing a $443 (3,000 yuan) subsidy for vehicles that save 20% on fuel consumption.

Auto sales surged 55.7% in August to 1.21 million vehicles, in part because of the stimulus measure, but Beijing didn't act purely in the interest of boosting sales. China is more interested in promoting hybrid and electric cars than it is in boosting sales.

"The tone of policies is not to boost the already-rapid growth" in the auto industry, Jenny Gu, a Shanghai-based analyst at J.D. Power and Associates, told AFP. It's to encourage purchases of "green" cars.

To that end, many local governments also offer clean car incentives in addition to the central government subsidies. Shanghai, for instance, offers an extra $2,946 (20,000 yuan) to customers who buy a plug-in hybrid and $7,465 (50,000 yuan) to those buying electric cars.

Shanghai aims to produce 100,000 green vehicles a year by 2012, as part of its initiative said Liu Jianhua, head of the city's new-energy promotion. The city will build 400 charging stations for electric cars this year.

Tactics like these have been effective in getting China's freshly minted drivers to go green.

A survey of 606 auto buyers in Shanghai found that 75% of respondents intended to buy a green car within three years, according to a report from research firm Ipsos.

The same proportion of responders expressed buying interest in another poll of 1,478 vehicle owners and potential buyers nationwide, according to Nielsen. Respondents cited low operational costs and environmental benefits as their reasons.

Indeed, Beijing's goal isn't just to boost auto sales - a rapidly growing middle-class of more than a billion strong already ensures growth. In Beijing alone, a city of 20 million, the total number of vehicles is expected to hit 7 million by 2015. The number of vehicles in Beijing has increased by 1,900 a day on average in the first six months of this year.

The government's real goal is to build a domestic auto industry around fuel-efficient vehicles, and to have its state-run auto companies take the lead globally. And it's taking proactive steps to ensure that it happens.

Putting the Pedal to the Metal
China's State-owned Asset Supervision and Administration Commission (SASAC) last month announced that 16 state-owned companies would form an alliance to research, develop, and produce electric and hybrid cars. Beijing will invest as much as $15 billion (100 billion yuan) in the venture by 2012.

SASAC, which oversees 125 of the country's biggest state-owned companies, said the alliance of state-owned enterprises was formed with about $200 million. It includes two of the nation's biggest car companies, - China FAW Group and Donfeng Auto - as well as its top three oil majors, its top two power grid operators, and military and aviation companies.

"This is the kind of plan the government would like to happen, and they certainly have the resources to put behind it," Oded Shenkar, a professor of management at Ohio State University and the author of "The Chinese Century," told The New York Times. "The government could easily underwrite or subsidize the development cost, and do it at a time when the global car industry is still reeling."

Beijing will divide the funds between the development and commercialization of fuel-efficient powertrains ($7.5 billion, 50 billion yuan), demonstration programs ($4.5 billion, 30 billion yuan) and creating a charging infrastructure ($800 million, 5 billion). It also will provide funding to 3-5 vehicle manufacturers and 2-3 battery and electric motor suppliers.

The plan aims to put 500,000 energy efficient vehicles on the market each year over the next three years. Electric and hybrid cars will soon account for 5% of the country's passenger car sales, the government said.

"What you have here is the confluence of two important things," said Shenkar. "The car industry was long ago designated as a pillar industry for China. And the second thing is green technology or high tech; this is where the action is going to be, and China wants to be there."

That's why in addition to bankrolling the initiative, China's government also is locking up the resources to ensure its long-term green car dominance.

China's Mineral Monopoly
The production of high-tech devices like computers, smart bombs, and hybrid car engines require so-called rare earth metals. There are 15 different types of rare earth metals scattered across the globe and they are very difficult to extract. They are in increasingly short supply as world demand surges, with industry officials predicting a global shortfall of 30,000 to 50,000 metric tons by 2012.

However, China realized the importance of these metals early on and has invested heavily in extraction technology over the past two decades. The country now controls more than 95% of recoverable reserves.

This metal monopoly gives China a tremendous advantage when it comes to producing energy efficient vehicles. Terbium can cut the electricity demand of lights by up to 80% and fractions of dysprosium can significantly reduce the weight of magnets in electric motors. There are more than 50 pounds of rare earth metals under the hood of a Toyota Motor Corp. (NYSE ADR: TM) Prius.

And now that China has the chance to become a technological leader, it's suddenly concerned with keeping more of its rare earth minerals at home. The country has cut export quotas for rare earth elements by 72% for the second half of this year. That move caps foreign shipments at 7,976 metric tons, down from 28,417 tons for the same period last year.

The United States is looking into whether or not China is breaking World Trade Organization (WTO) rules by giving preferential access to domestic companies, but it's unlikely Beijing will budge. China claims it needs a growing proportion of these metals for its own industries and the nation's top producer, Inner Mongolia Baotou Steel Rare-Earth, plans to use 9% of this year's production to build a stockpile that could grow to 200,000 metric tons.

Japan has already drafted a "Strategy for Enhancing Stable Supplies of Rare Minerals," and Japanese Foreign Minister Katsuya Okada yesterday (Thursday) warned that China risks losing foreign investments unless it introduces more transparency and consistency into its business rules.

Regardless of these objections, however, China continues to hold the cards. And the Red Dragon fully intends to use all of its political capital to advance its objectives.

"In 2009, there was a huge expansion of the government role in the corporate sector," Huang Yasheng, a leading analyst of China-style capitalism at the Massachusetts Institute of Technology, told the NY Times in a telephone interview. "They're producing yogurt. They're into real estate. Some of the upstream state-owned enterprises are now expanding downstream, organizing themselves as vertical units. They're just operating on a much larger scale."

Source : http://moneymorning.com/2010/09/03/china-auto-industry/

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