Automobile: China ready to conquer the world

While the Chinese automobile market has entered a phase of slowdown, the government wants to liberalize its highly-regulated market by a persnickety bureaucracy. It believes that the local brands have acquired enough maturity to conquer the world. For foreign brands, this liberalization is a real relief, but they could nevertheless continue their activity under the format of joint ventures.

It’s a big bang waiting for the Chinese car industry! Xi Jinping announced his intention to liberalize the sector, one of the most regulated in the world. The Chinese President made this announcement in response to the protectionist bidding of US President Donald Trump. In reality, it would seem that China is mainly preparing to change its industrial strategy in the automotive sector.

Strong slowdown

The world’s largest automobile market, with 27 million registrations in 2017, is experiencing a sharp slowdown in its market. In 2017, sales increased by only 2.1%, according to PwC. This slowdown is very brutal since, in 2016, growth was still at double digits (+14%).

Except that production capacity has not stopped increasing. New outlets must, therefore, be found to avoid the crisis of overproduction. All the more so as the Chinese are turning more and more to the second-hand market, an emerging market but one that will divert a large proportion of consumers away from the new market.

The end of the bureaucracy stage?

Until now, there were only two ways to sell cars in China: either by importing them, for 25% customs duties or by obligatorily building them on the spot through a joint venture with a local manufacturer. This last option is authorized after a careful and sometimes long study (up to one year) of the file by the Chinese administration which will issue a license. This license can be as restrictive as it is binding.

The license obtained by Renault prevented it, for example, from selling cars that were too small, such as its big success, the Captur, or too large. The diamond brand has thus launched itself on the Chinese market with the Kadjar and the new generation Koleos. Another constraint, the French manufacturer had the obligation to launch a specific local brand, as well as 100% electric cars. These are all very costly and complex constraints from an operational point of view.

Also, Renault is in charge of all operations, although it is a 50-50 joint venture with the Chinese group DongFeng. Here again, there is a source of difficulty since Renault is forced to form alliances with a group that has more than ten joint ventures, including with directly competing groups such as PSA or Honda. Not to mention technology transfers, and the impossibility of consolidating accounts.

Tesla, first beneficiary?

All these regulatory constraints could therefore soon disappear, including a sharp reduction in customs duties. Except Xi Jinping didn’t say anything more. According to the Wall Street Journal, regulation on electric car joint ventures could disappear this year, which could be a real boon for Tesla.

But according to experts, these measures may not lead to the expected big bang. Firstly, because what is true at central government level will not necessarily be true at a local government level, which would continue to be a lock on the deployment of concessions or car quotas for large conurbations.

“The real opportunity will lie on the margins, i.e. on the building rules, which will be relaxed. Foreign manufacturers will certainly benefit,” confirms Guy Burney of Deloitte.

General Motors wants to keep its 10 JVs

In addition, foreign car manufacturers have been working in China for too long in this format, some since the 1990s. And the largest have constituted real constellations of joint ventures (JV). General Motors is thus at the head of 10 JVs which enable it to hold 14% of the Chinese market (more than 4 million cars sold). According to the Wall Street Journal, the first American automotive group would have no intention of changing anything of this configuration even if the regulatory constraints are lifted. According to the American economic daily, the manufacturers fear to start a war without mercy with their former partners if they did not have any more common interests.

Because if Xi Jinping takes such an initiative, it is not only because its domestic market has reached maturity, it is also because local players have themselves acquired an industrial and technological maturity, as Guy Burney explains :

“China has not only been making cars for 30 years, but it has also learned a lot. And beyond that, it now can reproduce the convergence between Detroit and Silicon Valley, in other words between car manufacturing and new technologies. China has not only large and mature manufacturers, but also an ecosystem of digital and technological players with global reach.

Xi Jinping, therefore, wants to push its brands to advance their pawns towards foreign markets. In the first half of 2017, barely 3% of national production was destined for export, but this figure was up by 26%.

 

Donald Trump, Debt, Real Estate: What Could Slow Down the Chinese Economy in 2017

As the Chinese economy continues its structural slowdown, it will face significant challenges in 2017.

China’s economic slowdown

For the past 3 years, China has been experiencing a gradual drop of its GDP growth rate. According to experts, the economic slowdown is the result of the gradual slowdown in labor force growth (reinforced by the impact of the one-child policy) and the inevitable decline in productivity gains, as the economy is becoming more mature.

The credit boom and its consequences

While credit has steadily increased in recent years, much faster than the economic growth, corporate debt already reached 168% of the GDP in the third quarter of 2016, or nearly $ 18.5 trillion. With such a strong and rapid increase in credit, many unprofitable firms may find it difficult to finance in the event of tighter monetary policy in China. Credit is already getting stricter as the government decided in December to focus on risk reduction and financial stability, to the detriment of economic growth, implying measures to curb the credit. As a result, the amount of doubtful loans (loans with little chance of being repaid) may prove to be higher than what the official figures suggest. A phenomenon that could cause trouble…

The appreciation of the dollar against the yuan

Yuan weakened against US Dollar
Chinese Yuan Keeps Depreciating Against US Dollar

While the yuan (or renminbi, “currency of the people”) has already lost nearly 6% against the dollar in 2016, the upward trajectory of the US currency is a major challenge for Beijing. As China massively bought yuan currency to support its exchange rate, its foreign exchange reserves have melted by nearly $ 1 trillion, to $ 3 trillion in just two years. Beijing could also defend the yuan by implementing monetary tightening policy, but the room for maneuver of the PBOC (the country’s central bank) is limited, because of the size of the credit. The situation could be very worrying for the PBOC if the Federal Reserve (the US central bank) keep raising its exchange rate in 2017 as it has already been initiated by new Donald Trump government.

The real estate industry could slow down

One of the major pillar of China’s economic growth has been the development of the real estate sector over the past 10 years. In 2016, Chinese real estate grew strong, both in terms of construction and price increases. To cool down the overheated property market, local authorities have increased the share of minimum input required to purchase a property in order to lighten the use of mortgages. Consequently, the growth of the housing sector should slow down in the coming year.

Donald Trump threaten Chinese exports

donald trumpDonald Trump claimed during the election campaign that he would declare China a country manipulating his currency once he has become president and would impose heavy duties (up to 45%!) on US imports of Chinese goods.

In the end, China’s growth should continue to slow down in 2017 and the country will likely go through hard times in the coming months.