China: There Is Still Time Left To Fix Mistakes

Business, China, Company Strategy, Environment, Polyolefins

By John Richardson

WHEN something seems as if it is just too good to be true it usually – and this applies to China’s auto market.

As I have long argued, growth had to moderate from the 138% increase in sales that we saw between 2008 and October of last year. It is just plain common sense.

The chart below should therefore come as no surprise to anybody, even without the context of the specific reasons why the market is heading for a long period of much lower growth.

AutosalesgrowthChina

Here are the specific reasons why everyone should have known that this slowdown had to happen:

  • Affordability. The credit boom had to come an end at some point. Take away the “wealth effect” of that credit boom and the majority of people in China would be left unable to easily afford a new car.
  • The environment. Four years ago, a friend in Beijing told me: “It used to take me 25 minutes to walk to work. Now I have bought my new BMW, it takes me 25 minutes to drive to work.”

Sure enough, the nothing short of economically ruinous lending binge is over as an increasing number of restrictions on new car ownership for environmental reasons.

But plain common sense has not prevailed. Far too many people instead thought that the 2008-2013 boom in sales was a “new paradigm”. This rested on the idea that China was unique in the history of the world, thanks to the almost exponential growth of its “middle class”. That’s all you needed to know. This was the only piece of analysis that counted.

Banks, individual investors, and quite probably governments, will now have to pick up the mess that has been left behind.

For example, as fellow blogger Paul Hodges pointed out last week in this post:

  • The number of auto dealerships in China has expanded by 30% since 2011.
  • China’s Dealers’ Association says that 70% of dealers are unprofitable this year, up from 30% in 2013.
  • “Many dealers have come under huge financing pressure. They have to sell cars at great discounts,” said the chairman of the association.

To what extent does this all apply to the chemicals industry? How much capacity is still being planned on the lingering belief that China has established a new paradigm?

PPglobalcapacitiesDec2014

The above chart, as you can see, shows our forecast for global polypropylene (PP) capacity between 2010 and 2017.

I have chosen PP because, of course, it is extensively used to make auto components – for example, car bumpers, dash boards, cladding exterior trims and film cushioning.

It is time for all of us to go back to our spreadsheets and work out realistic scenarios for China based on the concept of ‘wealth effect decelerators”.

We can then start to cancel unneeded capacity additions. It might be too late for many of the auto dealers in China, but it is not too late for the chemicals industry to save itself considerable financial pain.

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