It’s tough for the business media to cover the China miracle of the past 30 years, at least the automotive industry’s part in it. Part of the miracle is that the Chinese people — after enduring centuries of serfdom and rule by warlords, foreign gunships enforcing international trade, corrupt governments, Japanese conquerors, and then decades under the harsh rule of communism — have finally entered the age of a state-controlled economy, in which their middle class is now larger than America’s entire population.
And, as they’ve made it to the day of personal financial freedom, the Chinese people have become voracious new car buyers. According to the official luxury car sales figures published by Reuters on January 8, 2015, “In 2013, the Chinese bought 492,000 Audis, 362,000 BMWs and 228,000 Mercedes.” Chinese consumers have for years purchased more new cars than we have in America, and now their government is about to launch another $1 trillion program to improve the country’s infrastructure.
None of those facts are in dispute, and all have been reported correctly. The problem is that, at least in the past 15 years, no one’s been looking at this market critically, asking if it’s real and sustainable.
Real High Ante
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Just getting into the Chinese new car market costs a long-term fortune. We’ve long known that, for a foreign car company to set up shop there, it must take a Chinese partner and own no more than 50 percent of the new joint venture. Even then it must agree to fund university programs to train a new generation of Chinese automotive engineers, transfer its latest production technologies to its joint venture partner, and so on. For automakers, manufacturing in China means training those who will one day become your biggest competitors.
Most have forgotten that years ago, when Bob Eaton was still head of Chrysler, he went to China to explore the possibility of building a factory there for Chrysler’s top-selling minivan. Eaton was still spitting mad when he deplaned in Detroit; he had walked out on their offer because, as part of the deal, the Chinese officials demanded that Chrysler allow a Chinese auto manufacturer to make a counterfeit version of the Chrysler minivan for its own personal profits.
It wouldn’t have been the first time that’s happened there.
And consider the case of General Motors. Many in the business media have written that GM sells more new vehicles in China than in America today and that this situation has existed for years. Also true. Yet some reporters, who regularly cover GM’s profits worldwide — and are quick to point out that GM has not earned a penny in Europe in 15 years — still never make a point of saying how little money GM China has earned in the automaker’s biggest automotive market. Last February the Detroit Free Press wrote that in 2013 General Motors earned $7.5 billion in operating profits in its North American operations, but only $400 million in pre-tax profit in China for the last quarter.
On an annualized basis as compared to its primary profit center here, China’s contribution to GM’s total worldwide profits is peanuts. That would suggest that the Chinese Economic Miracle has a few more downsides than most of us have been led to believe.
But that’s not the worst of it.
In April of 2010 the Wall Street Journal did one of its groundbreaking fluff pieces, “China’s Booming Car Market,” about how Mark McLarty had purchased a controlling stake in the Northern China German Automotive Group, a chain of dealerships selling BMW’s Minis and Volvos. He was quoted as saying, “What I can’t figure out is why other big foreign dealer groups aren’t here.”
Mark was about to find out.
Six months later the Arkansas Business Journal upped the ante on that story. Calling the Northern China German Automotive Group “a $1.4 billion powerhouse,” it related, “One of the Beijing locations sold 620 BMWs in August alone.”
About a year later, in September of 2011, the Automotive News covered the fact that Jim Press, formerly of Toyota and Chrysler, had come on board with McLarty Automotive Partners to oversee their international operations, including China.
And exactly one year after that, the Automotive News ran yet another story about that American-owned chain of Chinese luxury car dealerships, quoting Press from the sidelines of the Beijing Auto Show the previous April as saying, “This is the Gold Rush of 2012.” But the reason for that September 2012 story was to point out that McLarty had sold their 12 luxury car dealerships to Baoxin Auto Group. Mark McLarty was quoted in that article as saying, “It’s not the robust market that China had seen in the past ten years.”
Don’t feel bad, Mr. Press. Hardly anyone panning the rivers of Northern California made money during the California Gold Rush of 1849, either.
Last month the China Automobile Manufacturers Association revealed that 95 percent of all Toyota dealers in the FAW-Toyota joint venture are losing money. Dealers were demanding $353 million from Toyota to cover their accrued losses for the year, or around $700,000 per dealership. Those same dealers have threatened that if the factory doesn’t cover their losses, then they will refuse to accept any more deliveries this year. Dealers complained in the Automotive News article that they were forced to discount their cars up to $2,000 to sell them at all. How quaint. They should try selling cars in America.
BMW dealers were doing the same thing, demanding millions from the Bavarian automaker or they, too, would refuse new deliveries in 2015. It has been reported that BMW has agreed to pay $820 million in reimbursements to their Chinese new car dealers in order to keep peace in the family.
Then on January 8, 2015, Reuters reported that Audi and Mercedes have both quietly agreed to compensate their Chinese dealers via some form of subsidies, between $161,000 and $320,000, also to try and keep those dealers solvent.
Follow the Money into Thin Air
Keep in mind that, while new car sales in China have slowed from their former torrent, they have not gone backwards; in 2014 Chinese dealers sold 19.7 million vehicles, over three million more than the U.S. car market. The question is, who’s making money there? That’s the whole point of this pinnacle industry of worldwide capitalism.
China doesn’t seem to contribute much to the bottom line over at General Motors, even though it has at times been China’s largest manufacturer; yet China accounts for roughly one-third of BMW’s worldwide profits. Then again, that’s the joy of building SUVs in South Carolina and shipping them to China — bearing window sticker prices up to three times higher than the same model sells for in the U.S.
Ironically, South Carolina’s cheap labor here is responsible for BMW’s profits in China the way China’s cheap labor there is responsible for Apple Computers’ profits here. The revelation that 95 percent of Toyota’s dealers in China are actually losing money brings the whole “China miracle” into question.
All of the following statements are true: Jaguar Land Rover just opened its first factory in China. Chinese-made Volvos will be making their appearance here in the States later this year. Hyundai ditched plans for another Chinese auto factory and will instead build two new plants — and so much more — and all this after China officials said they were going to lock down the market for more new automobile plants.
For all the happy news about the Chinese new car market, it has a definite dark underbelly. Profits for a few, but hardly universal. It may not be dark enough ever to derail it, but it’s dark enough that the business media should shine some light on it more often.
© Ed Wallace 2015
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism. He hosts Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: firstname.lastname@example.org; read all of Ed’s work at www.insideautomotive.com.