The View From China: Despite the Auto Industry's Pedal-to-the-Metal Growth, a Safety Play May Offer the Safest Play

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is currently leading an investment trip through China, taking in that country's scenery, as well as its investment opportunities. Here is the first installment of a short series detailing his observations and discoveries.]

SHANGHAI, CHINA - Why U.S. automakers can't import smartly designed, well-made little cars that get 50 miles per gallon into the United States is absolutely beyond my comprehension.

Particularly because they already make those cars, and because oil prices (as well as gasoline prices) are destined to move even higher from here.

If you don't believe me, let me tell you about the little beauties I saw in downtown Shanghai early one recent morning.

They're made by Buick - a General Motors Corp. (GM) nameplate that's on its way to extinction in its home U.S. market.

Here in China, on the other hand, Buick is a luxury car of choice. Buick's also known for making sporty "econo-boxes" that offer a little bit of zip.

Ford Motor Co. (F), too, seems to have gotten back to its once-successful roots by "bringing a better idea" to the Chinese market. It's not a luxury car, but it does demonstrate some global thinking. The car I'm referring to is the Ford Focus, a "world car" designed so that a common chassis can be adapted for virtually every key market around the world. The car started out as the "Euro Focus," so it was imbued with a sporty, sophisticated design and image right from the starting line. And it shows - it gets very high marks from Chinese buyers.

But it, too, remains "unavailable" in the U.S. market - at least the sporty designs that I'm seeing here [although our crack Money Morning research team back in the States did some digging and were able to tell me that the Focus could debut in the U.S. market by 2010 or 2011]. European competitors such as Germany's Volkswagen AG (OTC: VLKAY), and France's PSA Peugeot Citroen SA, with its Citroen and Peugeot nameplates, both, also are clamoring for share on Chinese streets.

There's a good reason for all this interest: Here in China, auto sales are growing by 15% to 20% a year, with no signs of slowing down. Where as this used to be bicycle heaven, it's now bicycle hell.

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Much of that torrid growth is being "driven" by locals who are buying their first cars. But, believe it or not, rental-fleet operators are becoming more-frequent customers, especially in such major cities as Shanghai and Beijing, and in Hong Kong, one of the two "special administrative regions" in the People's Republic of China.

And "rental fever" is reflected in the emergence and fast growth of such companies as the Anji Rental and Leasing Co Ltd., which expects profits to soar beyond its usual 50% growth rate in 2008 and revenue to exceed the normal 25% to 30% rate the company consistently has been booking in recent years.

Much of that recent acceleration in sales and profits, according to company representatives, is being fueled by the looming Summer Olympic Games in Beijing. But Anji - a joint venture between Shanghai Automotive Industry Sales Co. Ltd., and Avis Europe PLC, expects this higher-than-normal business volume to continue after the Olympic games, because of the World Expo to be held in Shanghai in 2010.

To prepare for this, Anji is opening offices all over China, including locations at Beijing's International Airport and at both of Shanghai's airports. The rental firm is also taking steps to align itself with Avis' globally available services, including - for the first time ever - enabling foreigners to reserve cars before arriving in China.

And in China's red-hot competitive markets, companies like Hertz Global Holdings Inc. (HTZ), Bole International Car Rental, RuiJie Auto Rental and ShangCar are right behind them - pun absolutely intended.

Unfortunately, both the auto-manufacturing and car-rental businesses remain small and highly fragmented, meaning there is no clear pathway to profit - not yet, anyway.

But there is an alternative.

Many cars here lack critical safety features that are standard in both Europe and North and South America. Take air bags. Here in China, less than 60% of the cars come equipped with them. But as demand for cars and trucks continues to grow, consumers will become more informed about safety features.

The upshot: Beijing is expected to mandate higher automobile-safety requirements that fall in line with international standards within five years. That means that companies that have already started incorporating global safety requirements into their daily business operations have given themselves a real competitive advantage - both here in China, and in the growing global markets that even include the United States.

Our tour group just met with the top two executives - the chief executive officer and the chief financial officer - of one such company: Jinheng Automotive Safety Technology Holding Ltd. (HK: 8293).

If you've never heard of the company, don't worry. You probably will in the near future.

Jinheng is the leading automotive safety airbag supplier in China, and will likely become a global force in the very near future.

The company already makes products used in more than 60 different vehicle models produced by 30 different manufacturers in China, the Middle East and Europe. And the company is growing rapidly, with the expectation that it will be adding new international customers this year.

Jinheng's shares are trading at a compelling eight times earnings, right now, and is arguably undervalued. Furthermore, the company has fulfilled the requirements needed to advance from Hong Kong's secondary board (exchange), to the larger and more prestigious main board.

When that happens, expect the company's visibility to increase, making it much easier to attract large blocks of capital it can then use to finance its global aspirations.

And stay tuned … as this Money Morning series continues, we'll have many more such "on-the-ground" observations to bring your way. And we continue to believe that China will be a key to any investor's ultimate success.

["The View From China" is an investing travelogue chronicling Investment Director Keith Fitz-Gerald's current journey through Mainland China. Next up: A look at how China has played a key role in causing worldwide energy prices to increase.]

News and Related Story Links:

  • Shanghai Daily:
    Rental and Leasing company to expect robust profit and sales growth.