[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is one of the world's leading experts on Asia, especially China. Right now, Fitz-Gerald is leading an investment tour of the Red Dragon, and he'll be sending along regular investment travelogues to update Money Morning readers on his latest observations. This is the second installment of that series.]
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
BEIJING, The People's Republic of China - At a time when global auto sales are experiencing their biggest declines in decades - they are set to drop at least 8% globally - the burgeoning China auto market may grow by 10% or more.
With steeply rising disposable incomes and savings rates that approach - and in some cases exceed - 35% a year, it isn't difficult to see why the China auto market is zooming along. But what may be tough for U.S. consumers to picture - especially as they deal with rising unemployment and a nagging economic malaise - is the intensity with which domestic demand is growing here in China.
Autos are more than just transportation here. They're a symbol of wealth and success - a sexy status symbol. One's social position can be determined by the type of vehicle one owns and flaunts.
This isn't the first time we've detailed the promise of the China auto market. Nor is it the first time we've talked about the "Chuppies" (Chinese Yuppies), the demographic group China will rely on as the nation attempts to decrease its reliance on exports and become more of a consumer-driven economy.
Investors, economists and other "experts" on China are finally becoming attuned to this economic transition. But what those observers don't realize is that the story doesn't stop there. China isn't just evolving into a consumer economy. As auto sales demonstrate, China is becoming a "complete" economy, in which such key ingredients as consumer spending, domestic business investment and foreign investment are each increasingly playing their required role.
Take business spending. The auto has become an important business tool: It's believed that having your customers see an impressive car conveys confidence and helps build trust with the government. That kind of thinking is very Western in focus. What's different here, however, is that cars are also believed to be a key contributor to the concept of "face," which is ever so important here.
Huang Jin, a native Beijinger and longtime friend, explained it this way: "If you drive a late-1980s-model Japanese car, people will not want to do business with you. Your car suggests how much you are worth and, by implication, whether you are worth doing business with."
He drives an Audi A8 that's jet black, with all the trimmings. [Given his objective, the A8 was apparently an excellent choice. Its U.S. marketing tagline says that "(even) motionless, it still commands respect."]
Another friend of mine, Luo Xin, puts a different spin on things. The way he sees it, the car he drives makes a statement about who he is - which is why he craves the sporty, futuristic proto-types that were all over the Shanghai exhibiting center this week as part of the Auto Shanghai 2009 auto show.
"Why not dream?" he says. "The new stuff suggests that I'm hip and gives prospective wives the image that I am successful, enjoy my life and think about the future."
Julian Hardy, who serves as general manager for Aston Martin China, recently told the China Daily newspaper that China's mega-rich may have lost 1 billion yuan (about $146 million), but adds that they've "still got 5 billion ($730 million) left."
Aston Martin, long the preferred ride of fabled super spy James Bond, sold 50 cars here last year and sales may hit 150 within the next 12 months. It's a similar story with Lexus. The company's newest Shanghai store has already sold 20 cars since opening in mid April. And Ferrari, BMW (Bayerische Motoren Werke AG), Porsche (Porsche Automobile Holding SE), and any of a half dozen other high-end brands are finding a market among China's emerging consumer class.
China recorded 15 billionaires last year, as well as several hundred thousand millionaires, so this is not a trend that's going away anytime soon.
At the other end of the spectrum, low-end cars continue to move at record pace, too. Last year, we told readers that General Motors Corp.'s (GM) Buick line, Ford Motor Co. (F) and Volkswagen AG (OTC ADR: VLKAY) produce the lion's share of the small, sporty and fuel-efficient models sold here. At the time, I suggested that it wouldn't be long before Chinese automaker's like Geely Automobile Holdings Ltd., Red Flag (or Hong Qi, as it's known to its China customers), and BYD Co. Ltd., have come up to speed.
In fact, the MidAmerican Energy Holding Co., which is roughly 88% owned by the Berkshire Hathaway Inc. (BRK.A, BRK.B) investment vehicle run by U.S. stock-market icon Warren Buffett, announced in October that it would pay roughly $230 million for a 10% stake in BYD, which makes cars and specialized batteries.
I originally thought it might take as long as 24 months for China's domestic automakers to really get traction, but somehow I have not been surprised to see how quickly the markets have evolved to accommodate utilitarian cars that are "basic transportation" in words only. Why Detroit can't do this is beyond me; the so-called "Big Three" would be wise to take an extended field trip over here to learn how to get back into the ballgame.
A few years ago, I suggested that China would overtake the United States as the world's largest car market. Now China's done it not once, but for the last three months in a row, with sales reaching a record 1.1 million. Incidentally, at the same time I made that prediction, I also suggested that one or more of China's automakers would enter the U.S. market. Now it's all but a foregone conclusion. So stay tuned.
When it comes to cars - or to any other product or commodity for that matter - China's newly moneyed class is not going away anytime soon. The estimated 330 million people in this country's broad middle class continue to amass economic purchasing power at a rate that will exceed the capability of their counterparts in the U.S., Japanese and Eurozone markets combined during the next 12 months.
The bottom line: Investments focused on the ambition of China's emerging consumer class may prove to be some of the best available in the coming post-financial-crash environment.
News and Related Story Links:
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Money Morning View From China Series (2008):
The View From China: Despite the Auto Industry's Pedal-to-the-Metal Growth, a Safety Play May Offer the Safest Play. -
Audi USA:
The Audi A8. -
Auto Shanghai 2009:
Auto Show Web Site. -
Aston Martin China:
Web Site. -
Aston Martin:
Web Site. -
China Car Times:
Hong Qi (Red Flag) SUV to See Production in 2009. -
JamesBondWiki.com:
The Ultimate James Bond Web Site. -
Lexus.com:
Web Site. -
BMW.com:
Web Site. -
Porsche.com:
Web Site. -
Money Morning News Analysis:
Berkshire Stake Brings Confidence and Credibility to Top China Electric Carmaker BYD. -
Wikinvest:
Warren Buffett. -
The China Post:
World's automakers vie for China market. -
AxcessNews.com:
Move over GM, Chinese automakers to enter US, CA markets.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.