A car is a necessity for many, but so is toilet paper, and no one is putting racing stripes on toilet paper. Cars are still status symbols, and they’re almost always bad investments. Much of the global car market has been propped up by Chinese consumers eager to invest poorly. How long do you want to bet that lasts?
To understand what happened in China we need to go back to what happened with the United States. I don’t want to oversimplify the many levels of government non-intervention and economic foul play and hubris on the part of banks that led to the Great Recession, but here’s the bottom line: People assumed there would be a good economy forever and borrowed a ton of money for various assets, including homes, that couldn’t possibly retain their value.
When this happened, automakers looked to China with its insane growth and realized it made sense to build as many factories as possible. China took the car sales crown and automakers who were the furthest ahead in the massive country – largely General Motors and Volkswagen/Audi – made some serious bank. Everyone who wasn’t already there rushed there to build cars and the longstanding brands made bigger investments.
You may have heard that Chinese stock market exploded last week and then was miraculously sort of saved. What happened?
Again, an oversimplification, but regular Chinese citizens saw the growing stock market and seemingly robust economy (thanks to a little manipulation) and stopped spending money on cars. They instead borrowed money to put in the stock market. When the market started to sink it revealed a lot of issues with China’s underlying economic structure and it required, not surprisingly, government interaction to stop trading.
There are various views as to whether or not this is a massive bubble burst, a quick correction, or something altogether different, but the bottom line for us is that it creates a huge amount of uncertainty in the largest car market in the world without a clear sign of what will happen next. The Chinese are saying they expect the huge growth they’ve had will stall faster than they expected and have cut forecasts.
The worst outcome for automakers is that the average Chinese consumer decides not to splurge on a nicer car, fears more economic collapse to come, and also pulls out of the stock market. This is a person who is not going to wander down to the nearest Porsche dealer anytime soon.
A better outcome is that people stop borrowing money to get into the stock market and instead just buys a car and eats the lost value. Unlike stocks, you can look like a baller in your car. Well, I guess you could walk around with a big stack of stock certificates, but you’d be an asshole. Even Donald Trump doesn’t do that, and he’s the worst.
There’s actually some backing for this idea from the secretary general of the China Associates of Automobile Manufacturers, who told reporters:
“If people have extra money, don’t invest in the stock market,’’ Dong said in Beijing last week, when he announced the cut in forecast. “It would be nicer if people use it to buy cars.’’
If I were a Chinese consumer I’d look at the government controls on the economy, wait for another downturn and get back into the market, then take the profits and buy a Dongfeng Crazy Soldier. But that’s me.
Photo Credit: Getty Images
Business Time is Jalopnik head honcho Matt Hardigree’s regular column about the business of building and selling cars. He can be reached at at firstname.lastname@example.org.