Page 2 of 2 Lifting the hood on the
car
industry By Chan Akya
only
targeted areas with the greatest capacity for
employment generation, which obviously put
export-oriented industries on top. That approach
proved successful for Japan, as its car makers
went on to dominate the global auto industry.
It has since been adopted with less
success by South Korea, and even less so by other
countries, including Malaysia as cited
above. Even in Japan, the
lost decade of economic growth saw some of its
iconic car makers slipping, with the predictable
stake sales to foreign car makers.
Asian
governments looking for a model need to look no
further than the United Kingdom, where overall
manufacturing of cars has climbed sharply even as
its domestic brands slipped one after another into
foreign hands. This model is known as the
Wimbledon effect in developmental economics,
wherein the playing field is dominated by foreign
rather than local talent. However, the key
takeaway from Wimbledon itself is that while no
British tennis player has come close to winning
the tournament for many years, it remains the
centerpiece of the annual calendar of tennis
events, generating in its wake thousands of
tourists and millions of pounds in economic value.
That value creation is independent of who
plays, and herein lies the important observation
for any government, namely that it is sufficient
if the car industry employs local citizens, which
it must do to survive, rather than to focus on who
the owners are. An excessive focus on retaining
domestic control on the industry would likely lead
to the South Korean situation, where all but one
manufacturer slipped into foreign hands in the
wake of the Asian financial crisis.
Going
back to the Indian situation described above,
despite the opening of the sector to foreigners,
domestic players are still able to compete,
creating a situation with only one clear winner,
namely the Indian consumer.
Rule 3 for
investors: Bigger is not better The car
industry is dominated by significant risks in its
basic operating model.
As people use cars
to get from point A to B, but also as an
expression of their personalities, car makers
invariably have to focus on design in addition to
fretting about the level of performance that can
be delivered. Inevitably, this involves a tradeoff
among price, performance and reliability wherein
you would need to pick only two out of three. Thus
a car that is cheap and reliable would probably
have compromised its performance (ie, be slow),
while one that is cheap and fast would probably
suffer from poor reliability.
In practice,
as car makers invest billions of dollars in design
and production methods while confronting uncertain
sales expectations, returns for investors can be
extremely jumpy. Given that, it would take a fair
amount of luck as well as patience for investors
to make money while owning shares in such
companies. This means two things: first that one
doesn't buy shares in car companies just because
they are big in terms of revenues, and second that
even car companies with strong product lines can
prove to be lousy investments in the future.
I refrained from mentioning the most
exciting car market in Asia, namely China, until
this point, as all the lessons above apply to its
industry.
From being dominated by foreign
car makers that operate through favored joint
ventures, local Chinese companies have managed to
emerge from the shadows. However, many of these
companies are not profitable, based on my
calculations, and only exist because of the
support of their local governments. Inevitably, a
lot of these companies will need to merge in the
years ahead, even if China's growth in retail
demand is strong enough to warrant many brands
co-existing.
Many of the models currently
on sale in China are cheap knock-offs of designs
from other countries, and production methods still
lag other Asian markets, including South Korea.
Thus the industry needs a lot of capital, but as
the failures of US car makers show, these are not
necessarily suitable for public investors to
participate in, at this stage anyway. Nor is it a
good idea for banks to continue supporting such
entities purely to keep up appearances with local
government satraps.
As China catches up on
these fronts, though, it is important for the
government to tighten both fuel and safety
standards, to force innovation, level the playing
field and, most important, avoid large
bankruptcies of the sort seen in Britain. Equally,
it wouldn't want to keep unprofitable car makers
on life support for ever.
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