The key in China will be the rapid growth of the country’s middle class. Credit Suisse predicts that the household wealth in China will double to $35.0 trillion by around 2015 based on achieving sustainable GDP growth at or near the current growth rate.
The economic analysis is simple. The extra Renminbi mean that there’s more cash to spend on non-essential goods and services. This includes furniture, real estate, vehicles, and travel.
I have been a big supporter of the Chinese auto sector. Yes, the sector has slowed, but the massive potential is just too much to ignore. If you are patient, you need to have some capital in some of the Chinese auto-parts stocks or play the sector via U.S. automakers.
You don’t have to tell General Motors Corporation (NYSE/GM) to go to China and look for growth opportunities. In fact, you don’t have to tell anyone.
Going out and buying GM would not be my best stock advice, but this is not to say that there are not other opportunities to play the Chinese auto market.
The world’s automakers know that, to grow, you need to have a presence in China’s auto sector, whether as a venture with a Chinese company or as a standalone manufacturer of vehicles. The auto sector in China remains strong, as the country is the world’s largest auto market with an estimated 16.5 million vehicles sold in 2010, according to the Chinese industry association. Sales in the domestic car market are expected to grow 10% in 2011, according to the China Association of Automobile Manufacturers.
If you want to play via a U.S. automaker for less risk, General Motors, for example, is the top auto seller in China. GM and its Chinese partners (SAIC Motor and FAW Group) sold 2.35 million vehicles in 2010, well above its U.S. sales. In June, GM sold 193,878 vehicles in China, up a healthy 9.9% year-over-year. Ford Motor Company (NYSE/F), by comparison, sold only 44,442 vehicles in China in June and 274,510 in the first six months of the year. GM is set to grow its sales in 2011. In the first six months, GM sold 1.27 million vehicles, up 5.3% year-over-year. The automaker is focusing its growth in China, as it feels that the steady rise in the middle class will drive the demand for cars. GM will invest a minimum of $5.0 million in China in an effort to reach a sales target of five million vehicles by 2015.
There is clearly some slowing in the Chinese auto market, but I view dips as an opportunity to buy for those with a longer-term view.
Given that only about 41 in 1,000 Chinese own vehicles according to some industry pundits, there is clearly ample room for growth, especially as the income levels continue to rise. This fact will drive vehicle sales going forward to the point where China will likely remain the top auto market in the world.
The area of expensive or luxury vehicles is booming in China. The middle class is growing at a staggering pace, with more millionaires being created. When consumers find wealth, a big-ticket item they buy is a vehicle. The richer they become, the more they spend on vehicles. The sale of luxury cars is surging in China, according to auto industry researcher J.D. Power and Associates. The rate is well above what we are seeing in other industrialized countries.
There are numerous ways to play the Chinese auto sector. You can buy an auto company with exposure to China, such as the major global automakers I discussed; alternatively, you can also buy Chinese auto-parts makers. Some Chinese auto plays that I like include China Automotive Systems, Inc. (NASDAQ/CAAS), Wonder Auto Technology, Inc. (NASDAQ/WATG), and SORL Auto Parts, Inc. (NASDAQ/SORL). All three auto-parts makers are well below their respective 52-week highs and deserve a closer look. Note that these are not recommendations to buy; only examples of what to look for in this booming industry.