The Mystery of the Missing Chinese Cars
New vehicles sitting on a lot in Beijing, China
Several months ago, new vehicle sales in China supposedly passed sales in the United States. Naturally, the media, which is completely in love with the story on the demise of the U.S. auto industry was all over this story (author's note, for an example of someone who absolutely hates Detroit, look no further than Micheline Maynard. Ewwwww. She is probably dancing in the streets now that GM and Chrysler are bankrupt).
Someone over on the Global Gains message board (subliminal message...you will subscribe, you will subscribe) directed me to the following fascinating article on the growing gap between the new vehicle sales that China is reporting and the media is plastering all over the place and the actual vehicle registrations in the country: China’s Case of the Missing Cars. Here's a fascinating quote from the article:
There are some apparently contradictory numbers coming out of China at the moment. Take those car sales as an example. Our man on the ground tells us BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of last year, but the number plate agency recorded only 10,000 new cars of that model registered for use on the road. What happened to the other 20,000 are they running around without number plates? In a police state, I don’t think so. Our understanding is auto sales are recorded in China when they leave the factory, not when they are registered on the road, so dealers can build up inventory while car “sales” are rising.
Here in the United States manufacturers make money when they produce new vehicles and sell them to their independent dealers. Manufacturers record revenue when they produce a new vehicle, however the monthly auto sales numbers that are reported in the press every month are sales to consumers.
According to this article, "Our understanding is auto sales are recorded in China when they leave the factory, not when they are registered on the road, so dealers can build up inventory while car “sales” are rising."
It is very possible that this is true. Given my skepticism of many Chinese economic data this would not surprise me in the least. This sort of situation would be very obvious in the U.S. because manufacturers report inventory numbers. One can get a solid picture of how many vehicles are floating around out there by looking at the raw inventory data as well as the "Days Supply" of vehicles. Despite the weak level of new vehicle demand, new vehicle inventory is actually in great shape n the U.S. right now because manufacturers have significantly slashed their production. This is a fairly bullish sign for automakers and new vehicle sales going forward.
If the Chinese auto sales figures that have been widely reported in the media are indeed production numbers rather than retail sales we may be witnessing an unsustainable trend of overproduction. Time will tell if this is the case. If China doesn't lie about the numbers, eventually lackluster consumer demand will cause this overproduction and in turn the reported Chinese auto sales numbers to slow unless consumer demand increases significantly.
Having said this, here in the United States there is always a several month lag time between when new vehicle sales are reported and when the numbers show up in vehicle registration data. Companies like Wards or Autodata report new vehicle sales when they really happen but the vehicles do not show up in Polk's registration reports until two to three months later. If something similar is happening in China then it is possible that a rapid spike in new vehicle demand would cause a huge discrepancy between new vehicle sales and new vehicle registrations.
It's possible that the situation in China is a combination of inventory growing either in anticipation of increased consumer demand or unjustifiably and a spike in new vehicle demand that hasn't showed up in the registration numbers yet. Exactly what is happening should be fairly obvious in the near future (assuming that the data that China is providing is accurate). Manufacturers cannot indefinitely produce vehicles in excess of demand. Eventually cars would begin piling up so deep that production would have to slow.
That's my $0.03 (I gave myself an extra penny because I actually work in the industry ;)).