China may run Detroit off the road

Here’s something to spook Detroit’s big carmakers. While GM, Ford and Chrysler wrestle with their huge losses in the US, China is preparing to jump-start its own automotive industry.

Sales of new cars have been falling on both sides of the world. While the Americans stole headlines with February’s 41% drop, China too saw three months of shrinking volumes, before a New-Year fillip kicked in. Light vehicle sales in China are forecast to fall 2% this year, says consultancy JD Power, and 14% in the US.

The big difference is that Beijing, unlike Motown, isn't asleep at the wheel. The government has announced a stimulus package designed to rev up domestic demand. There will be a subsidy programme for light vehicles in rural areas, mergers amid China's fragmented car industry, and a tax cut for mini-vehicles – conveniently the size where domestic producers are strongest.

In theory, Western suppliers should benefit from this too, since they shift units aplenty in Asia. General Motors has 8% of the Chinese market for passenger vehicles. Besides, there should be room for everyone. China still has just 22 cars per 1,000 people, according to KPMG, compared with around 800 in the US.

But potential demand isn’t the same as real demand. China’s factories are ready to produce, but few Chinese consumers are rich enough to buy, even with fiscal incentives. China exported 67% more cars than it imported so far this year – and almost half of its total production. Most goes to Russia, Algeria and Vietnam rather than richer markets, but each set of cheap wheels China sells is a pricier vehicle Detroit doesn’t.

If China’s demand increases only slightly, or stays flat, but production keeps growing as a result of the great fiscal experiment, carmakers elsewhere have a problem. Beijing plans to crunch together some of the country’s 57 suppliers. But with plants working on just two-thirds capacity, even that may not dampen output. All signs point to an export glut.

For those who drive cars, more cheap vehicles sounds like good news. For anyone outside China who manufactures them, it’s a pile-up waiting to happen.