Wednesday, February 25, 2009

China ADR Stock Market Opportunities

President Obama's Tuesday Congress Speech

First, I want to say President Barack Obama gave a great speech yesterday as he looked to create the sensitive balance of hope and reality to reassure Americans being affected by the economic crisis that they would survive a "day of reckoning."

Shanghai Stock Exchange
By Jim Trippon China Stock Digest

U.S. In China’s Rearview Mirror - Who’s That In The Rearview Mirror? US

If there’s one thing America has long been famous for, it is our longstanding love affair with cars. Ask anyone who currently has the biggest automobile market in the world and the answer would just have to be the United States. But as of now, that answer is dead wrong.

Only two years ago, China’s exploding automobile industry raced past Japan to become the world's No. 2 vehicle market. Now China has surpassed the United States to become the world’s largest market for automobiles.

China overtook the United States as the world's largest auto market for the first time in January, when it sold more cars, 735,500 units, according to the China Association of Automobile Manufacturers.

As every investor knows, America’s auto industry is desperately weak and on the verge of bankruptcy without the help of ongoing government bailouts. A near-term recovery in vehicle sales in the U.S. is highly unlikely as the recession and unemployment take their toll on consumers’ wallets.

The Chinese auto market now has America in the rearview mirror and the U.S. is unlikely to regain the lead. Vehicle sales in China rose 6.7 percent to 9.38 million units last year. Sales may grow another 5 percent this year (considered sluggish by Chinese standards). Although China is growing while the U.S. is shrinking, the China Association of Automobile Manufacturers acknowledges that the latest figures show the slowest pace of growth since 1998.

Recently one investor asked our staff why we were not more interested in making more investments in the booming Chinese auto industry. The answer is quite straightforward and requires some understanding of conditions in mainland China.

To describe the situation in a nutshell, the Chinese auto industry looks much like the U.S. industry did in the 1920’s and 1930’s when America was making Packards and Reos and countless other now-extinct brands. China currently has more than 80 car companies and an industry-wide shakeout is inevitable.

Predicting who will survive the battle for survival in this industry is impossible, partly because many Chinese provincial governments are major stakeholders in failing enterprises and may be willing to use bailout funds to prop up unviable corporations. That kind of action threatens to prolong the survival of the weakest and to make it more difficult for established automakers to survive.

Anyone who has visited China recently will have noticed that BMWs, Volkswagens, Toyota and GM brands dominate the roads in every major city. All foreign automobile firms operate in partnership with Chinese enterprises. But in the countryside, cheap and undependable brands like the “Florid” are popular because they sell for less than $8,000 per vehicle.

It’s a very messy and unpredictable situation for investors. Does that mean there are no investment options related to China’s booming auto industry? Not at all.

There are related industrial sectors which are far less fragmented and more likely to make a dependable profit. We’ll be looking more closely at the safer ways to play the China auto boom in coming editions of the China Stock Digest.

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