Every now and again you get a reminder of how stupid and crazy governments are. China and Japan had another spat over the disputed Senkaku/Diaoyu islands in the East China Sea this week.
Take the Japanese government, in this instance. Japan is into its third ‘lost decade’ since its bubble economy collapsed in 1990. The government has a debt burden of over 200% of GDP in the face of a rapidly ageing population and a declining trade balance with the rest of the world.
The currency has deliberately been debased to drive its value down, hurting the average citizen, whose costs have gone up. And there is still the cost and burden of the aftermath of the tsunami.
One of its few bright spots is its trade surplus with China. And yet the Japanese government seems prepared to jeopardise this for the sake of these rocks.
Perhaps it’s all a ruse to justify the Japanese military build-up. Perhaps it’s the lucrative fishing waters. We don’t know.
But we do think this dispute could alter the trade flows of a major industry and could cost Japan and their major automakers an astonishing amount of money.
But that doesn’t mean investors here have to miss out on ways to play this lucrative market…
Who Will Triumph in This Market?
We’re talking about the Chinese car market. It’s the biggest on the planet. And the news should have been good for Japan this week.
Take this from the Australian:
‘Japan’s biggest car makers said their production in China surged from a year earlier, when territorial disputes sparked anti-Japan protests…this month, the three [Toyota, Nissan, Honda] posted healthy sales data for September.‘
That was September. You can imagine a few Japanese auto execs with their head in their hands if the latest showdown causes anti-Japanese sentiment to rise in China again and starts showing up in their sales figures. They’ve spent 12 months and no doubt millions in marketing to win Chinese consumers back over.
Japanese carmakers currently have a 15% market share in China. This is still actually down from last year’s 18.5%. The competition from South Korea, Germany and Chinese domestic brands is pretty stiff already.
China’s a profitable place to do business too, by the looks of it. The Australian reports Great Wall Motor, a large Chinese SUV maker, is the most profitable carmaker in the world, with higher operating margins than Ferrari. ‘Great Wall’s Hong Kong shares have rallied 93 per cent this year, even as the Hang Send index has stayed flat.‘
But the key takeaway is this:
‘China’s car industry has been a bright spot in an otherwise lagging mainland economy.‘
With rising incomes, and a staggering amount of money spent upgrading its road infrastructure over the last decade, a car and a ‘road trip’ style holiday is increasingly accessible to millions of Chinese citizens. A car is an important status symbol in Chinese society too.
It’s a lucrative market. But there’s one problem, and it’s a major one: pollution.
China’s Big Problem
According to Tom Miller in his book China’s Urban Billion, ‘Fewer than 20% of China’s cities meet World Health Organization standards for sulphur dioxide and nitrogen dioxide levels, and almost none for particulate matter… China is already the world’s biggest greenhouse gas emitter, and emissions will continue to grow as the country urbanizes.‘
And the Chinese know it. Miller points out that Chinese cities are willing to spend millions investing in mass transit systems, both subways and above ground to ease congestion and improve air quality.
If the automakers want to hang on to this market, they need to get the emissions down and their cars as ‘green’ as can be. It’s good news for all of us, actually. Pollution doesn’t stop at the border.
As ever, where you find problems, you find entrepreneurs working on solutions. It can be a happy hunting ground for investors too.
It sounds odd, but this is where it becomes a resource story. There’s more than one way to play this idea too. Our colleague Byron King over in the US thinks the demand for platinum and palladium will soar once China mandates that its millions of diesel engines, which belch out toxic exhaust, be fitted with catalytic converters.
You might member, too, that we reported a few weeks ago how the editors over at Revolutionary Tech Investor had discovered a company developing a unique material to bring the weight of cars down, and hence the emissions.
But that idea hasn’t made it to the final production line (yet).
But what about right now? This is where it gets intriguing. Over at Australian Small Cap Investigator, Kris Sayce has discovered an innovation in car manufacturing being used as we speak. He reckons it’s going to spur a resurgence for a very specific commodity in Australia. He calls it the ‘Wonder Weld’ and he’ll show you why later this afternoon.
Callum Newman+
Editor, Money Weekend
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