China boom will eventually bust: IRN (April 01, 2004)

GRAND RAPIDS, MI — The days of China’s booming automotive market may be numbered — but don’t think that will be the last offshore threat to face North American suppliers, says IRN, a U.S. consulting firm that monitors the tool, die and mold industry.

China has invested more than US$12 billion into new vehicle assembly capacity since 1994; half of that has in the past two years. North American suppliers have had to compete with the related influx of cheap tooling.

But much of the financing for China’s industry comes through shaky “policy loans” that are doled out to State-Owned Enterprises (SOEs), says IRN vice-president John Cleveland, who presented his findings during a Feb. 26 meeting of the Canadian Tooling and Machining Association in Mississauga, ON.

“Ten percent of the (GDP) is driven by free money getting pumped into the economic system,” he told Canadian Plastics. “That is, in essence, disguised deficit spending.”

The country’s non-performing loan rate has reached at least 50%, meaning that the banks are insolvent by Western standards, he says. (China says the number is closer to 25%, but it doesn’t count such things as the non-payments of interest.) And the liquidity of the financial system depends on depositors who are beginning to buy cars instead of feeding the banks.

“The government is going to have to back off at some point,” Cleveland adds, noting that it will cost more than US$500 billion to clean up China’s debt. That’s more than 40% of the nation’s GDP.

“The money supply is increasing at twice the rate the economy is growing, and that means inflation,” he says. “It has all the look of a bubble.”

His only question is whether the bubble will burst, or if the Chinese government will be able to manage the economic shift.

But IRN doesn’t see China as the last significant offshore competitor. Cleveland says India is a bigger threat, with advantages that include a billion-strong population that conducts business in English, a stable banking system, and a democratic state.

It will be increasingly important for North American suppliers to manage customer relationships, he says. That may mean sourcing low-cost tools from China, but blending high-value domestic tooling into the mix.

“If you’re going to hang your hat on cutthroat, international competition going away because China crashes, don’t bank on it,” he adds.