USA challenges China for world's largest car market

By Ally Liu 

A few weeks ago, I predicted that "unless the sky will fall in the second half of 2009, China will solidly dethrone the USA as the world's largest auto market." The sky fell faster than I thought.

Suddenly, American buyers storm the showrooms and demand CARS. The acronym-happy US government calls their stimulus program "CARS," as in "Car Allowance Rebate System." People and even politicians call it "Cash for Clunkers," so let's stick with the popular choice.

Only six days after the USA had launched their Cash for Clunkers incentive program, which offers up to $4500 to people who retire their old car and buy new, the program ran out of fuel. Supposedly, the program is such a success that it had burned through its allotted money in less than a week. Gone were $1 billion, as originally earmarked for the program, good for about 200,000 to 250,000 cars and trucks, depending on the average rebate qualification.

News that the program was ending sparked another tidal wave of traffic, drowning the America's auto showrooms in something they hadn't seen for months: Eager buyers. The program was hastily restarted.

Government systems were overwhelmed by the deluge of applications. Some brands, such as Hyundai, had taken applications before the program had started. Some brands, such as Chrysler, had put their own $4500 on top of the $4500 in federal aid. A few days later, they stopped the offer.

There are reports that demand for new cars suddenly outstrip supply. Car manufacturers had taken a summer holiday. Chrysler hasn't produced anything since declaring bankruptcy. Supply was too thin even without the stimulus program. Customers had waited for the program to go into effect. Now, dealers are being mobbed by customers. Some dealers worked until past midnight. Many dealer lots are empty.

Already, conspiracy theories are making the rounds. Some claim, the US government stopped the program so that GM and Chrysler could re-stock their dealers. The right wing Fox News network turned hysterical and warned its viewers not to access the government website, because the computer could be taken over by the American government: "They could continue to track you forever, they could do just about everything." America is in the midst of a Cash for Clunkers frenzy.

With the allotted money gone, by early Friday, the US House of Representatives had to rush through $2 billion in emergency funding to save the program. Funding needs to be approved by the Senate. The extra $2 billion probably will not be enough. Also, the program may have unintended consequences.

The American clunkers program heavily favors large trucks and SUVs, many say to the benefit of government-owned General Motors and government-saved Chrysler.

However, early indications show that cars are selling better than pickups or sport utilities. What's more, according to Ford sales analyst George Pipas, consumers are trading larger vehicles for smaller ones. "It is pretty dramatic," Pipas said.

Something similar happened in Germany. Germany gives 2500 Euros to its citizens who retire cars 9 years or older. Germany had originally earmarked 1.5 billion Euro ($ 2.13 billion) for the program. Quickly, the funds were exhausted. Additional funds were provided, the program was expanded to 5 billion Euro ($7.1 billion), good for 2 million cars. This is a market that sells approximately 3 million units a year. As I write this, 1.7 million applications have been submitted, there is money left for only 300,000 more. This stimulus program turned Germany's new car market red hot. Twice in a row, Germany registered increases of 40 percent over the same month in the prior year. Instead of 3 million cars last year, Germany could sell up to 4 million new cars this year. Germany also saw a huge trend towards smaller cars as a result of the program.

Analysts expect that the American program, if fully utilized, will push US sales above 10 million units for 2009, higher than the annual rate so far this year. If Germany is an indication, these estimates are overly conservative. The American consumer psychology is known to be able to turn suddenly. It is turning now.

As in Europe, the stimulus program will lead to market disruptions. It already does. Prices of cars go up. Parts makers will most likely see sudden demand from OEMs for parts for smaller cars, a so far uncommon segment in the USA. Korean and Japanese manufacturers could fill in the void, creating fresh demand for Made in China parts. The strong American after sales market can be affected as the fleet of older cars is reduced. Also, many parts of the retired "clunkers" will be recycled or remanufactured, creating pricing pressure. The price of steel will be affected as more scrap is entering the market.

Most of all, the race for who will be the world's largest auto market is suddenly getting very suspenseful. For months, it looked like China will easily beat the USA this year, and in years to come. Now, America, fuelled by the cash for clunker frenzy, is picking up speed and is threatening to catch up with the Chinese powerhouse. It will be a tight race, a thrill to watch until the final numbers are in.