CHINA’S AUTOMAKERS TO BREAK INTO TOP TIER

China is positioned to surpass Germany as the third-largest producer of automobiles in 2007, reports automotive market analysis firm CSM Worldwide, Farmington Hills, Michigan, in its updated summary on global production. China’s barely 50-year-old industry could even push Japan out of its No. 2 spot as early as 2015. North American automakers still hold the No. 1 seat, but are under siege from foreign competition.

Multinational car manufacturers dominate China’s auto market—the top three producers are Suzuki, Toyota and Mitsubishi—but Chinese auto brands such as Chery Automobile and Geely are beginning to emerge. CSM research shows that Chery, which produced 178,000 cars in 2005, is expected to produce 319,200 automobiles in 2007, an almost 80% increase, and 453,600 in 2012. Market leader Suzuki, which produced 828,600 cars in China in 2005, is set to produce 975,300 automobiles in 2007, an 18% increase, and 1.1 million in 2012, a 31% increase.

China’s exports in the auto market also have begun to surpass its imports. The Beijing Review reports that between January and August 2005, China exported 100,000 complete vehicles—a quarter of its production—more than double the number from the same period in 2004. China’s imports, on the other hand, are decreasing. Between January and September 2005, China imported 94,000 complete vehicles. This signified the first time that Chinese exports overtook imports in number, the weekly news magazine says. Major export destinations include Africa, the Middle East, Central Asia, Southeast Asia and Latin America.

by Eli Lustgarten

Business conditions remain solid with positive momentum in virtually all industrial sectors, particularly in the construction equipment and fluid power segments.

Capacity utilization in manufacturing moved up to 80.5% during the first quarter from 80.1% in December (originally estimated at 79.6%). This is the first time since before the 2001 recession that the figure has exceeded its 1972-2005 average of 79.8%.

Only the farm equipment sector outlook remains weak, reflecting weak commodity prices, a condition that could continue well into 2007. A major drought this summer, which would reduce the currently burdensome crop carryovers and improve crop prices, could save this sector for next year.

A weaker dollar still is on the horizon and likely will help 2006. The dollar rose 12.5% against the Euro and 14.8% against the Yen last year. Likely improving economic growth in these two regions may drive their interest rates up somewhat, while the Fed in the United States is perceived to be nearing the end of its rate increase cycle.

Despite robust conditions, most industrial managements continue to provide conservative guidance to Wall Street. The basis is concern about a slowing domestic economy as 2006 progresses. Conversations with several internal company economists indicate that they are focusing on the current flat yield curve as a harbinger for potential slowing of industrial markets in the second half of this year.

This conservatism reflects the projections of many economists. While the consensus GDP estimate for this year is more than 3%, many economists foresee economic growth by the fourth quarter of 2006 to be half the robust levels of the first quarter, or 2% to 2.25%.

There are two potential positives that could contribute to upside surprises in 2006: better-than-anticipated results overseas and weaker pricing in the materials sector that would reduce costs for manufacturers while pricing generally holds. Recent data indicates that global economic activity continues to improve with unabated strength in China, improving growth in Asia and economic momentum gathering steam in both Japan and Europe.

The bottom line is that this still is expected to be a mid-cycle year where top-line growth falls from above-normal double-digit levels to mid-single digits. Meeting the goal of most industrial business models of an 8% to 10% revenue increase likely requires acquisitions, an improvement in margins from a better cost-versus-price relationship, new products or market share gains.

If the economy slows at the close of 2006, it will be typical of a mid-business cycle pause. There were similar slowdowns in 1966, 1986 and 1995. Hence, 2006 global economic conditions are likely to be average—and average is good.

Analyst Eli Lustgarten is senior vice president at Longbow Research and president of ESL Consultants in St. Louis.