This holiday season holds special promise for me. I am spending the holidays with extended family in Los Angeles. And the trip has reminded me of the importance of family and sharing.
We must all be grateful for the abundance around us and continue to thank our good fortune that we live in a land that allows freedom of thought and action.
This trip to Los Angeles has also brought back something that I had forgotten in Alaska, where I live.
Even during this holiday season, traffic in Los Angeles is horrendous. You have to schedule at least an hour to go anywhere.
As regular readers know, I am a major Asia fan and expect great things from there during the next decade. And yet, not all sectors will perform uniformly during each of the coming years in the decade.
China has been on a tear for a while now. And 2011 may not be much different. But I have discovered one major sector that will stall and slow down significantly: the auto sector.
I remember my days in Beijing when I would open my blinds and windows in the morning and struggle to see the sky. The smog was overpowering and oppressive. The traffic was thick and dense on the major roads.
Despite major overhauls and restrictions, there were just too many cars on the roads. Nicknamed the "Bicycle City," there were cars as far as you could see.
And with the recent growth, this problem has gotten significantly worse.
While I am a firm believer in the free economy, sometimes artificial restrictions can bring positive results. Beijing’s municipal city government recently announced a new traffic-control policy.
The main aspects of the policy are:
• A restriction on new-car sales with annual new passenger-car license numbers reduced to 30 percent of 2010 numbers, a drop of 70 percent, (2010 is expected to end at about 800,000 new cars and 2011 would be 240,000);
• Individuals who will be allowed to buy cars must hold a valid Beijing resident permit or working permit, have a valid driver’s license, and currently have no car registered under their name;
• Individuals will receive 88 percent allocations, taxis will get 2 percent and the remaining 10 percent will be for corporate users.
• Freezing the city government fleet for the next five years;
• Increase parking fees from April 1, 2011;
• Restriction on cars allowed on selective roads via an odd-even license number system.
What does this mean for the residents and investors?
While I had anticipated some of the restrictions on auto traffic in Beijing, they are a lot stricter than I had expected. I expect the auto sector in China to take a significant hit. And that is based on the expectations that other first- and second-tier Chinese cities are going to soon follow Beijing.
Car demand will get squeezed severely and this will lead to a sharp decline in the results of local car manufacturers as well as foreign car manufacturers who sell heavily in China, such as Peugeot, GM and Chrysler. I expect this new policy will drop growth rates of cars in China to about 6 percent in 2011 from 11 percent.
Having spent a lot of time in China, I know the locals will cheat and try and circumvent the procedures. This will lead to much higher enforcement of fines and tickets. Unfortunately, we cannot buy shares of the local government whose revenues are set to rise.
But there are ancillary sectors that will benefit from this policy decision.
Operating costs for auto ownership in China will rise. And we can capitalize on some of this via investing strategically into this policy decision. Publicly listed parking-lot owners, car-rental companies, repair and maintenance shops, etc., would all begin to see significant growth in 2011 and beyond.
So let’s get wise and short auto companies that sell into China and then invest into focused sectors in China which will benefit from this change in how China drives cars.
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