A prolonged bout of the worst air pollution on record in China has sent Beijing scrambling for solutions.
Some of the quickest fixes could dim the Detroit Three’s hopes for explosive sales gains this year in that critically important market. But long term, a government crackdown on auto emissions could benefit Ford (NYSE:F), General Motors (NYSE:GM) and Fiat‘s (PINK:FIATY) Chrysler if China takes aggressive action to get some of the vilest polluters — older gas-guzzlers — off the road.
Air quality has been at hazardous levels for days from Beijing in the northeast to Guiyang in the south-central part of China. At its zenith, pollution levels in the “airpocalypse” were 25 times the concentrations the U.S. considers safe, according to NPR.
In response to a public outcry, Beijing has temporarily shuttered some construction sites and factories, including one belonging to Beijing Hyundai Motor. It also parked about one-third of its official vehicles and promised to cut air pollution by 15% over the next three years.
And therein lies the rub. The Chinese economy runs on coal-fired plants that produce steel and other essential construction materials. Most power-generating utilities also burn coal. Producing cleaner fuels is no quick fix, either. That means first responses to the pollution problem will likely focus on getting cars off the road — or at least limiting the number of additional vehicles that hit the streets.
Last September, the municipal government of Guangzhou cracked down on private car ownership by introducing lotteries and license plate auctions. This action — particularly coming from the municipality that’s home to so much of the auto industry — likely is a harbinger of things to come.
If China adopts such restrictions more broadly, it could take some of the air out of auto sales growth projections for 2013. Recent forecasts by the China Association of Automobile Manufacturers estimate auto sales will grow 7% this year, fueled by a favorable economic environment.
Still, while the Detroit Three might take a hit in the short run, the long-term trends are in their favor. For example, municipalities like Xi’an and Urumqi already were banning vehicles produced prior to 2005, when emissions standards were tightened. If such bans were adopted widely in China, it could spark new-vehicle sales in that market just as the “Cash for Clunkers” program did here in the U.S.
The Detroit carmakers not only exceed those standards but have models that can stand up to even tighter standards likely to be adopted in the next 12 to 18 months.
China is big business for the Americans, particularly in light of Europe’s woes. GM’s sales in the world’s largest car market hit a record 2.8 million in 2012, and it plans to open 400 new dealerships this year, GM China President Bob Socia said at the Detroit Auto Show on Monday.
Ford China racked up 21% higher sales in 2012, and it plans to double its production and introduce 15 new models by 2015. Fiat and Chrysler on Tuesday announced a deal that gives Guangzhou Automobile Group the rights to build Jeeps for the Chinese market.
Bottom Line: The public outcry over deadly air is significant enough to trigger a near-term backlash as Beijing is forced to take the health problem seriously. Placing stricter limits on new vehicles is easier than shuttering factories or rushing cleaner fuels to market.
Even so, the Detroit Three should weather the turbulence — helped along by the territorial dispute between Japan and China that has cut into sales of Japanese brands like Toyota (NYSE:TM) and Honda (NYSE:HMC). While the situation bears watching, tighter emissions requirements should ultimately benefit the Detroit Three, as will any move to get older gas-guzzlers off China’s roads.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.