How to profit from the worst new car market in decades.

Making money with while auto makers are fighting for survival. By Bertel Schmitt, CEO Sinamotive Group (HK) Limited.

You think the stock market is bad? Look at the auto market. Empty showrooms. Incentives that don’t incite interest. This is the worst year for auto sales in decades, especially in the U.S. and Europe. In September 2008, US new car sales crashed to a record low. For the first time in more than 15 years, monthly U.S. sales came in below 1 million. Industry sales tanked by 27% to 964,873 vehicles. Likewise, the European new car market is on track to fall to its lowest level in more than a decade.

In Europe, the drop of new car sales is expected to be less dramatic than in the U.S. Analysts expect Western European volumes to decline 5% in 2008 and 3.5% in 2009. Analysts also expect Western Europe and the US to report approximately 14 million in new cars sold in 2008, with the outlook flat to lower in 2009. Some industry insiders, such as Katsuaki Watanabe, President of the world’s largest automaker, Toyota, expect even lower numbers. Watanabe recently said that U.S. new car sales will probably end the year below 14 million.

U.S. industry sales could “collapse” in 2009, J.D. Power & Associates cautioned. Standard & Poor’s warned of a possible insolvency of GM and Ford, “because of the rapidly weakening state of most global auto markets” and weak capital market conditions. Ford and GM promptly denied that they might file for bankruptcy. Instead, GM is in merger talks with Chrysler, after ending a flirt with Ford – as they did many times before, without ever consummating the marriage.

How can you make money with cars in such a catastrophic market? The answer is auto parts. People may stop buying new cars, yet, people don’t stop driving. People simply hold on much longer to their cars. This is aided by cars having an increasingly longer usable life. Already, the average age of all cars on Germany’s streets is more than 8 years. 10% of Germany’s cars are over 16 years old. Some observers already talk of a “Cuba-effect” on Germany’s autobahns, a tongue-in-cheek reference to the old cars on Castro’s island. According to a recent study, the car park in Europe will rise from currently approximately 200 million to 275 million in 2025. The study also predicts that the average age of a car on Europe’s streets will rise to 10.2 years in 2025. In the new European countries, the average age of the car is expected to rise to 14 years by 2025.

If you are in the business of servicing older cars, you are sitting on a gold mine. Nobody spends more for service and repair than owners of older cars. According to a recent DAT-Veedol Report, the annual average spendings for maintenance and repairs by German owners of cars that are less than two years old are EUR 109. Owners of cars older than 6 years spend close to EUR 500 per year for maintenance and repairs. The Wall Street Journal agrees: “As more consumers hold off on buying new cars, they’re making more repairs.” As older cars are subjected to wear and tear, expenses for service and repair are much higher than for new cars (which are covered by warranty anyway.)

Owners of older cars may spend more, but they don’t throw their money away. Owners of older cars are value conscious. The price of the repair bill should be commensurate with the value of the car. The key to this profitable market are high quality, competitively priced parts.

Where do these high quality, competitively priced parts come from? Mainly from China, the world’s leading exporter of auto parts. Auto manufacturers worldwide have been sourcing their parts in China for years. Japanese, European, and US automakers source parts used for production in their home markets in China. According to the report, GM buys 20 million parts a month from 190 Chinese suppliers, and had experienced no quality problems over the past year. Most brand-name parts are actually manufactured in China.

Prices in China are now more competitive than ever:

Metal prices, which saw a wild run-up in the first half of 2008, have been coming down since July. In October 2008, Aluminum fell to a 31-month trough on the deteriorating health of the car industry.

Steel prices are also in decline. There are reports of panic selling as speculative positions are being unwound. Forbes quoted an analyst who said that steel prices are “coming down hard and fast as the economies of the United States and Europe deteriorate and growth slows in China.”

Rates for container shipping are also coming down dramatically. “Barely 12 months ago carriers were making record profits in the Asia-Europe trade but from summer 2008, freight rates have plummeted and appear to still be in decline,” said Neil Dekker, editor of the Annual Container Market Review and Forecast 2008/2009 for London-based Drewry Shipping Consultants.

– China’s domestic auto sales will most likely see 2008 growth rates of under 10%, just released figures by the China Association of Automobile Manufacturers say, In the previous years, China had experienced double digit growth rates. The reduced domestic demand for OEM parts is expected to apply additional pricing pressure on parts manufacturers.

For these reasons, many repair chains and wholesalers in Europe and the U.S. have plans to launch their own private label parts lines, sourced in China. The profits can be huge. Many parts can be sourced in China at fractions of their European and U.S. retail prices.

People might delay the purchase of a new car for a while, but they won’t stop driving. As their cars get older and see more wear, they need more parts.

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