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Cheap Chindian Cars and High Priced Oil Don't Mix

by: Luka Agrapidis August 15, 2008 | about stocks: TTM    

Luka Agrapidis

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The rising cost of crude has been attributed to rising world demand and dwindling supply. 'Peak Oil Theory' is debated at family dinner tables and water coolers throughout America. CNBC hosts a parade of analysts who speak in detail on how growing demand in China and India are eating up supply. I wonder and question the health and longevity of this reality.

A growing middle class in India and China are singled out as the largest growing consumer segment of gasoline worldwide. It also happens that it is in China and India where you can find the world's cheapest cars. The highly anticipated Nano, known as the "People's Car", from India's Tata Motors (TTM), is the world's cheapest automobile starting at just $2,500.00 and China boasts a $5,000.00 car from Chery Automobiles sold only in China. Why do the world's cheapest cars come from the two countries with fastest "growing middle class"? Why doesn't this growing middle class go out and buy a shiny new BMW or Mercedes?

Middle class in India is considered to be anyone with a yearly salary of over $2,000. Yes, that is in dollars not rupees (by the way it's around 87,000 Indian Rupees) and yes, that is a calendar year, not a week or a month. In China, according to the China State Information Center, a yearly salary over $6,300 (about 43,000 Chinese Yuans) is considered middle class. I guess that explains the higher price of the Chery - if people can afford it they will pay for it.

The middle class in China and India are looking for and buying the cheapest car that they can get their hands on. The entire price tag on the Nano or the Chery is less than a down payment on most American cars. Consider finance payments for a car loan that is more than your yearly salary and then add rising gasoline prices. What percent of income will go to fuel costs? Can anyone reasonably expect demand to continue to grow in these countries at the current pace if oil prices continue to rise?

In the U.S. we complain about high fuel prices but most Americans can actually afford their cars and can, grudgingly, afford higher gas prices. Ultimately, the percent of our salary that goes to fuel is still relatively low. If prices get high enough you may drive less but you are still going to drive. The same cannot be said for China and India. Demand has already pulled back in the U.S. and as fuel costs rise, expect to see a larger proportionate decrease in demand in the countries that have been touted as its largest consumers.

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This article has 26 comments:

  •  
    Aug 15 08:58 AM
    Excellent point. A commuter in China/India driving 12k miles a year while getting 40 mpg will consume 300 gallons of fuel a year (please forgive my archaic measurement units, I'm from the U.S.)(also please forgive the ridiculous assumption that one could get 40 mpg in their city traffic)(also please forgive me for ignoring fuel subsidies).

    At $2/gallon, this costs $600.
    At $3/gallon, this costs $900.
    At $4/gallon, this costs $1200.
    At $5/gallon, this costs $1500.

    Interesting numbers for a middle class making $2000 - $6300 a year.

    $2 - 9-30% of annual income
    $3 - 14-45% of annual income
    $4 - 19-60% of annual income
    $5 - 23-75% of annual income

    In comparison, an American making $30k a year driving a 20 mpg SUV 15k miles per year at $3.50 per gallon consumes 750 gallons of fuel at a cost of $2625, or less than 9% of income. This is the point at which we have seen obvious demand destruction in the U.S.

    As the dollar weakens over the next two decades and Chindia's enonomies improve, expect these numbers to moderate. We may someday look back in anguish at the days when we could have bought TTM at less than a $10 bill (by then, that will be what a coke machine charges) and at a single digit P/E. In that way, TTM is a highly leveraged bet on two things: the long-term economic development of China and India and the continuation of the car as an economical form of transportation.

    Oh well, you have no choice but to bet on something.
    Reply
  •  
    Aug 15 09:02 AM
    Luka,
    After reading your article I don't see any connection between the title and the text. Furthermore there is no conclusion from the comparioson between chindia and usa.
    Reply
  •  
    Aug 15 09:44 AM
    You fail to note that these cars are FAR more fuel efficient than even the very best US cars (54 mpg)
    These vehicles will carry an entire family safe from the vicissitudes of the Indian monsoon yielding an even better fuel cost per person
    Meanwhile, In the US you've got SUV fuel hogs on highways carrying all of one person and a bag of shredded carrots. Ask who's really causing fuel prices to be where they are, look in you personal vanity mirrors in your Excusions! You might as well say that US driving and the rest of the world using any power at all don't mix
    Reply
  •  
    Aug 15 09:49 AM
    @Chris B,

    The whole point is that the average Indian (I don't know about the Chinese) doesn't drive 12k miles a year- that's what the average American does. The average middle class in India lives within its cities not in far flung suburbs. Also India is a far more geographically compact nation with much smaller driving distances. Therefore these numbers are completely meaningless
    Reply
  •  
    Aug 15 12:13 PM
    idiotic article.... i'm originally from india (born and raised, and lived there until age 21). lived in america for 5 years now. the author mentions the middle class starts at anyone hwo makes more than $2K a year. but thats a starting point. ppl making 100K a year are also considered middle class. don't forget that india has more than a billion ppl. so there is a huge segment of ppl making anywhere between $2K and $100K, who not only want cars, but also want environmentally friendly and less fuel-consuming cars. and hence, the high demand for these cheap and environmentally conscious cars. also, i would say the average miles a person drives a year would be in the ballpark of 3000-4000. maybe even less. the author is stupid enough to think that the entire middle class makes only 2 grand. i'm not denying that thse middle class ppl would eventually drive the price of oil up due to heavy consumption, but the point he's trying to make about unaffordability of car and fuel as of now is completely bogus.
    Reply
  •  
    Aug 15 01:08 PM
    Not sure why I rubbed everyone the wrong way but I did not mean to attack the Indian or Chinese middle class or the cars that are produced in these countries. US fuel consumption has fallen because of rising oil prices all I'm saying is that I expect consumption in China and India to fall off as well (unless subsidies continue). In theory this would bring fuel prices down making driving more affordable in the US and Chindia.
    @d_sat... 100K is not 'middle class' in any country. These are not my numbers... the average income in India is well below $2000. Granted some people make more, maybe alot more. Some people in the US make over 1million a yr... but it's not me.
    Reply
  •  
    Aug 15 02:24 PM
    I have to say that I totally agree with the pissed off people. I was trying to figure out where the author came up with that info after I read it the first time. You should explain that the reason people in India now have a thriving middle class is because companies like Dell, Verizon DSL and just about any other company that needs a call center has outsourced their work to India. So now there is a new class of people in India who are making more than .00045 us dollars/hour. Which now results in a higher unemployment rate here in the States. Which in turn now means that more people can not afford the cost of living in the great USA. So now they have to foreclose on their home because there is a margin call on the middle class millionaires who sucked up all of the equity in their homes to finance the HUGE HUMMERS so they could go to the store and pick up a bag of shredded carrots. Do not forget the fact that personal bankruptcies are on the rise again for the first time since the late 90's which in turn is now going to f@*k the financial markets AGAIN. Lets not forget those middle class citizens from India, who are taking the US dollars that Mike Dell is giving them and exchanging it for Euros so they could then come to the US and purchase a home for .50 cents on the dollar because our economy is so F&@ked. All because Big Companies outsourced there phone centers.

    In a Nut Shell: We are paying more for Fuel because American Companies are outsourcing their employement to India. So the people of India are making more money and are buying things that they have always wanted but could never afford until now. And we are complaining because for the first time we are paying more for fuel while some one else is living the American Dream.

    Let's just hope that India and China can one day outsource their work to us.

    My Advice; Life is a cycle, you have to know when to jump on and off.
    Reply
  •  
    Aug 15 02:33 PM
    One of the most stupid and simplistic analysis I've ever seen. Despite the growing demand for gasoline in developing countries like China and India the US still accounts for almost 60% of the gasoline consumed in the world. It almost seems like any improvements in living standards in Chindia is anathema to the vast majority of Americans. An average Indian commuter probably drives close to 2000 miles in an year, not 12000. Plus public transportation and 2 wheelers (of the 150cc engine variety, not 1200c Harleys) is the norm not the exception. Almost everyone who buys a car also has a 2 wheeler. The car is usually reserved for occasions where more than 2 people need to commute and would not fit on a 2-wheeler. Luka, you should visit Chindia once before spouting about things that you don't have the foggiest clue about.
    Reply
  •  
    Aug 15 02:44 PM
    @jduke
    Doesn't matter if it's 2000 or 20000 miles no reasonable person can believe that fuel consumption will continue to rise in Chindia at over $4 a gallon when salaries are so low.
    I visited Mumbai back when it was still Bombay.
    Reply
  •  
    Aug 15 03:42 PM
    Maybe they are just angry because TTM has gone from $20 to $9 and headed to $1. They bought Jaguar and Land Rover... what a stupid move and now looking to buy Hummer... real good on fuel. This company is getting driven to the ground.
    Reply
  •  
    Aug 15 05:06 PM
    "@jduke
    Doesn't matter if it's 2000 or 20000 miles no reasonable person can believe that fuel consumption will continue to rise in Chindia at over $4 a gallon when salaries are so low.
    I visited Mumbai back when it was still Bombay."

    The switch occured in 1995 (CIA Factbook, Wikipedia), before the major companies began offshoring (go look at ISP pervasiveness figures). I've gone to India once a year, every year in my life and like d_sat said, India's Middle Class (which is defined by various metrics depending on who you talk too) is very widespread. The Americanized view of the world believes that a middle class must exist under the exact same conditions that are found in America; however, in India, you can find an auto driver, a store clerk and a store owner who all will tell you they are in the middle class - yet the Auto Driver makes $2,000, the Clerk makes $10,000 and the Store Owner makes $50,000. The reason for this (I suspect) is the rather large aristocracy that India has; similar to Russia (and of late, China), India has an enormous amount of wealth poured into it's (relatively) large upper class...so much so that it severely (in an uneasily correlative way) skews any simple metrics on a continuous real probability space (i.e. the statistics you are using). You'd need some better weighted figures to account for this huge discrepancy; think of it as using modern American class standards on pre-WWI Europe...it just wouldn't work because of the cultural/class differences. Unlike America, where we have a rather uniform (and normal) distribution of income, India has a very uninterpretable income distribution due to society and cultural differences. Your analysis was a good try (I'm sure many other culturally-unaware people would easily agree with your analysis), but it disregards some of the cultural aspects of India that really make it a different economy than America.
    Reply
  •  
    Aug 15 06:11 PM

    Aug 15 02:44 PM
    @jduke
    Doesn't matter if it's 2000 or 20000 miles no reasonable person can believe that fuel consumption will continue to rise in Chindia at over $4 a gallon when salaries are so low.

    Over $4 a gallon is not that severe a problem when you are driving a 150cc scooter or motorcycle which usually give you upwards of 100 miles per gallon even with the clogged roads in India or other developing countries. When I was in India it was a pleasant surprise to see how far a tank of gas went on a motorcycle. No matter what you believe in it should be a no-brainer that with the Chindian economies on the rise we're not going to witness huge drops in gasoline consumption, although the Indians have been producing a decent all electric car called Reva for the last 3 years now. With improved electricity generation capabilities they should be able to manage just fine.
    Reply
  •  
    Aug 16 10:10 AM
    So what's the point?

    We started all this with the Ford Model T. Some things change, economic behavior doesn't.
    Reply
  •  
    Aug 16 10:41 AM
    This is a simple supply and demand issue... dont complicate matters.
    Already the Nano demand is beyond supply... and that is even before the car has launched!!!
    TTM is projected to make a profit if they can sell over 45K cars / years.
    This is the chance to get on board a quality company which will own the Indian market (both the low and high end of the spectrum).
    My target for TTM is $18 by year end when the Nano launches.
    Reply
  •  
    Aug 16 12:00 PM
    So what is it Bush is crying about?
    Reply
  •  
    Aug 16 12:14 PM
    {Quote}Maybe they are just angry because TTM has gone from $20 to $9 and headed to $1. They bought Jaguar and Land Rover... what a stupid move and now looking to buy Hummer... real good on fuel. This company is getting driven to the ground. {/Quote}

    Stupid Move? Interesting that you say that since it just tells me that you have no idea about Brands. Do you know as to how much time it has taken for Toyota to establish a Lexus? If Tata had not gone with the take over, it would have lost a lifetime oppurtunity since such Brands never come on DISTRESS Sale. Recently read that Jaguar will soon be launching a $100K car. You can well imagine the kind of margins those cars shall have.

    With regard to buying of Hummer, as far as my info is concerned, neither Tata nor any other Company has come forward for that Brand. Its unlikely to be ever sold unless given away for a pittiance.

    Reply
  •  
    Aug 16 01:15 PM
    Of far more impact than new car owners, are the millions whose newfound definition of affluence, is entering the fuel consumer class by putting a motor on a bike they previously peddled and buying a pint of gas a day.
    Reply
  •  
    Aug 16 01:20 PM
    as much as i agree the price and income has real bearing on consumption i continue to be amazed at this idiotic use of ABSOLUTE value of dollar when comparing income . it is simply meaningless to say a person in place X earns 1 dllar a day with out knowing what that 1 dollar will buy OVER THERE .
    a lot more meaningful and informative is use of Purchasing Power Euivalency .
    Reply
  •  
    Aug 16 03:55 PM
    I'm always amazed that people have no problem with the idea that Americans will cut oil consumption when the price skyrockets, but think that countries with a fraction of our GDP and disposable income will sustain their demand.

    And don't forget, we have an unlimited supply of dollars, the currency of oil.
    Reply
  •  
    Aug 17 03:09 AM
    Btw, India pays more than the US per "gallon" of petrol, despite what people think of as huge subsidies, because gas is taxed to hell and back. A liter of petrol costs Rs. 55 in Mumbai, and a gallon is what, 3.5 liters? That, at Rs. 43 to a dollar, gives you the $4 petrol we are ALREADY paying. And guess what, this has always been the case - on a comparison we have always paid more than the US for petrol (okay, we do pay lesser for diesel, but the small car you talk about is petrol for the $2500 price)

    Now let's take this $2000 income person. Will probably not drive more than 4000 km. a year. With the fuel efficiency of the small car, they'll pay some Rs. 2.2 per kilometer (25 km/lt). Say Rs. 3 including maintenance.

    I think by $2,000 you actually mean someone earning more than Rs. 1 lakh (Rs. 100,000) per year which is $2500 per year. At least that's what I think (we don't think in dollar terms, so a lakh is like the lower minimum) And this is post tax because tax doesn't hit you till you earn at least Rs. 150,000 a year.

    On a Rs. 100,000 salary, the cost of getting the car, at $4 per barrel gas, is 12%. That's not much more than the 11.5% that the US spends on gas:
    blogs.wsj.com/economic.../

    Note then that Rs. 100,000 is the absolute lower end of middle class. If you take tax payers (of which there are officially only 33 million, or 3.3 "crore" in our terminology) who earn a minimum of Rs 150,000 that percentage will diminish. At say 300,000 a year, 8000 kms and 18 km/lt cars, we are speaking of about Rs. 26,000 in [only] gas expenses, which is 9%. I would imagine that people with less than 300,000 a year would only buy two-wheelers which give some 60 km per lt (that's about 130mpg) and the corresponding fuel cost as a % of income is considerably lower.

    Of course all this is set to change dramatically. With the highway upgrades nearly done, you can drive the length of the country easier and with power, water and phone/data spreading out people will be willing to drive, to work and for pleasure. Then, the $4 per barrel gas won't make sense - but by that time - a year or so from now - gas may not be at that level. Plus, in a few years, $4 at todays rates is likely to mean Rs. 30 or Rs. 25 with India's growth reflecting in the drop of the dollar against the rupee. (The rate is Rs. 43 now)

    Note that government employees form the base of the "middle class" - i.e. they are lower paid that the equivalents in the private sector. The government just raised their minimums to Rs. 10,000 per month and that does not include typical perks like conveyance, phone bills and allowances.

    And finally, consider that cars can run on compressed natural gas, which is cheaper, burns better, and is less polluting. India has large reserves of CNG as well, and there are pipelines being built to distribute it across the country. If it becomes a fuel of the small car, then the entire equation can change - where, coupled with a falling dollar, even 2x or 3x growth in car ownership, miles driven or cost of gas may not impact spending power.

    What you might not have accounted for is that Chindia can use more efficient fuels before they become a "standard". Kinda like cellular phones.

    And kunst: when you make the supply of dollars unlimited, the dollar will not be the currency of oil.

    Reply
  •  
    Aug 18 10:26 PM
    Deepak, I agree completely. It is amazing that the world continues to take US dollars for goods of real value, with oil at the top of the list.
    Reply
  •  
    Aug 21 03:39 PM
    Being a person born in the US does not give one a right to own/use a car. As a human, you should be thankful that these countries are trying make things affordable for more people. Most of the cars in US carry a single person, whereas in India/China it is at least 2. Also, how weird the comparision of salaries. A dollar in US is offers far less buying power than a dollar in India.

    Get rid of that fancy gas guzzlers here, and let all the people in the world enjoy fuel-efficient ways to commute.
    Reply
  •  
    Aug 22 11:55 AM
    Good article. Oil is a world commodity everyones comments compares the buying power of the dollar to the rupee in relation to local commodities. $2 may buy you a dozen eggs in the US and 4 dozen (for all I know) in India but when you compare things that are not locally produced or grown India cannot keep up or pay for it... like unsubsidized fuel or italian shoes or american computers. India is an emerging market and will take offense to whatever is said about it that is not perceived as beneficial. You could have said Indian children are eating less vegetables and you would of had the same angry responses. Of course there will be demand degradation in India and China just like there is in the rest of the world.
    Reply
  •  
    Aug 22 11:56 AM
    I'm surprised there is no discussion of Chindia's cutting edge research & development of alternative fuel vehicles such as hydrogen, ethanol, biodiesel, and elephants. Chindia leads the world in elephants, which are biodegradable as well; worth far more to our planet than a Tata or a Chery I would venture to say. Further, when the cowboys were fighting the indians, they didn't bother to consider the annual middle class salary in dollars or in rupees, so why the hell should we? As an American Indian I am embarrassed to admit that sometimes I wonder why Christopher Colombus ever bothered to discover India in the first place.
    Reply
  •  
    Aug 23 02:22 AM
    {Quote} I am embarrassed to admit that sometimes I wonder why Christopher Colombus ever bothered to discover India in the first place {/Quote}

    Well, please study History before commenting. Columbus set out to discover a new route to India because India was the biggest trading country at that point of time and no country could afford to ignore India as a Trader and as a Supplier of a lot of products used by the Europeans and the land route was blocked.
    Reply
  •  
    Aug 29 09:16 AM
    Read the World is Flat, pretty good book on this subject, it isn't just call centers that are being outsourced.
    Reply
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