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There’s An Automobile Craze Sweeping Across China

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, December 6, 2006

Right now, as you’re reading today’s DailyWealth, the most populous nation on Earth is building the world’s most extensive expressway network.

Started in 1988, the new Chinese interstate network should total 175,000 km by 2050. To reach its goal, China will have to lay more than 2,955 km of highway every year for the next 44 years.

In its rush to build out Eisenhower’s interstate highway system, the U.S. laid 2,964 km a year... but kept up that pace over “just” 19 years (1956-1975). For comparison, the U.S. currently maintains 76,000 km of interstate highway.

At 45,000 km China’s current freeway network is already the second-largest in the world. Ten years ago, it barely existed. Jim Rogers says China’s roads are already the best in the world. The build-out is creating some big opportunities for auto manufacturers in China:

  • China now has more car brands than the U.S., according to the New York Times.
  • Car sales in China have climbed 38% in the first three quarters of 2006. This year alone, automakers have sold more than 7 million cars in China. (By comparison, automakers have sold 16.7 million cars in the U.S. so far this year.)
  • Sales of light trucks in China already have surpassed sales in Japan. Car, SUV, and minivan sales in China are projected to overtake Japan early next year. The U.S. is now the only country with a larger vehicle market than China.
  • A record 500,000 people attended the Beijing auto show earlier this month.
  • J.D. Power and Associates estimates vehicle sales in China will double over the next three years.

It’s also generating some interesting opportunities for American companies. Take Intercontinental Hotels Group, the largest hotel operator in the world. It is building 11 new hotels in China this year. Overall, Intercontinental plans to build another 61 hotels in China before the end of 2008.

McDonald’s already owns 750 restaurants in China. It plans to build another 250 by the opening ceremony of the 2008 Beijing Olympics. McDonald’s has said that half of these new restaurants will be drive-thrus. Right now, only three McDonald’s restaurants in China have drive-thrus.

Furthermore, McDonald’s has entered into an agreement with China’s second-largest oil company Sinopec, announced in June. McDonald’s will turn “an unspecified number” of Sinopec’s 30,000 Chinese gas stations into drive-thru McDonald’s.

Intercontinental is building all these new hotels and McDonald’s is building all thee new drive-thru restaurants to profit from the automobile craze currently sweeping across China.

The question is: How do we profit from this craze?

Several options spring to mind. We could invest in a Chinese automaker. We could invest in rubber. We could invest in tourism. But I have an easier play.

According to the Energy Information Administration, 85% of the world petroleum production is used for transportation.

Andrew Gould, CEO of Schlumberger, estimates 80%-85% of growth in world demand for petroleum over the last five years has come from emerging markets.

Or how about this: According to the Earth Policy Institute, of the five basic commodities used by mankind – grain, meat, oil, coal, and steel – consumption in China has eclipsed consumption in the U.S. for all but oil.

Translation: Demand for gasoline from third-world countries is driving the bull market in oil. And a further increase in Chinese oil demand is inevitable.

Therefore, I expect oil's bull market to continue until they find an economic substitute for gasoline. Is that substitute coming soon?

Don't hold your breath.

Good investing,


Market Notes


After the carnage in commodity prices this summer, you’re hard-pressed to find a mining stock sitting near 2006 highs. Anglo-American (AAUK) is the glaring exception. The stock hit new all-time peak yesterday.

AAUK is the third-largest diversified mining company in the world. Coal, platinum, tin, gold, silver, iron ore, zinc, copper – you name it – Anglo-American mines it. It even has a massive position in the diamond market, owning 45% of the infamous DeBeers.

And guess who’s helping to drive up Anglo’s stock price? Like everything related to higher commodities, you can blame the Chinese. Larry Yung, one of the richest people in China, just bought 17 million shares of the company. Rumors of a huge buyout also are keeping a “bid” under Anglo’s shares.

Whatever the reasons, True Wealth readers have made almost 50% on the play in the past year. Want an investment strategy for the next few decades? Sell the Chinese what they need.

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