China's Inflation - Toyota's Challenges

http://www.nytimes.com/2010/12/11/business/global/11inflation.html?emc=eta1

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"Professional psychiatrists in China are like pandas. There are only a few thousand of us." (Zhang Yalin, Assistant Director - Mental Research Institute - Central South University - China)

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China's consumer price index rose 5.1% in November. That's the highest in 28 months. This is way above the government's target level of 3%.

The rise was attributed to food prices which are up 11%.

China's central bank order for all commercial banks to increase minimum reserves by 0.5% of deposits was the third such directive in the last five weeks. It comes as Beijing tries to rein in a flood of money flowing through the economy from stimulus spending and bank lending that helped China rebound quickly from the worlwide financial crisis.

The government has also instituted price controls and released food reserves in agricultural areas hoping that food prices won't spike anymore.

While China's economy is still growing at 9% (9.6% GDP growth for the 3 months ending in September, down from a post-crisis high of 11.9% in the first quarter), the measures that the government is taking to slow inflation could also "slow" the economy. That, in turn, could increase unemployment.

No matter what the situation, we see it as difficult to manage such a high rate of GDP growth in a sustained way. Mathematically, it's impossible to continue compound growth at 9% for anything. When it's an "economy," there are too many factors at play to have any level of "smoothness."

Therein lies the rub: a subtraction of 1% in GDP growth (below 9%) in China means 22 million people are unemployed.

Speaking of problems, Toyota is continuing to have problems as sales slump and inventories go up even for the Camry and the Prius. Consumers are demanding larger discounts to remain loyal. Toyota is up to 11 million recalls worldwide over the past year. Last week, Toyota recalled 650,000 Priuses to fix "cooling pumps." While industry sales rose 17% last month, Toyota's sales fell 3.3%.

In November, Toyota spent an average of $2,602 per car on incentives, 37% more than a year ago.

While Toyota's troubles can be traced to a variety of sources - recalls, market trends, etc. - many stem simply from an aging product line.

Ed Tonkin, a multi-franchise dealer in Portland, Oregon was recently quoted as saying that the Hyundai Sonata has been a real in-your-face example of how the competition is better.

Before anything can be turned around, the negative slide needs to be stopped. With Toyota, that slide appears to be longer than people originally thought.