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Breaking news – A strawberry picker in Mexico held responsible for huge losses to Chinese tyre companies.

Strawyer
Posted: March 22, 2016 at 12:00 pm   /   by   /   comments (0)

Here’s how a loan given to a strawberry picker from Mexico to buy a home in USA resulted in the downfall of tyre companies in China.

In the early years of this millennium financial institutions in USA were bent upon making profits and they planned to do so by selling home loans.

A home loan needed to be backed by a credit history, and the lenders like in any country needed a minimum financial credit rating score before a person could become eligible to get a loan. However the lenders redefined the rules by combining credit scores of people from different economic backgrounds and averaging them to reach the magic number at which a bundle of home loan applications with some good scores and some unacceptable scores would cross the hurdle of the score required to get a home loan.

At this stage they encountered another hurdle–the number of people with good credit scores were very few compared to ones with a bad score.

So they found a way to circumvent this – they started giving loans to people who did not have much of a credit history – a person with no history ended up being a person with a clean history – this resulted in good credit rating scores for some individuals.

These individuals with clean credit histories were immigrants (like the apocryphal strawberry seller from Mexico) who had just started a life in USA, and with no financial defaults to their name they became eligible borrowers.

Their loan files bundled together with other borrowers with a low score reached an average acceptable score that big financial institutions were willing to underwrite.

So you had borrowers with no record of repayment capacity, therefore a clean record bundled with borrowers who were known to have an uncertain capacity to repay. Now, that’s a recipe for making money, but it had to turn sour at some time, and it did.

The result – a mortgage crisis that lead to the fall of some of the biggest financial institutions    in the USA, like the company founded by Henry Lehman, Emanuel Lehman & Mayer Lehman –the Lehman Brothers.

So allegedly a strawberry seller from Mexico managed to catalyze a worldwide financial crisis.

In the year 2009 the world auto industry was reeling under the effects of a slowdown in economies all over the world. There were bail outs for the auto industry in USA , since like in any other part of the world the auto industry is expected to churn out GDP which is the nutrient needed to revive a flailing economy reeling under an economic crisis.

Logically since a bailout of the auto industry could work in the USA there were similar bail out packages made available to the auto industry in China too.

What happened in China was that the consumer was given a subsidy going into thousands of yuan for exchanging an old car and buying a new one-the result was that car sales jumped by more than 40% and China became the fastest growing automobile market – overtaking the USA – in a span of over a year.

The increase in sales of cars in turn spurred the growth of manufacturing in general and tyre manufacturing too. The Chinese invested heavily into expansion of capacities in tyre manufacturing after they experienced this sudden change in auto sales numbers.

Today the situation of tyre manufacturing capacities in China according to some educated guess work and estimates is that:

-For passenger vehicle tyres, China may have the capacity to manufacture nearly two thirds of the total global demand.

-For commercial vehicles China may be having a capacity to produce tyres which is equal to the total expected consumption of these tyres in the world!

Now that they had the capacity built up – the next logical step should have been to dominate the world tyre markets? The perception is that this is a complex and fiercely competitive set of business people, but all they did to stay ahead was to slash prices with very little focus on brand building.

With prices going down, the numbers just did not grow and the stairway to heaven became the highway to hell. The capacity utilization in China tyre industry has been estimated at 40% to 50 % below optimal levels in commercial tyres and passenger car tyres.

The result, the whole industry is waiting with baited breath about who will pass out first and give the rest a breather. If there ever was a war of attrition to leave the last man standing-it is happening in the Chinese tyre industry.

To compound the mess the lowering of prices by Chinese manufacturers have created has led to tariff enhancements across the world on imports of tyres from China , which has led to a shrinking in the available market size to Chinese tyre manufacturers.

The search continues for the strawberry picker from Mexico held responsible for downfall of the Chinese tyre manufacturers-Q.E.D.

Hemant Lal.

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