How to Invest in a Smoggy China

How to Invest in a Smoggy China

We've all seen the headlines about the pollution problems in China's biggest cities. Whether it's because drivers have to use their headlights during the day, because in some cities breathing the air for a day is the equivalent of smoking over 20 cigarettes, or because the smog can be seen from space, pollution is a very real problem in many Chinese cities.

Smog landing
With smog this thick, airlines are being affected, with Beijing and Shanghai having some of the worst on-time flight records among major airports. To combat this, the Chinese government is instituting new policies for Chinese domestic pilots flying into certain major airports. Businessweek reports that these pilots will now need to be qualified to land aircraft when visibility falls below 400 meters, a distance that previously required flights to be diverted.

Alaska Airlines, a subsidiary of Alaska Air Group , has dealt with a similar issue involving its Seattle hub. While Seattle does not have the same smog issues as many Chinese cities, the city is known for foggy conditions. Alaska Airlines has managed to work around this, landing hundreds of flights on time in fog described as "pea soup" over a two week stretch of thick fog. Thanks to Sea-Tac's Instrument Landing System and the equipment on board Alaska Airlines' Boeing 737 fleet, the aircraft have an "autoland" feature wherein the aircraft largely lands itself while the pilot supervises.

The smog landing requirement most directly impacts major Chinese airlines such as China Southern Airlines and China Eastern Airlines , since both carriers operate large numbers of domestic flights using major airports. However, this requirement could help the carriers in the long run. Alaska Airlines says the procedures allowing it to land in foggy conditions save the carrier about $15 million per year due to fewer cancellations and flight diversions. While there will be an upfront compliance cost, these Chinese airlines should be able to keep flying, even if the skies are smoggy.

Auto sales
China is considered a growth market for automakers as a rising middle class continues to seek automobiles as both a part of life and as status symbols. But the lottery system for license plates in Beijing is reducing the number of auto buyers due to limited supply. The system was started in 2011 and is set to issue fewer license plates per year, declining from 240,000 in 2013 to only 90,000 in 2017 as part of the government's plan to fight air pollution.

Automotive sales are still expected to remain strong as areas without a lottery system continue to grow, and whatever license plates are available in lottery areas will almost certainly be used.

But the number of license plates is stated as those issued to standard vehicles. Other vehicles running on electricity or natural gas can qualify for additional plates, allowing their owners to more easily get a car. This is a strong positive for Tesla Motors as it expands into China. Currently, the electric-car maker is caught up in a trademark dispute, but is selling its cars without a name anyway. While the Model S still sits at the upper end of the automotive price range, the more affordable third-generation sedan expected to be in production in a few years could offer Chinese buyers an excellent combination of prestige, practicality, and affordability.

Critics will argue that the coal-fired electricity used to power electric vehicles in China is itself dirty polluting energy. However, movements toward cleaner power generation would significantly reduce the net pollution from electric vehicles. The change in power source to fuel them would only require the conversion of a select number of power generation facilities, a simpler task than the conversion of millions of individuals vehicles.

Wrapping it up
The smog filling China's largest cities is now news around the world but investors still have ways to profit from the Chinese government's reaction. While airlines may actually benefit in the long run, Tesla Motors has a unique opportunity to supply Chinese car buyers with a vehicle able to be driven in Beijing.

But while Tesla can serve a wealthier group of consumers, other automakers could be better positioned to profit from the growing middle class. As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

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Alexander MacLennan owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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