The Chinese stock market crash has hit the world’s largest auto-market hard; BidnessEtc explores the terrain and evaluates the damage to players in the ‘game’
Between June 12 and July 9, China’s Shanghai Index fell 32% after rising 150% between June 2014 and early June of this year. In recent days, at the behest of the government, large investors have stopped selling their stock, which explains the market’s current stability.
Although the stock market plunge badly hit investors, it has also hit China’s automobile market, currently the world’s largest.
Automobile Sales In Asia-Pacific Region Decline As The Shanghai Index Plummets
Sales were already falling. The above chart illustrates automobile sales in the Asia-Pacific region over the past 12 years. Regional sales nose-dived between January 2014 and January this year. June’s sales retreat amounted to 3.20% year on year (YoY).
General Motors Bankruptcy – A Case In Point
Notoriously, Detroit, MI’s General Motors Company (GM) was bankrupted as a consequence of the great crash of 2008. This new situation is alarming for GM in China, the region accounted for 35% of its global sales in 2014.
Also in 2014, the corporation earned 40% of its net income from investments made in Chinese equities. Alongside profits from equities, GM’s investments in China further added between 20% and 30% to the multinational’s operating cash flow last year, says a report by Barclays PLC (ADR) (BCS).
With China’s stock market crumbling in recent weeks, Barclays analyst Brian Johnson, thinks that the automaker may reduce its Chinese sales target.
American Automaker’s High Exposure To The Chinese Market
Last year, Ford Motor Company (F) sold approximately 6.33 million vehicles globally. Of these, almost 1.08 million vehicles were bought in China, up 77% from 2012’s reported sales of 0.61 million.
Ford’s sales in China comprise 17.10% of its global tally, far lower than the 40% portion sold in the United States. Despite this, Ford’s Chinese joint venture added $1.30 billion to the company’s pre-tax profit, almost 30% of the company’s bottom-line for the year.
Ford’s high exposure to the Chinese automobile market increases the risk of its being undermined by a more difficult economic environment in the country. Nor will GM escape unscathed, in fact it could face harsher reverberations than its rivals.
China’s market conditions don’t simply challenge US manufacturers. Volkswagen AG’s (ADR) (VLKAY) position within China is a precarious one. The country provides 50% of the conglomerate’s net profit and 71% of its free cash flow (FCF).
During the last week, Volkswagen’s subsidiary Audi said it would consider revising its 2015 Chinese sales target in response to signals that the downturn could be deeper than previously thought.
The Bottom-Line
For now, China is a dream turned sour for the Michigan-based Ford and General Motors and Germany’s Volkswagen.
The risks are enormous and will become greater with time. The government has introduced a ban on selling in the stock market, to put a stop to its precipitous decline. If this stabilizes the situation, as many hope, it will provide a breathing space for the auto-market... but judging by last night's collapse, it's not working.
However, China’s growth has slowed to its lowest for 24 years, which suggests deeper underlying problems in the wider economy, perhaps its growth model has run its course and requires substantial rethinking. There are other clouds too within the financial sector such as the unregulated shadow banking system.
All of these point to a longer lasting, more fundamental problem in the country. The message to send to investors at this point is not to expect a quick turnaround. Returns on China of the kind we had become used to, are over for now. China though, is a long-term project not a short term party.
Investors and automakers need to make short-term alternative plans, but keep a long-term view because it probably will get better.
Steel industry is boned.
Shhhh....Janet doesn't know
Typo in the headline. There are two types of auto makers. Anti-American ones(UAW infested, Obama supporting) and foreign auto makers. Choose patriotically.
"Investors and automakers need to make short-term alternative plans, but keep a long-term view because it probably will get better."
Oh, it's gonna get better, all right. It'll be epic.
Automakers are the obvious problem, but a lot of big corporations has thrown a lot of money at China because it's the 'future'. Somebody is going to be paying the piper for relying on magic futures.......
If you've been in any of China's largest 50 cities, you understand that taking a taxi is way way more convenient than driving a car...so I ask my Chinese friends...WHY DO YOU WANT A CAR...when it's a complete pain in the rear to find parking, etc. They say "it's just a status symbol". I ask myself, will this 'fad of inconvenience' wear off? China's entire commuting infrastructure was built around the bus and the taxi.
The plastic industry is boned
Fixed it for you
No worries: Just introduce a subprime 144 month loan
Problem solved
Now you ruined it. Queen Yellen was going to announce this at the next FOMC meeting. How are we going to get a 300 point stock bump if everybody knows it is coming?
Good thing Obama "saved" GM!
As Obama begins his pivot to Asia and confrontation in the South China Sea appears more likely, sales of US cars and phones will see a big decline in China,
The stock market crash in China will not help.
Forward.
On the eve of China’s largest car show in April, executives and analysts braced themselves for a “new normal”: single-digit sales growth after two fat years. Yet some are beginning to wonder if the world’s largest car market is actually entering an abnormal era of flat or even falling sales.
The catalyst for this pessimism was a sharp fall-off in year-on-year sales — 9.4 per cent higher in March, but 3.4 per cent lower by June than the same month last year, according to wholesale figures compiled by the China Association of Automobile Manufacturers. It was the industry’s first decline since early 2013.
http://www.ft.com/cms/s/0/1ce0dc1e-31a9-11e5-8873-775ba7c2ea3d.html
You haven't heard the news yet, evidently. As a result of the Messiah's visit to his birthplace, the Kenyan Postal System is going to start buying GM cars.
"... the Kenyan Postal System is going to start buying GM cars."
Instead of using the Internet or mobile phones.
That's what happens when you have central banks: you don't make the smart investment decisions!
You just counterfeit the money.
See, there's another 7 cars sold right there.
Of course, if you subtract the cost of the trip, it doesn't look like such a bonus, but, hey, at least he's in there pitching for us.
Way to go, Mr. O
As long as they're paid for by the US. Good thing McConnell has just reauthorized Ex-Im.
2015-2020 gonna be a doosey
gonna upturn by 2020? an optimist I see.
"However, China’s growth has slowed to its lowest for 24 years, which suggests deeper underlying problems in the wider economy, perhaps its growth model has run its course and requires substantial rethinking. "
Maybe China should fill the empty cities with empty cars. That will fix things.
Banking is funny over there. You can lever up to buy an asset by showing the banker your already comically levered up assets as collateral.
The Chicoms should just order everyone to buy a new car, if they refuse then execute them!
Or pehaps a perpetual auto loan and you must trade in your car every two years, or be executed!
Wait a minute, 40% of GM's profits were from Chinese equities?!
You mean the automaker was making profits from being invested in Chinese stocks that are now crashing?
"Notoriously, Detroit, MI’s General Motors Company (GM) was bankrupted as a consequence of the great crash of 2008. This new situation is alarming for GM in China, the region accounted for 35% of its global sales in 2014.
Also in 2014, the corporation earned 40% of its net income from investments made in Chinese equities."
The bailout recipients took your tax dollars to China to buy 'investments' instead of employing Americans and building better cars..
"Alongside profits from equities, GM’s investments in China further added between 20% and 30% to the multinational’s operating cash flow last year"
NOT just 'equites' would seem to imply debt.
Is GM now running a large Shadow Bank in China with the bailout funds provided by the US Treasury?
One wonders if GM is repatriating that '40% net income' to the US and paying taxes on it or if it is rolling it's cash into ever more Shadow Banking leverage and debt purchases within China...
China will NOT 'probably get better' and is telegraphing a Casino Capitalsm Ponzi implosion that is coming to a bank near you this season, SUCKERS.
Dear GM CANADA,
My 1996 GM is still good for another 10 years I figure. It only has 225k and I change the oil regularly, and do routine maintenance to ensure that I don't have to seek out a SUBPRIME Auto Loan from one of the slimebucket Canadian Chartered Banks that you do business with.
DO NOT feed the SUBPRIME Auto Loan Ponzi.
Give the finger to Goldman Sachs and pay with CASH.
That ought to fix the little bastards, eh.
That chart looks like they built a really cool roller coaster. Sounds like GM will be at the front of that queue line for another .gov bailout when the ride is over.
Others here at ZH have previously pointed out China was American auto's biggest profit center and problems loomed. Damn you guys are good.
Our real estate market here has reportly crashed. Anyone else?
There should be car-lots full of bargains everywhere, but governments are in the way, or companies are waiting for a bailout.
Mucho bloody gracias statist shits.
Me thinks the Chinese are doing this on purpous to slam the EU and good ole USSA! We are at war and have been for some time now. China and Russia will defeat the US without a single bullet being fired! I hope!
I do not remember seeing Chinese auto sales going through the roof when the stock market was skyrocketing. China will remain the largest and most important auto market for the forseeable future, no matter how its stock market behaves.
How can you be an american auto maker if you aren't making any autos in America?