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).
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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.
