China Fears Hit Germans, But Future Looks Relatively Bright.
“What will profit per unit look like in the future? We believe Chinese margins are past peak and are set to fall meaningfully for the Europeans”
Doubts about the prospects for the Chinese car market have undermined the share prices of BMW, Mercedes and Volkswagen’s but recent reports show these worries are probably overdone and medium term prospects are still strong.
China’s days as a virtual licence for the German premium manufacturers to print money though do seem to have gone.
Alix Partners, in its Global Automotive Outlook, reckons that China’s share of the world’s car sales will increase to 32.6 per cent in 2022 from 23.6 per cent in 2014. Even though the rate of growth is slowing, it will still look healthy compared with the other big markets like Western Europe and the U.S., Alix Partners said.
IHS Automotive sees similar strength with sales in China, the world’s biggest market for cars, surging to 30 million in 2020, up 30 per cent from 23.1 million in 2014, while U.S. sales grow between two and three per cent.
But since investors started to worry back in the middle of March that growth in China’s car sales might endanger the bottom lines of the German premium leaders, their stock prices have been on the slide. Mercedes relies on China for around 20 to 25 per cent of its profits, rising to between 35 and 40 per cent for BMW, with VW somewhere in between. VW, which owns Audi and Porsche, has seen its stock price fall 13 per cent since mid-March, Mercedes-Benz parent Daimler has shed 12.5 per cent, while BMW has lost 18 per cent of its value.
The Financial Times of London had a headline in mid-June which said “Europe’s premium carmakers are warned the China ‘cash cow is dying’”. The FT’s Lex opinion column had a more nuanced piece a couple of days later pointing out that although premium car sales in China had fallen in May, the future was probably bright because the rate of premium car ownership in China was still way behind the U.S. rate.
Slowing but not stopped
“The market may be slowing, but it has not come to a stop,” Lex said.
Investors are probably worrying unnecessarily, although IHS Automotive does concede there are problems to be overcome.
“The next decade will bring very different challenges in China as high double-digit sales growth is expected to be replaced by a complex combination of low single-digit growth, intense competition, extreme market fragmentation, more city restrictions, regulatory pressure on air pollution and fuel efficiency standards, and the development of a viable used car market in the country,” the report said.
But China will remain the engine of global automotive volume growth, despite its moderating economic expansion.
“China’s real GDP (growth) is expected to hold steady at 6.5 per cent in 2015 and 2016, down from 7.4 per cent in 2014, according to IHS Economics.
Brazil, India and Russian stumbles reinforce China’s importance.
“As a result, global automakers will most likely continue to invest in China by establishing more factories in the country,” IHS Automotive said.
Investment research outfit Evercore ISI says worries about BMW, and by inference the other Germans, are overdone.
“We believe the market is over-emphasising about BMW’s exposure to China and we feel a lot of the negative sentiment is priced into the stock,” said Evercore ISI analyst Arndt Ellinghorst.
Bernstein Research analyst Max Warburton points out that profit per car in markets like Europe is less than in China. The Germans will still make profits, but at a lesser rate.
“Almost all (international manufacturers) have new assembly plants coming on stream in the next few years. Almost all are now engaged in price cutting. We have few doubts that China will resume growth at some point and end up being a bigger market. The question now is: what will profit per unit look like in the future? We believe Chinese margins are past peak and are set to fall meaningfully for the Europeans,” Warburton said.
And Warburton has a warning for investors.
“Owning the European auto sector at a time when its single biggest profit driver is deteriorating, and where we have little visibility, looks very dangerous,” he said in a report.