China Market Rumours Agitate German Premium Investors

Reports Of China Coup Quickly Shot Down

“When you get right down to it, what are China’s leadership transitions if not palace coups on a regular schedule? That’s not a stable institution. It’s an invitation, sooner or later, for tanks in the streets,” the Journal said.

Investors were reminded of just how important China is to German automotive prosperity when rumours of big discounts on luxury vehicles were followed by news sales growth will slow and were topped off with the horror scenario, quickly denied, that the Beijing government might be toppled in a coup.

It turned out that only two of the above had any substance – sales growth would slow a bit, and discounting in the premium sector was taking place, but not as much as first thought. The coup rumours turned out to be false, although media reports were taken seriously enough for the Wall Street Journal to take to its editorial pages.

“There wasn’t one iota of evidence that shots were fired at the Diaoyutai State Guest House or tanks were taking to the streets, as viral microblog posts had it,” the Wall Street Journal said in an editorial called “China’s Coup Jitters”.

The Journal thought recent government personnel changes had generated the rumours about instability.

China is hugely important to the German premium car makers, with BMW, VW’s Audi and Mercedes taking more than 70 per cent of luxury car sales there, and with Audi accounting for more than 30 per cent, Morgan Stanley said. Bernstein Research reckons China generated about 30 per cent of Audi’s profit in 2010, and almost half of BMW’s in 2011.

A Bloomberg report that Mercedes dealers were offering record discounts of 25 per cent on S300s, and BMW 7-series and Audi A8s price cuts of 20 per cent were taking place, were shown to be exaggerated and regional.

Pricing pressure
Deutsche Bank didn’t believe it, though it did see pricing pressure in the premium sector.

“We believe a 20-25 per cent (discount) is rather excessive and probably cherry-picking the most extreme cases as the Cheshi index cited in the Bloomberg article was only down 3.5 per cent in February. Still, this development is of concern as ultimately pricing has three times the leverage on profitability over volumes,” said Deutsche Bank in a report.

After the Bloomberg news was published BMW, Daimler and VW shares dived by between four and five per cent on stock markets.

Premium sales growth is set to slow, which is a bit of a misnomer for a decline from a gain of 34 per cent in 2011 to a gain of 24 per cent in 2012, which is IHS Automotive’s latest sales forecast.

Overall car market sales are set to accelerate again after pausing between 2010 and 2012, according to PriceWaterhouseCoooper’s Autofacts. Sales totalled 14.5 million in 2011 and will race ahead to 27 million by 2018, spurred on by a new wave of customers in smaller towns and the interior, according to Autofacts. Official Chinese figures expect overall 2012 sales to miss the eight per cent growth forecast, and increase by under five per cent.

Bernstein Research analyst Max Warburton worried that premium sector demand might disappoint, but said so far there was little evidence to back that up. Sales of BMW, Mercedes and Audi had grown 35 per cent in the first two months of 2012.

Where’s the slowdown?
“The slowdown has not yet happened – although we do question the direction of pricing,” Warburton said.

The Deutsche Bank report found demand for luxury imported cars had been weakening, following the trend in domestically made premium cars. SUV prices continued to be stable, but it had good news for manufacturers.

“At this stage, we understand that the fall in prices is likely hurting dealer margins but not manufacturers’ profitability. In our view, prices will become more competitive in China with sales growth slowing. This will add to flat/potentially falling EBIT (earnings before interest and tax) contributions on top of an increasingly localised content for the Germans. We also note that comparisons will get tougher from May onwards,” the report said.

But before investors get too complacent, the Journal had some sobering thoughts in its editorial, saying Chinese politicians had kept internal strife under control over the past 20 years by using what it called “technocratic pragmatism”, which may be breaking down.

Tanks in the streets
“When you get right down to it, what are China’s leadership transitions if not palace coups on a regular schedule? That’s not a stable institution. It’s an invitation, sooner or later, for tanks in the streets,” the Journal said.

Neil Winton – April 2, 2012