Investor Reaction Ranges From Sanguine To Worried.
“I would be surprised if it happened all at once, but it seems inevitable that there will be a takeover of foreign automakers interest in China” – Keith Crane
China has started flexing its muscles to remind mainly-but- not-exclusively German luxury manufacturers selling huge numbers of highly profitable cars there who’s the boss, and investors are divided over the long term significance.
The Chinese authorities have been handing down relatively minor fines, or have signalled investigations into VW’s Audi, BMW, Daimler’s Mercedes and Tata’s Jaguar Land Rover among others which allegedly have violated the 2008 Anti-Monopoly law. These companies have been quick to lower spare parts and sticker prices in response, and investment banker Macquarie feels pretty sanguine about the affair, deciding that this might be a short-term negative for manufacturers, but a long-term positive because the price cuts should lower ownership costs and boost new car sales.
Morgan Stanley is more concerned, pointing out China represents 25 per cent of global auto manufacturing profits, and said recent actions could start a trend to threaten this rich source.
“German (manufacturers) look most exposed,” said Morgan Stanley analyst Laura Lembke.
According to Macquarie, Volkswagen and its Audi subsidiary earns between 40 and 50 per cent of pre-tax profits in China, BMW 25 to 30 per cent, and Mercedes 20 per cent. Renault of France affiliate Nissan has 25 to 30 per cent of its pre-tax profit in China, while Fiat Chrysler Automobiles has five to 10 per cent through its Jeep, Ferrari and Maserati subsidiaries.
Shake up dominance
IHS Automotive, in a report, said China is looking to shake up the dominance of foreign automakers in the local car market.
“The sudden switch to enforcing existing regulations and laws will send shock waves through Chinese industry. Probes, the enforcement of regulations, and the imposing of stringent fines are part of a cross-industry clean-up, with those foreign firms found to be behaving above the law likely to be made an example of. The auto industry is considered a pillar industry of China and it is this industry that is currently under intense scrutiny,” IHS Automotive said.
The report said local car brands are seeing a sales slowdown while foreign ones are accelerating and that is why the government is stepping in. Local brands include Geely, Chery, Great Wall and BYD.
Western companies do have a voice there, and the European Union Chamber of Commerce said China was using strong-arm tactics and appeared to be unfairly targeting foreign firms, according to a Beijing-datelined report from Reuters.
“Inspections must not prejudge the outcome of the investigation and full rights of defence must be afforded to the companies in question. Disconcertingly, the European Chamber is not convinced that this has systematically been the case in China’s recent investigations,” Reuters quoted the organisation as saying.
Looking at 1,000
Morgan Stanley’s Lembke said China has expanded the scope of its investigations and is looking at about 1,000 players in the auto industry.
“China has grown into a €450 billion revenue auto market, of which the four German premium (manufacturers) BMW, Daimler, Audi and Porsche generate €50 billion alone, close to 80 per cent of luxury demand,” Lembke said.
“(Manufacturer) led joint ventures take another 50 per cent of turnover. Taken together around 80 per cent of China’s auto industry revenue is implicitly run, or heavily influenced, by foreign (manufacturers),” Lembke said.
Lembke said China might take further action, and pointed out that pricing in China was bound to normalise as the luxury market matured.
“However, we see risk of a negative cycle, where Chinese consumers wait for price cuts, necessitating reductions by the (manufacturers) to boost business, but thereby also reinforcing the incentive for auto purchasers to delay further,” Lembke said.
Automotive News’s Keith Crane said eventually China will take-over foreign automakers in China.
Long wait?
“I would be surprised if it happened all at once, but it seems inevitable that there will be a takeover of foreign automakers interest in China. The Chinese are more than willing to wait until they have gotten what they think is the maximum value of intellectual property. They are trying to learn as much as they can as quickly as possible. This is a patient nation and a decade or two will not be that long,” Crane said.
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