Sep 24, 2020
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German Car Makers In China Safe To Make Money, For A While Yet

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China has started flexing its muscles ever so slightly to remind mainly German luxury manufacturers selling huge numbers of highly profitable cars there who s the boss but investors seem to agree that any nightmare scenarios are unlikely to happen just yet. The Chinese authorities were handing down relatively minor fines or have signalled investigations into Audi BMW Mercedes and Jaguar Land Rover among others which allegedly have violated the 2008 Anti-Monopoly law

 

These companies were quick to lower spare parts prices in response and investment banker Macquarie feels pretty sanguine about the affair deciding that this probably a short-term negative for manufacturers but a long-term positive because the price cuts should lower ownership costs and boost new car sales. There s no evidence that anything catastrophic is going to happen in China but the sheer size of the market and the rate of its emergence into the area s largest has made it almost a license to print money for the luxury car makers

 

This must give investors the vapors in their weaker moments. In step with 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 s Nissan has 25 to 30 per cent of its pre-tax profit in China while Fiat Chrysler Automobiles has five to ten per cent through its Jeep Ferrari and Maserati subsidiaries

 

That’s worth remembering that China is an authoritarian state and although it appears to make big efforts to act in the law investors can t exclude the opportunity of political volatility. You could safely assume that an armed coup won t overthrow the U. S. government or the European Union any time soon

 

That’s easier to imagine albeit most unlikely in China. A more realistic nightmare scenario concerns the banking system in China. Earlier this year the Economist magazine pointed to the terror that the valuables boom might become a bust leading to a panic in the so-called shadow banking system which would reduce access to credit and push economic growth down

 

That wouldn t be great for luxury car sales. IHS Automotive in a report said China is looking to shake up the dominance of foreign automakers in the local car market. PROMOTED Grads of Life BRANDVOICE | Paid Program
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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 automobile industry is considered a pillar industry of China and that’s this industry that’s currently under intense scrutiny IHS Automotive said

 

The report said local car brands are seeing a sales slowdown while foreign ones are accelerating and because of this, 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 seemed to be unfairly targeting foreign firms in step with a Beijing-datelined report from Reuters

 

Inspections mustn’t ever prejudge the outcome of the investigation and entire rights of defence should be afforded to the businesses 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. Peter Schmidt editor of British-based Automotive Industry Data said many of the luxury manufacturers were quick to slash their car prices in addition cuts in spare part mark-ups adding this will markedly lower Chinese profits

 

Schmidt said this also underlines the risk of putting too many of your eggs in one basket citing the case of Porsche which almost went bankrupt in the early 1990s since it had become over-exposed to the U. S. market. The longer China s prestige car sales boom goes on the messier the capability bust would be for those too heavily exposed to it Schmidt said

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