China Watch : Downturn squeezes small automakers

Yang Jian, Automotive News China, 19th November, 2008

SHANGHAI — With the economy slumping at home and abroad, China’s auto industry is looking at slower growth — or no growth at all. At greatest risk are small domestic automakers laboring to establish their own brands. The major state-owned automakers are protected by their overseas partners and their well-known brands.

The chances of the Chinese government providing financial aid for the domestic auto industry are slim. Automakers are on their own. After maintaining double-digit growth since 2006, passenger vehicle sales started shrinking in September this year. Total sales dropped 2 percent year-on-year in the month, according to official statistics.

Supported by strong brands, the joint ventures of international automakers and major state-owned Chinese auto manufacturers are still profitable, though they are making less money than before. The small automakers at risk include Chery Automobile Co., Geely Automobile Holdings Co., BYD Auto Co., and Great Wall Motor Co. Their vulnerability lies partially in heavy dependence on exports for profits.

By selling to emerging markets, they avoid competing head-on with international players in China. Market analysts say Chery, for instance, can make more than 10 times as much money selling a QQ small car in the Middle East as on the domestic market. With the global economy sliding into a deep recession, exports of these companies have slumped.

Detailed figures are not available. But at a recent industry conference in Shanghai, Geely’s president Li Shufu acknowledged that his exports to some developing countries have dropped more than 60 percent since September. Geely has already cut its export target for this year to 40,000 cars from 60,000. Li estimates the exports of other domestic automakers have also declined sharply.

I wouldn’t be surprised if one or two of them close down or are acquired by a major state-owned automaker.

Exports are an even greater share of total sales at Chery and Great Wall. All three companies have been expanding fast and therefore cash is tight. Both Chery and Great Wall sought to raise funds from the domestic stock market earlier this year. But Chery couldn’t meet the stock listing requirements while Great Wall’s listing application was rejected by market regulators.

Slumping sales will put pressure on their already weak liquidity positions. To revive the domestic economy, the Chinese government has rolled out a 4 trillion yuan ($585 billion) stimulus package. But the package has little for automakers.

Most of the money will be invested in railway, energy and social security projects. To date, the government has remained cool to calls by industry professionals to help the auto industry. Maintaining social stability ranks much higher on the government agenda than helping the auto industry.

Thanks to profits contributed by their joint venture partners, major state-owned automakers, such as China FAW Group and Shanghai Automotive Industry Corp., are still cash rich. As long as major state-owned automakers can stay afloat, the government has little incentive to support the domestic industry. So the small automakers face an increasingly difficult future.

I wouldn’t be surprised if one or two of them close down or are acquired by a major state-owned automaker.

[Source: Automotive News China]

Clive Goldthorp

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