Euro stocks lead an auto drop today on negative China news. Overblown short term reaction, I think so. Sure VW, BMW and DAI have enjoyed steady income from China and that reads through to GM here in NA, but the latest spat of negative outlooks for a hard landing is not news for automakers.
The volume international makes in China include Toyota, Honda, Nissan, Hyundai, VW, GM and PSA. But even they play in the lucrative high-end of the Chinese market through their high-end brands; Lexus, Infiniti, Audi.
After growing a sluggish 5.2% last year as the government took off incentives for smaller local product, my opinion was 5% upside for China in 2012, and that may be hard to hit in a year where Beijing maneuvers to manage something of a landing. The mid-term trend remains on the path to the 30 million neighborhood, even if we hit a couple of speed-bumps along the way.
You have to factor in a series of unique issues driving the recent volatility in monthly China car sales like increasing urban regulation, new safety and emissions requirements and asymmetrical regional growth. These require a little more inspection, not knee-jerking. This year has started off with season irregularity including New Year’s holiday, and we don’t yet have an established trend for three months. It’s also too soon to read through trends of pricing competition such as BMW and MB actions to balance sales and inventory. I’m not turning bearish yet.
In the end, like everything else in the auto sector, it’s all in the mix. Tier I luxury brands have the advantage of numbers in a change in mix, the local value brands stand to lose the most. But remember this is not a reversal, rather a breather for a market that has been red hot for 10 years.
Profits last year were still strong, probably around 8-10% EBIT margins. In a year where US is surprising to the upside, Europe to the down, China will likely be at worst a neutral – keep an eye on Brazil too where we see a similar story of a breather in the #’s but with a different dynamic context.
Comment: For established players the impact is still up in the air, US should back fill and Q1 will give us an idea to what extent. Keep close eye for Euro brands (read PSA). Japanese should backfill with US and easy comps from horrendous 2011. Not good news for latecomers like Fiat and Renault. As pricing stabilizes, introducing a new brand is harder.