Price pressure seems inevitable
In summary, we believe downward price pressure on automobiles will form a medium-term trend, due to the following factors:
· Exceptionally high profitability provides room for price cuts. According to the State Development and Reform Commission, average profitability for the automobile industry was 28.45% in 2002, compared with overseas auto companies’ average net margin of around 5% and the highest national margin of 10-15%. GM estimates its own margin at around 10%, which is still double the global average of around 5%. GM and its JV partner in China earned a handsome US$2,267 per vehicle last year. In the US, by contrast, GM earned only US$145 per vehicle. In 2003, the top three profit earning car makers had average vehicle profit of RMB39,671 (US$4,780),
RMB34,253 (US$4,127) and RMB20,669 (US$2,490), respectively.
· Overcapacity. According to a report from the State Information Centre issued in May 2003, there are still more than 100 auto manufacturing plants in China. 27 provinces (cities) manufacture automobiles, 17 provinces (cities) produce sedans, and 23 provinces (cities) are building production lines for sedans. According to estimates, aggregated national capacity for automobiles amounts to over 5.5 mn
units, and sedan capacity exceeds 2.5 mn units. These capacities far exceed demand.
· Falling per-unit production costs. Increasing localisation rates and production scale, plus improvements in the supply chain should help lower production costs. To expand market share, automakers will need to pass on cost savings to customers, which will be reflected in more competitive pricing.
· Import tariff cut after China’s WTO entry. With further cuts in import tariffs to 25% by July 2006, car prices in China will align with international prices. Since China’s WTO entry in late 2001, ex-factory prices declined 5.14% YoY in 2001. The downtrend continued in 2002, with an average decline of 4.8%. We believe prices will come down further in coming years.
Cost pressure
Product price cutting may not be the most crucial factor to squeeze margins. We believe volume growth is a key influence on automakers’ economies of scale, which will significantly affect the per-unit cost of production. Automakers’ margins may not necessarily be squeezed if they can increase sales volume and lower production costs through economies of scale, increase localisation rates and improve supply-chain management in order to reduce logistics costs. However, the risk is that if auto
demand slows down significantly, product price cuts will erode automakers’ margins, as volume cannot increase to lower production costs.
Increase in production scale
The auto industry’s profitability is often tied to the performance of the economy. The need for big volumes in the auto industry is because of the substantial financial requirements. Manufacturers in general have high fixed costs, require large investments in plants, tooling and training for employees to bring out new products. According to our estimates, fixed costs (depreciation, R&D, selling and distribution expenses, labour costs and manufacturing charges) account for about 20% of the total cost of a passenger car. If volume cannot increase, due to the slowdown in market demand, automakers’ margins will be eroded.
Raw material costs – up
Surging steel, plastic and rubber prices have exerted significant raw material cost pressure on automakers. According to the SEEC research institute, the raw material cost breakdown of a passenger car is roughly as follows: steel accounts for 70% (of烟台交警网违章查询
rapidewhich 75% is steel plate), and glass, plastics and rubber account for the remaining 30%. Electronic components are also critical, representing almost 70% of the total cost of a high/luxury-end sedan and 30% of a mass market model.
Rising localisation rate – helps lower cost pressure
柯尼塞格ccxrRaising the local content of vehicles can help reduce costs in two ways. First, if a model has 40% local component content, the tariff on the imported components will be much lower than for a model with less than 40% local content, down from 33% to 8-20%. Second, components sourced in the domestic market usually cost less than imported components. For example, a PRC-made tyre costs about RMB360 versus an imported tyre at RMB800. If the automakers are able to source all tyres from China, it could save considerable costs, as each vehicle needs five to six tyres.
Logistics costs
According to TNT China, China’s current supply chain in the automotive business is far from being optimised. These inefficiencies are evident if we compare China with Japan. China lags far behind Japan on two important benchmarks:
· In parts inventory at the plant, China’s OEM plants have ten times the inventory level
of Japanese plants; and
· With regard to dealer’s order-to-delivery times, dealers in China have to wait on
average 30-40 days to receive their ordered cars, whilst dealers in Japan receive the models within one week. Moreover, Chinese dealers complain about receiving wrong or damaged orders, such as a different colour or interior from the one ordered, or cars with scratches etc.
Profitability of PRC automakers
比亚迪今年首次降价While the market generally perceives that PRC automakers’ profitability is much higher than that of international peers, their operating performance varies significantly. We highlight a number of examples in Figure 74. In terms of return efficiency, Guangzhou Honda had the highest ROA and ROE, whereas Tianjin FAW Xiali and FAW had the lowest ROA and ROE, respectively. The range is more than 30 p.p. In terms of margins, Shanghai Auto and Guangzhou Honda outperformed Tianjin FAW Xiali and FAW by a big margin. We think the big differential in operating performance distinguishes different companies’ product and pricing strategies, segment positioning and efficiency in capital employment.
锐志2.5
There are four main groups of business within the PRC motor vehicle segment, namely: vehicle manufacturing, vehicle motor engine manufacturing, parts and component
manufacturing, and modified vehicle manufacturing. As Figure 75 shows, vehicle motor engine manufacturing registered the highest growth in profitability in 2003. The strong growth momentum continued in the first four months of this year. On the other hand, the growth momentum of vehicle manufacturing profitability declined in the first four months after recording 56% YoY growth in 2003. Profitability growth for parts and component
Not easy to make a direct comparison