Ripples from the recent collapse of the Russian ruble are jostling the auto market in China in ways that give western automakers such as General Motors Company (GM) and its Chinese partners a new advantage.
Investors in auto stocks can play these ripples by betting on a likely increase in China sales and Chinese market share in 2015 for global industry stalwarts GM and Ford Motor Company (F). A handful of state-owned Chinese companies trading over the counter, including Brilliance China Auto (BCAUF) and Dongfeng Motor (DNFGF), should also benefit.
Chinese auto stocks to shun on Russia risks include Chinese car manufacturers such as the maker of Volvo cars Geely Auto (GELYF), Warren Buffett-backed BYD Auto (BYDDF), and Great Wall Motors (GWLLF). These companies have invested heavily in Russia in recent years.
Great Wall, for example, last May unveiled plans to build a $523 million assembly plant south of Moscow with an annual capacity of 150,000 vehicles. It’s the largest investment ever in Russia by a Chinese carmaker. Another big spender is Shanghai-listed Chery Auto, which last summer started building cars and SUVs in Russia with its local partner Derways. Geely builds cars for Russia at a plant in Belarus.
Ruble Plunge Rattles Auto Markets
Every global automaker with a share of the Russian market has been forced to re-evaluate business following the ruble’s sudden fall against the dollar in mid-December. But the ruble plunge triggered immediate sell-offs for BYD and Geely shares listed on the Hong Kong Stock Exchange.
Analysts at Dongguan Securities attributed the 32% decline in BYD stock shortly after the ruble’s plunge to traders selling on market fears, and not to any significant deterioration in company fundamentals. The company later denied its global business would be affected by falling sales of Chinese-made cars in Russia.
Geely, on the other hand, in a statement bluntly acknowledged “financial risks” tied to Russia. After the ruble’s decline, the carmaker said currency exchange losses and falling sales in Russia would cut its 2014 earnings in half from the previous year. The company also said it planned to raise prices in Russia. Investors responded by dumping Geely stock.
Truth is, Russia sales for most of China’s major carmakers started to slide months before the ruble faltered and drove the cost of living for Russian consumers sharply higher. Geely’s sales in Russia fell 34% from January to November compared to the same period 2013, according to the China Association of Automobile Manufacturers (CAAM). Sales also fell dramatically for Great Wall and China’s biggest car company in Russia, Shanghai-listed Lifan Auto.
Going into 2015, all this turmoil in Russia has worsened an already gloomy outlook in China for Chinese car companies that are not affiliated with western car makers.
Chinese Auto Market Expected to Cool
Automakers in China, the world’s biggest market for new cars and trucks, are expected to sell more than 22 million vehicles this year. But the market is expected to cool in 2015 in ways that pinch weaker players and benefit the western-Chinese joint ventures that dominate the market.
A warning signal for 2015 came with CAAM’s posting December 23 of a forecast for 2014 sales in Beijing, one of the country’s biggest markets. It said all-year sales would likely fall to 550,000 vehicles in the capital, down 7% from 2013.
Falling sales overall in China will likely have the biggest effect on BYD Auto, Geely and other all-Chinese carmakers. These firms may have put down stakes in Russia and other countries, but they trail at home behind the big Chinese-foreign joint ventures.
China’s top auto seller SAIC operates through joint ventures with GM and Volkswagen (VLKAY), while another major company Chang’an builds vehicles with Ford. Brilliance is a standout as China’s partner with Germany’s BMW, whose sedans and Mini cars are hugely popular on the mainland. Another Chinese company with a great foreign tie-up is Dongfeng, the partner for Honda, Nissan and Peugeot.
Investors can thus take advantage of the ruble-related ripples in China by playing these joint-venture car companies against their Chinese competitors. Globalization works in more ways than one.
As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.