Car Maker BYD's Health Faces Skeptics

The Wall Street Journal, September 26, 2012

Click here to read the article at wsj.com

By COLUM MURPHY in Shanghai and JOANNE CHIU in Hong Kong

Chinese auto maker BYD Co. —investor Warren Buffett's highest-profile China investment—is facing renewed questions about its future as investors grow increasingly skeptical of its core businesses' prospects.

BYD shares traded in Hong Kong have fallen 13% over the past two days after brokerage CLSA slashed its target price for the stock, citing weakness in the company's mobile-phone-component, rechargeable-battery and "new energy" businesses. "BYD is likely in worse shape than we thought," analysts Scott Laprise and George Yang wrote in a research note.

CLSA's target price is 41 Hong Kong cents (13 U.S. cents), compared with the eight Hong Kong dollars (US$1.03 ) a share that MidAmerican Energy Holdings Co., a unit of Mr. Buffett's Berkshire Hathaway Inc., paid for its close to 10% stake in BYD in 2008. On Wednesday, BYD's shares closed at HK$13.26.

At the heart of BYD's problems is the company's weak performance in China's increasingly competitive market for conventional cars, a core revenue source. BYD also hasn't delivered on its mission to ride an intended Chinese push into electric vehicles, which is taking longer than expected to materialize as the government's implementation plan falls behind schedule.

The company eked out a profit of 16.27 million yuan ($2.58 million) in the first half of this year, down 94% from the same period a year earlier.

"BYD has been and continues to be profitable. Now it's not the same profit levels we have all been all accustomed to, but we are on track to get back to that spot," said company spokesman Micheal Austin.

BYD will re-emphasize quality in its vehicles as well as focus on new electric vehicles it is designing along with Daimler AG of Germany, he said. "We got ahead of ourselves," Mr. Austin said. "It's time to slow down and redirect to the principles we were founded upon."

Bill Russo, founder and president of auto consulting firm Synergistics Ltd. and a former Chrysler executive, said he believes BYD needs to be restructured. "As a maker of conventionally powered vehicles, BYD does not have what appears to be a very strong case for its continuation," he said.

The company's debt totaled 18.04 billion yuan as of June, slightly less than the 18.42 billion yuan at the end of 2011. Its cash and cash equivalents totaled 4.83 billion yuan at the end of June. Of total debt, about half is repayable in one year.

Industry officials said BYD is at little risk of insolvency because Chinese officials and banks often prop up major companies, and it enjoys the backing of major state-run banks. But its finance costs nearly tripled last year, and its weakened share price gives it less room to go to equity markets for the money it might need to overhaul its operations.

BYD's first-half vehicle sales fell 9% compared with a year earlier, to just under 199,700 vehicles. Electric cars, including electric taxis, accounted for only a few hundred.

China's auto industry has been plagued by high inventories, overcapacity and fierce price competition. The economic slowdown and higher oil prices also contribute to a much tougher environment for car makers. Still, revenue from BYD's auto division was up modestly, suggesting that the company has managed to increase sales of higher-priced models.

BYD is also striving to rebuild its distribution network after an exodus of dealers. According to Macquarie Securities, 308 dealers left the network last year, representing about 20% of BYD's total dealerships.

One of the company's major weaknesses is a lack of a foreign partner, analysts say. Chinese auto makers allied with big global car makers such as General Motors Co. and Volkswagen AG have posted stronger sales results than many of their unaligned rivals. "The better foreign auto makers are already dancing with someone. It's kind of hard to get married up now," Mr. Russo said.

BYD points to its new joint venture with Daimler, in which it is providing battery and other electric-vehicle technology. "The JV with Daimler has completely changed the way BYD thinks about the design process," Mr. Austin said.

A spokesman for Daimler said the joint venture was for the sole purpose of developing an electric passenger vehicle in China. "We are currently focused on the Chinese market only," he said.

Electric cars won't be a quick fix. In 2011, only 6,000 electric vehicles were sold in China, well behind the official target of half a million, according to a report by consulting firm McKinsey & Co. China has failed to build a support network as quickly as planned. More than 400,000 charging piles were to be in place in 2015, yet only 16,000—or under 5%—had been built as of last year, McKinsey said.

Japan Auto Makers Count the Cost of China Spat

The Wall Street Journal, September 26, 2012

Click here to read the article at wsj.com

By WILLIAM MALLARD

No wonder Japanese auto makers are slowing production in China. Who would buy a Japanese car in China right now, given drivers of such vehicles risk attack by their compatriots enraged by the country's territorial dispute with its neighbor?

Though the spat has lingered for weeks, the severity of the economic impact is only just becoming apparent. Worries about production cutbacks for Japanese auto makers are intensifying. Nissan, 7201.TO -2.64% for example, now says it will halt some passenger-car production until Oct. 7, while Toyota 7203.TO -2.67% says it is adjusting production of its pricey Lexus models.

The concerns sent shares in Japan's Big Three down Wednesday. Honda 7267.TO -4.88% fell the most, by 4.9%.

There will be a short-term hit to earnings. China accounts for between a fifth and a tenth of global sales by volume for the three car makers. In a dire case, production might be halted for, say, a month. Under that scenario, global unit sales for the Japanese companies would likely be down by around 1% to 1.5% this year. The impact on revenue could be even bigger because foreign car makers typically charge more for their premium brands in China than elsewhere. In some case, they charge twice as much.

Margins could also take a hit from rising input costs. Lower production means less buying power for parts, and that pushes up the total cost structure, says Bill Russo, China auto analyst at Synergistics.

The anti-Japan sentiment has been on the wane in China in recent days. But the spat goes on. Beijing is unlikely to take a softer tone ahead of a once-a-decade leadership change expected in coming weeks. Japan may even ratchet up the rhetoric: The the main opposition party Wednesday chose an outspoken nationalist as its standard bearer heading into elections, likely in coming months.

Previous bilateral flareups have meant only a blip in sales of Japanese cars in China. But the full effect on Japan's auto makers hasn't been counted yet. China is a key growth driver for the entire auto sector. Honda, Nissan and Toyota will hope a peace is brokered soon.

Write to William Mallard at billy.mallard@dowjones.com

沃尔沃找到了南泥湾

Bloomberg Business Week Chinese Edition, September 2012

Extract of Bill Russo's quote:

就像狄更斯在《双城记》中讲的那样：“这是最好的时代，这是最坏的时代。”问题在哪里？坐在北京建国门SK大厦27层办公室里，克莱斯勒（Chrysler）前中国区负责人罗威（William Russo）指着窗外说：“你看，这就是问题。” 

早上10点的长安街，按说已经过了车流高峰期，与其说是一条公路，还不如形容为一个停车场。不算在河北等地登记的外地车辆，有513万辆汽车拥有北京牌照，比2008年高出了61%左右，迫使政府出台了车辆限购的法规（广州也出台了相似限制）。工信部的数字显示全中国有1300家汽车和摩托车生产商，造出了惊人的过剩产能。罗威现在是汽车行业顾问公司协同共进（Synergistics）的老板，据他分析，未来五年中国汽车制造业将出现20%到30%的产能过剩。兼并和整合只是一个时间的问题。

沃尔沃找到了南泥湾 from Synergistics Limited

Beijing blames car row on US elections

The Financial Times, September 19, 2012

Click here to read the article at FT.com

by Patti Waldmeir in Shanghai

When it comes to election year trade politics in the US, nothing is easier than to complain about China, an economy sustained by a web of subsidies across a wide range of industries.

China has long wanted to become a world leader in car and car part exports and has been offering tax and other incentives for years – including cheap credit and land – to domestic auto and auto parts companies. So why complain now?

Beijing has been quick to blame the move announced this week by Washington on the race for the White House.

“In the midst of an election race, the United States chose to announce this news in Ohio, an automobile production area, showing that the US took this step against China out of considerations of electoral politics,” the ministry of commerce said on its website.

The US case hinges on so-called “export bases” for car and car parts, which Washington says hurt US manufacturers and force them to shift production overseas. The Obama administration says these bases violate the prohibition on “export contingent subsidies” that China signed up to when it joined the World Trade Organisation.

“Based on publicly available documents, export bases made at least $1bn in subsidies available to auto and auto-parts exporters in China between 2009-2011,” according to the office of the US Trade Representative.

The export bases are located in 12 cities around China and serve to gather firms ranging from manufacturers to trading companies to training and financial institutions with the aim of facilitating automotive exports. In Shanghai, for example, Anting Shanghai International Automotive City offers preferrential policies on rent and other subsidies. Individual companies are not subsidised, but local governments subsidise spending on services, such as holding exhibitions.

The USTR says these bases “use central and local government funds to provide a variety of export-contingent subsidies to auto and auto parts exporters such as grants, tax preferences and interest rate subsidies”.

Auto market analysts in China say that is all true – and has been for several years.

China’s car exports have risen sharply in recent years, by 50 per cent in 2011 to 850,000 cars, and exports this year are expected to hit 1m. But only 2,252 of those cars went to the US last year: most went to emerging markets.

The jump in exports to those markets “has everything to do with weakening performance at home”, says Mike Dunne, of Dunne & Co, an Asian auto consultancy. Chinese automakers had been losing market share to European and American carmakers for the past few years, so to reach their production targets they had put new emphasis on exports.

Bill Russo, head of Synergistics auto consultancy in Beijing and former head of Chrysler in China, says: “Providing special economic zones ... is pretty standard in China. The legitimate question is: why have they not complained before?”

Additional reporting by Yan Zhang

A sea of trouble surrounds five tiny islands

The Globe and Mail, September 17, 2012

There are reports that a flotilla of about 1,000 Chinese fishing boats is headed for the disputed islands at the heart of the dispute between China and Japan. A move toward the islands – known as Senkaku in Japan and Diaoyu in China – raise the question of whether Japan’s coast guard or navy would confront the ships.

A dispute over a quintet of uninhabited islands is jeopardizing the political and trade relationship between the world’s second and third-largest economies, as a number of Japan’s flagship companies announced temporary closures of their China operations on Monday after being targeted by days of angry protests.

Automakers Nissan Motor Co., Honda Motor Co. and Mazda Motor Corp. – who collectively employ thousands of Chinese workers – each announced they were temporarily suspending production in China after a week of anti-Japanese protests around the country that saw Japanese-owned businesses looted and Japanese cars and restaurants attacked. Other industries, including electronics, food and retail, were also affected and the dispute put global supply chains for Japanese products produced in China under threat.

Protests are expected to crest Tuesday, the anniversary of the 1931 Mukden Incident, a staged attack on a Japanese railroad that was used to justify the Japanese Imperial Army’s invasion and occupation of Manchuria at the outset of the Second World War. There were also reports that a flotilla of some 1,000 Chinese fishing boats was headed towards the disputed islands – which are known as Senkaku in Japan and Diaoyu in China – raising the question of whether Japan’s coast guard and navy would try to confront the ships.

Any kind of trade war – let alone a broader conflict – would be devastating. Commerce between the two Asian giants amounted to $345-billion (U.S.) last year, with many of Japan’s globally known brands, including electronics firms, outsourcing much of their production to China. Already, there have been calls in China for a nationwide boycott of Japanese products. China is Japan’s largest trading partner, while Japan is China’s No. 2 partner after the United States and a major source of direct investment in the Chinese economy.

Joseph Caron, Canada’s former ambassador to both Japan and China, said the situation will require delicate diplomacy from both sides to avoid escalation of the dispute. A heightened conflict would have implications for the global economy as Asia’s manufacturing and supply chains are deeply integrated.

“It’s important not to demonize one side or the other in all this. There is obviously going to be a painful but hopefully non-militarized adjustment to the fact that China’s power is increasing,” Mr. Caron said in an interview. “It is not only China that has legitimate interest in these waters and in the region.

“Unfortunately, we are seeing the manifestations of this adjustment in its worst and most dangerous form.”

Neither country can afford a prolonged break in the trading relationship. The Japanese economy grew just 1.4 per cent in the second quarter of 2012, while China posted 7.6-per-cent growth in the same period, its slowest pace in three years.

“The reality is that while these adjustments are struggling to emerge, in so many other areas, levels of mutual dependence have never been higher,” Mr. Caron said.

Japanese car manufacturers count China as a major market and a driver of future growth. Toyota, Nissan and Honda saw 11 per cent, 17 per cent and 20 per cent of their respective 2011 unit sales from China, according to Bill Russo, China auto analyst at Synergistics.

Mr. Caron said targeted economic sanctions or large-scale boycotts imposed by both China and Japan are a distinct possibility if the dispute is not quickly resolved.

“It’s worrisome. Our economic security depends so much on the success of those economies. So everyone is going to watch this very closely,” he said.

Julian Dierkes, a professor at the Institute for Asian Research at the University of British Columbia, said he was optimistic that the deep economic ties between the two countries would keep the dispute from getting out of hand.

“The economic implications are huge but that is also the safeguard. ... It must be very clear to [Chinese] businesses and industry that there is no way to decouple from Japanese industry. Those inter-linkages are so clear and obvious,” Mr. Dierkes said.

Some of the protesters in Beijing admitted they weren’t sure how they could live without their Japanese electronics, fashions and snacks. “Japan is bullying China and I hope Japan does not take Chinese tolerance for granted,” said Zhang Liguo, a 17-year-old student who joined the protests at the Japanese embassy.

“But we cannot deny the advantages of Japanese products.”

The temporary closure of Japanese manufacturing facilities and other businesses came as the United States announced a new trade action against China. Speaking in Ohio, a hub of American auto parts manufacturing, president Barack Obama accused China of illegally providing $1-billion worth of subsidies to its auto parts industry.

“These are subsidies that directly harm working men and women on the assembly line in Ohio and Michigan and across the Midwest... . It's not right, it's against the rules and we will not let it stand,” Mr. Obama said.

China Smashes Japanese Cars, and Buys Them

The Wall Street Journal, September 17, 2012

Click here to read the article at wsj.com

There likely won't be any quick resolution in the dispute between China and Japan for control of an obscure group of islands. But there's already one clear loser: the Japanese car industry.

Thousands of Chinese protesters marching on the Japanese Embassy in Beijing over the weekend, burning flags and smashing cars, signals the strength of anti-Japanese feeling among young Chinese. The proximate cause is a dispute over control of the Senkaku Islands, controlled by Japan and claimed by China, which call them the Diaoyu Islands. Lingering anger at Japan's 1930s invasion of China, and rivalry between Asian powers, runs deeper.

In the immediate future, it's bad news for Japanese car manufacturers, who already count China as a major market and a driver of future growth. Toyota, Nissan and Honda saw 11%, 17% and 20% of their 2011 unit sales from China, according to Bill Russo, China auto analyst at Synergistics.

The China Association of Automobile Manufacturers has said the downturn in sales of Japanese cars is already evident in the August data. Nissan has acknowledged that the row is hurting sales, and Honda dealers have canceled some promotional activities. There could also be longer-term consequences. The sight of Japanese cars smashed by angry mobs won't encourage dealers to place bumper orders for next season's models.

Japan's auto firms still have many factors in their favor, though. Many of their Chinese sales are made in joint ventures with mainland firms—a confusing factor for angry mobs and government officials considering trade sanctions. A reputation for reliability at an affordable price is another plus. A similar wave of protests in 2005 had little effect on the upward trajectory of sales. Japan's auto makers will hope that the latest wave of nationalist sentiment doesn't have a more lasting impact.

How Maruti keeps meeting India's demand & what makes Swift and Dzire so popular

The Economic Times of India, August 19, 2012

Click here to read the full article

The MUV segment in India is currently at 16% of the total car market. But it is set to grow rapidly. In Indonesia, MPVs comprise 30% plus of the market. In China too, this segment is growing rapidly. "Their popularity seems to coincide with a changing consumer profile. Second-time Chinese buyers use their vehicles for multiple purposes like travel, family activities where MPVs serve well," says Bill Russo, president, Synergistics Ltd, a China-based consulting firm with focus on the auto sector.

India will surely follow China in the preference for MPVs. Maruti was the first one to realise its true potential and launch a product to cater to this segment.