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US Car Makers Bet Their Future on China Growth

April 25, 2012 | About:
Profit Confidential

Profit Confidential

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The Chinese economy has accelerated at a high level for a number of years. While China’s growth might slow down in the short term, the long-term forecasts for the Chinese economy are extremely bullish. Many firms are hoping for an increase in corporate earnings by expanding sales and production within the Chinese economy. While most Americans still think of the Chinese economy as production only, meaning cheap labor, several corporations see more to the Chinese economy than that simple notion. Ford Motor Company (F) has just announced a $5.0-billion expansion in the Chinese economy. This includes a massive increase in production, as many would expect, but it is also expanding its dealerships throughout Asia. Ford, along with many corporations, sees the Chinese economy as the great frontier for corporate earnings growth over the next several decades. By completion of the fifth factory in 2015, Ford’s total capacity of production plants will be to build 1.2 million cars in China.

Ford isn’t the only carmaker looking to China for increased corporate earnings growth. General Motors Company (GM) has been active in the Chinese economy and has a larger share of the market with its head start. GM is also looking to continue its expansion with additional joint venture partners and more production facilities to take advantage of the continued Chinese growth over the next two decades.

While GM is number one in overall car sales for non-Chinese automakers, Volkswagen Aktiengesellschaft (VLKAY) is also a large player in the Chinese economy, with additional production also set to take place over the next few years. As Ford stated in its release regarding new production facilities, it expects China’s growth in car sales to be 70% larger by 2020. With forecasts of car sales estimated to grow at that point to over 35 million units, as estimated by LMC automotive, compared to the current pace in the U.S. of 14 million units, it is evident that the Chinese economy will be the place for additional corporate earnings growth for many car manufacturers.

But the car market for the Chinese economy isn’t only in the low-end, cheaper cars. The high-end market is very active, adding to profit margins and corporate earnings for several firms. Nissan unveiled that it will be producing its luxury brand, “Infinity,” in 2014. It, too, will be ramping up production of vehicles locally for the Chinese economy, as authorities enact a 25% tariff on imported cars. Nissan’s Infinity brand will join a crowded luxury car market with “BMW”, “Mercedes-Benz” and “Audi.”

While the Chinese economy is certainly slowing, the long-term potential is very strong. Current reports of first-quarter auto sales show a slowing Chinese economy, with a decrease of 3.4% in total automobile sales compared to 2011. The trend is obviously showing that the Chinese economy is slowing down. But the long-term potential, if one were to look out over one to two decades is still quite strong. Many auto manufacturers are looking for any market to grow corporate earnings now that Europe is in a deep recession and possibly getting worse. While the Chinese economy is certainly slowing down, carmakers believe that they have better potential for corporate earnings growth there than they do in Europe or the U.S.


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