Despite promising high returns, the burgeoning auto markets of India and China carry high credit risks for foreign automakers, not least because of intense competition to maintain a foothold in these markets, says a report published on 22 March by Standard and Poor’s Ratings Services. As the report, titled “On The Road To Big Profits In China And India, Global Automakers May Hit Some Bumps,” points out, automakers’ hopes are riding particularly high in China due to the significant investments already made in this market.
“China represents a major factor in foreign OEMs’ profitability expectations, especially those with the largest presence such as Volkswagen and General Motors,” said Standard & Poor’s credit analyst Maria Bissinger. “It will take longer for the automakers to reap rewards from the Indian auto market, on the other hand, as they are still in the initial stages of the investment cycle.”
Competition has severely dented the OEMs’ market shares. That of Germany’s Volkswagen, which gained almost 60% of the market in the mid-1990s, has fallen to 18% in 2006. Nevertheless, VW’s sales in absolute numbers are growing steadily, and the 711,000 units sold by Volkswagen Group in China in 2006 represented 12.4% of the group’s global sales volume. VW made a loss in China in 2005, but recovered to a modest profit of 108 million euros in 2006. And despite its established production base, investments in China remain high for the group. Between 2007 and 2009, it will invest 1.9 billion euros in China, although this will be financed from internal funds of its local joint ventures.
Similarly, the book value of investments in China by General Motors Corp., which is number two in the Chinese market through six joint ventures, amounted to about $2.8 billion in the course of the past three years.
Profitability, as measured by GM’s share of its Chinese affiliates’ net income, amounted to a constant $300 million per year over the past two years, which represents a meaningful contribution to GM’s net income of $1.2 billion in the Asia-Pacific region in 2006, and stands in sharp contrast to its huge net loss of $4.6 billion in North America during the same period.
In India and China, with populations of more than a billion each, fewer than 20 in 1,000 driving-age inhabitants owned a car in 2006. This compares with 900 car owners per 1,000 inhabitants in the US. With purchasing power forecast to grow above 10% per year in China and by more than 7% per year in India over the next five years, car sales are expected to grow enormously.