The 'Time Of Reckoning' Is Here In China

Photo: AP
The Morning ShiftAll your daily car news in one convenient place. Isn't your time more important?

There’s no end in sight to China’s auto industry woes, a top National Highway Traffic Safety Administration official is out, and did you hear Uber lost a ton of money? Again? This and more for The Morning Shift of Friday, August 9, 2019.

1st Gear: Things Are Not Getting Better In China

After years of unfettered post-recession growth, the global auto industry has been hit hard over the past year on two fronts: slowing sales here in America and plummeting sales in China. For most of this decade, automakers treated China as a kind of Golden Goose, a market that would never stop producing both millionaires and new middle-class car buyers.

Advertisement

Lately that hasn’t been the case. Exacerbated by President Donald Trump’s trade war and rising prices, car sales in China have been slumping. And that has meant a huge hit to car companies’ profits.

Here’s Bloomberg on the latest, which indicates a brief resurgence in June was pretty short-lived:

Retail sales of sedans, sport utility vehicles, minivans and multipurpose vehicles in July fell 5.3% from a year earlier to 1.51 million units, according to the China Passenger Car Association. That’s the 13th decline in the past 14 months.

The figures show that the increase seen in June was just a blip caused by dealers offering heavy discounts to clear inventory. Rising trade tensions, a slowing economy and stricter emission rules have left carmakers and dealerships mired in the market’s most prolonged slump in a generation. Researcher LMC Automotive is estimating a second straight annual drop for the world’s biggest car market.

Rising trade tensions, a slowing economy and stricter emission rules have left carmakers and dealerships mired in the market’s most prolonged slump in a generation. Researcher LMC Automotive is estimating a second straight annual drop for the world’s biggest car market.

The unprecedented slide has hit local brands particularly hard, with Geely Automobile Holdings Ltd. and BYD Co. among those reporting sales declines. However, European luxury brands BMW AG and Daimler AG as well as Honda Motor Co. and Toyota Motor Corp. have continued to boost sales this year. Ford Motor Co. and General Motors Co. have had some bright spots.

Yes, through it all, the U.S. automakers are probably weathering this downturn the best—but it’s still bad news for them. For the domestic outlook we turn to The Detroit News:

“It’s a time of reckoning for many companies operating in China,” said Michael Dunne, CEO ZoZo Go LLC, a Hong Kong-based automotive consultancy. “Until very recently, Detroit automakers and their suppliers had a sensational run in China. Now they’ve seen 12 months of declining sales. This puts us into a totally new uncharted territory. This is a jolt for everybody, and everyone’s working hard to reset expectations.”

[...] After reporting losses in China in the second quarter, leadership at GM, Ford and FCA said they have the pieces in place to be successful in the rapidly changing market even as analysts like Morgan Stanley’s Adam Jonas begin to question whether it’s worth spending more to find a way to profitability in an increasingly challenging market.

“We believe many foreign auto firms, and in particular some U.S. firms, may be operating in China on borrowed time,” Jonas wrote in a May note, even as Ford, FCA and GM plan to launch new models focused on the luxury they say caters to Chinese consumers — and would drive profits.

Advertisement

Borrowed time! A time of reckoning! I have never seen this situation described in such gloomy terms, but perhaps a hard dose of reality is needed. After all, maybe this is what automakers get for assuming that explosive economic growth could just last forever. It never works out that way.

2nd Gear: Big Trouble With Mini In China

Subsequently, Mini’s planned joint venture with Chinese automaker Great Wall to make affordable electric city cars for both brands is on the rocks. Why? Because of the sexiest reason of them all: regulatory hurdles.

Advertisement

Via Automotive News:

Great Wall’s statement, made in a stock market filing, came in response to media reports that the alliance was in trouble.

German newspaper Sueddeutsche Zeitung reported on August 4 that the tie-up could fail, citing sources familiar with the matter.

Since February 2018 BMW and Great Wall have worked on plans to build a low-cost electric vehicle on a joint platform which BMW would use for the Mini brand and Great Wall would use for its own brand.

BMW and Great Wall have not yet received permission to build a new plant in Changsu, China, and Chinese State Planning authorities last year tightened regulations on adding manufacturing capacity unless factory utilization rates improve.

“At present, the project is proceeding as planned, and the two parties are communicating on the details of the cooperation and preparing for the project to seek approval from the relevant authorities,” Great Wall said in its statement.

Advertisement

This is a big deal as the Mini brand eyes an electrified future and as parent company BMW, as you read above, deals with declining sales and profits in China.

3rd Gear: Will Ride-Hailing Ever Turn A Profit?

Investors are getting pretty fed up with Uber, which just announced a $5.2 billion loss in Q2 2019 like it’s using play money instead of actual money. Now, $3.9 billion of that was payouts in its IPO, but that still leaves $1.3 billion in actual operating losses—up from $1 billion in Q1.

Advertisement

Lyft isn’t much better these days. So the question posed by the New York Times is this: even though pretty much everyone uses these ride-hailing services, will there ever be a path to them actually making money?

The ride-hailing industry has faced scrutiny in recent months for the way its businesses burn money with no imminent likelihood of profits. Companies must constantly spend freely for incentives to attract passengers and drivers and to fend off competition. Both Uber and its rival Lyft were questioned by investors this year about their business models as they prepared to list on the stock market.

Advertisement

One answer, apparently, is to do more and do everything:

Although Uber has relaxed its discounts for rides, the food delivery business is still highly competitive and the company plans to invest more aggressively in that area, he said. Uber’s food delivery business, Uber Eats, more than doubled its number of monthly customers in the quarter.

Uber, which aspires to become an Amazon-like store for all forms of transportation, is also investing in the development of autonomous cars, public transit deals, the expansion of its bicycle and scooter business, and in its freight delivery platform. The company plans to roll out more options for shared rides, such as its car-pooling and public transit features.

Advertisement

Of course this all hinges on not treating drivers as employees. And someone else inventing robot cars, ideally. This is fine! Everything should be fine.

4th Gear: Mahindra Eyes Former GM Plant

Not the shuttered Ohio plant with a probably overblown startup “savior,” though. But it’s potentially good news for Flint, Michigan. Via Crain’s Detroit Business:

Indian vehicle manufacturing giant Mahindra & Mahindra Ltd. said it plans to revitalize the former General Motors Buick City complex in Flint, Mich., in a deal that could lead to 2,000 jobs if it wins a major U.S. government contract.

Mahindra North America Inc. signed a letter of intent with RACER Trust to build a plant on the 364-acre site, which was once the home to the majority of Buick’s operations before operations ceased in 2010 following the GM bankruptcy.

Mahindra is out of capacity at its plant in Auburn Hills, Mich. — where it manufactures an off-road vehicle called the Roxor — and requires more production space, the company said Thursday in a statement.

Advertisement

I’ll take that to mean the Roxor is a success, which is lovely to hear. That thing rules.

5th Gear: Top NHTSA Boss Out

Heidi King has been working on the NHTSA side to roll back Obama-era fuel economy standards, something even automakers have opposed. Via Automotive News:

The top official of the National Highway Traffic Safety Administration, who has been key to President Donald Trump’s effort to roll back Obama-era fuel economy rules for vehicles, is expected to leave her position, a person briefed on the matter said on Thursday.

Heidi King, the deputy administrator of NHTSA, plans to leave the agency in the coming weeks, the person said. NHTSA, part of the Department of Transportation, oversees auto safety recalls and fuel efficiency regulations.

King’s departure was reported earlier by E&E News. King, who was nominated as the agency’s administrator but has never been confirmed by the U.S. Senate, is not being forced out of her job, the person added.

Advertisement

Why she’s leaving beyond the normal amount of Trump administration turnover is unclear. But there’s this:

King did not immediately respond to a request for comment, but said in a social media posting: “How do you know when you are working too hard? When your vacation is reported as a career change!”

Advertisement

Hmm. Okay.

Reverse: We Stan A Legend

Advertisement

Neutral: What Happens Next In China?

And for automakers—was pinning all their hopes on endless growth there a mistake? Or can that market weather this downturn?

Share This Story

About the author

Patrick George

Editor-in-Chief at Jalopnik. 2002 Toyota 4Runner.