It’s getting harder to sell cars in China.

Regular readers know that China is having problems. Its stock market has crashed 27% since June. Its economy only grew 7% last quarter, its slowest growth in 25 years.

Bloomberg explains how this is hurting car sales in China, the world’s largest auto market:

China’s vehicle sales may post its first annual decline in more than 17 years if the stock market continues to slide, according to the China Automobile Dealers Association.

“A stock market plunge hurts consumer confidence,” Luo [deputy secretary-general of industry trade group] said in a phone interview Friday. “People wouldn’t want to spend on cars when the market keeps on declining. Dealers are sacrificing their margins and giving out big incentives to help attract buyers.”

Volkswagen (VLKAY) is the largest carmaker in the world by sales. It owns several luxury brands including Porsche, Bentley, and Audi. Its sales in China declined last quarter for the first time in ten years. Volkswagen’s management called China an “increasingly difficult market environment.”

Volkswagen’s stock has dropped 9% in the last year. And it’s just one of many car companies warning about slowing sales in China.

Here’s Bloomberg:

China has gone from growth engine to source of concern for carmakers, with BMW AG and Toyota Motor Corp. becoming the latest to warn about the world’s biggest auto market slowing down.

Japanese carmaker Mazda, American carmaker Ford (F), and French carmaker Peugeot (PEUGY) have all warned about slowing sales in China as well.

•  The Chinese car market is extremely competitive…

Here’s Reuters:

Toyota Motor Corp. said it “can't be optimistic” about profitability in China, the world's biggest auto market, where slowing growth is forcing the Japanese manufacturer to cut prices and offer buying incentives to keep up with rivals.

Toyota, which on Tuesday reported record first-quarter net profit for the third consecutive year, enjoyed rising China sales but price wars were sapping profit, company officials said at an earnings briefing.

And German carmaker BMW AG (BMW) blamed extreme competition in China for its bad quarterly results. Reuters reported:

The German luxury car maker’s second-quarter earnings before interest and tax fell 3% from a year earlier to €2.5 billion ($2.7 billion). BMW pointed to increasing competition and rising costs in China, the world’s largest auto market, where BMW had its first sales decline in a decade this year…

“If conditions on the Chinese market become more challenging we cannot rule out a possible effect on the BMW Group's outlook,” the Munich-based carmaker said in its quarterly report.

Mercedes-Benz seems to be the only car company doing well in China. Bloomberg reports:

Mercedes-Benz defied a Chinese car-market slowdown for the second month in a row, posting a 42-percent surge in July deliveries there even as rival BMW AG warned that the environment is becoming more difficult.

Mercedes-Benz is the third-largest luxury car maker in the world behind BMW and Audi. German company Daimler AG (DAI) owns Mercedes-Benz. Daimler’s stock is up 13% over the past year.

•  The world’s second biggest car company earned a record profit last quarter…

But not because it sold a record number of cars.

Here’s The Wall Street Journal:

Toyota Motor Corp. (TM) can thank a weak yen for its record quarterly earnings.

The car maker Tuesday reported a 10% rise in net profit to ¥646.4 billion ($5.2 billion) for its first quarter, even as slowing demand in Japan and Southeast Asia slightly reduced its global vehicle sales. Removing the impact of foreign exchange, Toyota would have posted an operating-profit decline.

Japan’s currency, the yen, has been in a freefall. It’s down 39% versus the US dollar since mid-2012. And it’s down 25% from just a year ago.

We recently explained how a strong domestic currency hurts a country’s exporters. The US dollar has gained 20% this year against other major currencies.

The Wall Street Journal explains how the strong dollar hurts American carmakers:

Ford, General Motors Co. and Fiat Chrysler Automobiles NV, although profitable, are struggling to keep pace with lower-cost Asian automakers that now have the added advantage of weaker currencies compared with the U.S. dollar.

While a strong currency hurts exporters, a weak currency helps them. And the weak yen has been a huge help to all Japanese carmakers, not just Toyota:

Japan’s top three auto makers all continued to benefit from a weaker yen in April-June. No. 2 Nissan Motor Co. posted a 36% rise in quarterly net profit, and No. 3 Honda Motor Co. a 20% increase.

For every one-yen rise in the value of the dollar, Toyota expects its annual operating profit to increase by ¥40 billion.

Toyota’s stock is up 2% in this year. Nissan’s (NSANY) is up 8%. Honda’s (HMC) is up 19%.

Chart of the Day

Today’s chart shows the Japanese yen’s huge 39% decline since mid-2012.

The yen was one of the strongest currencies in the world in the ’80s, ’90s, and 2000s. But Japan’s economy and stock market both have struggled over the past twenty years. Japan’s benchmark stock index, the Nikkei, lost 57% from 1992-2012.

Japan’s central bank is weakening the yen on purpose. It’s hoping a weak yen will jump-start Japan’s economy and stock market.

So far, it’s working. We mentioned that the weaker yen has been good for Japanese exporters like Toyota. It’s also been good for the Japanese stock market in general.

Japan’s benchmark index, the Nikkei, is up 99% since the beginning of 2013. That’s more than double the S&P 500’s 41% gain over the same period.

Regards,

Justin Spittler
Delray Beach, Florida
August 06, 2015