Revenues have declined for BYD and Great Wall in a sign of challenging market dynamics for China's homegrown automakers.
IHS Automotive perspective | |
Significance | BYD has posted a 15.5% year-on-year (y/y) decline in first-half earnings to CNY361 million, while fellow automaker Great Wall reported a 3.3% y/y drop in profitability to CNY3.95 billion for the first six months. |
Implications | Underpinning the financial results was a trend of lower sales volume for both automakers. |
Outlook | Financial performance of both automakers is an indication of mounting challenges for domestic automakers, which are being marginalised by international brands. |
In yet another indication of growing troubles for indigenous Chinese automakers, BYD and Great Wall have reported lower profits for the first half, ending 30 June. Underpinning the financial results was a trend of lower sales volume for both automakers.
BYD, backed by investor Warren Buffett, posted a 15.5% year-on-year (y/y) decline in first-half earnings. The automaker's net profit stood at CNY361 million (USD58.6 million) for the first six months, down from CNY426.9 million in the same period of last year. The impact on profitability largely stemmed from a 27% y/y decline in vehicle sales to 180,000 units during the period that dragged the company's automotive revenue down to CNY11.94 billion, down 6.5% y/y. The company generates about one-half of its overall revenues from automotive operations, while the remainder comes from solar and handset components, and assembly operations. Overall revenues increased 4% y/y to CNY23.3 billion during the six-month period.
A bright spot in BYD's otherwise disappointing earnings announcement was the 11% y/y surge in sales of electric cars. The automaker said it expects net profit to remain between CNY361 million and CNY411 million for the first nine months of the year, representing a decline of 12–22% from the previous year's levels in the same period. On the other hand, sport utility vehicle (SUV) specialist Great Wall reported a 3.3% y/y decline in net profit attributable to shareholders in the latest six months. The automaker posted a net income of CNY3.95 billion, although revenues increased 8% y/y to CNY28.53 billion. The increase in revenues was driven by a higher SUV product mix as sales volume actually decreased 6.5% y/y during the six months. This reflects declining sedan sales (see China: 9 July 2014: Great Wall's H1 sales drop 5.57% y/y).
Rising research and development (R&D) expenses played a big role in the decline in profitability – a first for the company. At 4.1% of revenues, R&D expenses were double those from last year's comparable period and higher than the 3% the management forecast for the current year.
Outlook and implications
BYD's results came at the lower end of the earnings guidance the company offered earlier this year (see China: 29 April 2014: BYD to launch Han, Ming PHEVs, Q1 net profit tumbles). BYD has posted encouraging growth in the electric vehicle (EV) domain, but the long-term sustainability of the business remains under question as government subsidies and not retail demand are behind the surging sales of electric vehicles (see China: 16 May 2014: Subsidies aid sales of BYD's Qin, Nissan aims for 20% EV market share). Chinese car buyers are as yet reluctant to buy new energy vehicles (NEVs) due to a lack of infrastructure and confidence in battery systems. As such, it remains highly unlikely that BYD will be able to garner meaningful EV sales behind the key markets such as Shanghai, Shenzhen, and Guangzhou.
Great Wall's quarterly results came as a disappointment as the company earned the reputation of being the most profitable automaker last year. In the first half of 2013 the automaker saw sales of 367,900 units, reflecting an annual increase of 32% y/y, which pushed up the automaker's profits by 73% (see China: 24 July 2013: Great Wall Motor's profit jumps 73.7% in H1). In the first six months of 2014 Great Wall faced challenges in terms of poor initial reception of the Haval H8 model, which was found to be making knocking sounds when driven at high speed (see China: 13 May 2014: Great Wall delays Haval H8 indefinitely). Although the company invested substantial resources in developing the H8, the issues suggest a lack of thoroughness sin the development and introduction of an upscale product.
Although both automakers had bright spots in their results, the undercurrent is one of losing the competitive edge where it matters the most. In the traditional automotive space, more and more Chinese consumers are choosing higher quality foreign brands, marginalising domestic automakers (see China: 13 August 2014: China's domestic-brand sales drop, with Geely and Great Wall down in July). Meanwhile, government-led probes into international automakers have resulted in some price cuts, which will increase competition for local carmakers (see China: 11 August 2014: Chinese authorities announce probes to be regular to "clean up auto market").