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Carmakers grapple with China conundrum


IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

The Market Intelligence Platform

Carmakers grapple with China conundrum

From the shift to battery-electric vehicles to the proliferation of ride-sharing, the long-term structural challenges that face car manufacturers have been well documented. However, one headwind that has taken automakers by surprise is the sharp decline in the world's largest car market: China.

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Source: Associated Press

In 2018, China recorded its first annual decline in car sales for more than two decades. The impact this had on major automotive companies became increasingly clear as 2018 earnings reports filtered through over the past week.

"Most concerning was the unexpected slump in the Chinese auto market," Fiat Chrysler Automobiles NV CEO Michael Manley said after reporting a 28% year-over-year decline in shipments to the Asia-Pacific region. Tata Motors Ltd. wrote down the value of its Jaguar Land Rover division by £3.1 billion after it revealed a 47.1% drop in China sales. Tesla Inc. has cut prices in China several times in recent months. General Motors Co. Chairman and CEO Mary Barra said she expects sales in China to be on a par with 2018 levels. This list of laments goes on.

Where are the reasons for optimism? The Chinese government has announced plans to stimulate the economy, with a particular focus on stabilizing sales of automobiles and household goods. Trade talks resumed this week between the U.S. and China which could, in a best-case scenario, see China reduce tariffs on U.S.-made cars. Furthermore, luxury brands have warned of waning demand in China, but the latest results from Hermès, Kering SA and The Estée Lauder Cos. Inc. suggest consumer spending is not uniformly depressed.

The scale of the Chinese market — Ford expects it to be twice as large as the U.S. by 2025 — means this is not an issue any carmaker can simply ignore. Many have talked of refreshing lineups, increasing local sourcing and rethinking dealer networks. The companies that best address the China problem are most likely to excel in 2019.

Chart of the week: M&A activity in the US beverage industry

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Automakers weigh battery-electric vs. hydrogen as investment expands

The two technologies are both used in electric vehicles, but one could be better suited for passenger cars and the other for buses and trucks.

General Motors sees strong 2019 despite headwinds from China, factory downtime

Executives said company-specific tailwinds will help offset headwinds from tariffs, equity income in China and production downtime.

Fiat Chrysler CEO expects bumpy road for carmakers in China in H1'19

CEO Michael Manley said the industry as a whole is likely to suffer in China in the first half of 2019, but cost-cutting measures FCA has already taken should feed through in the second half.

Ford weighing battery-metals supply chain involvement

Ford executive Ted Miller described how the automaker could increase its participation in battery-metal supply chains.

'We have excess': US utilities pitch grid oversupplies for EV charging

Electric utilities are stepping up their proposals to expand America's electric-vehicle charging network and to manage it in a way that improves the operational efficiency of the power grid, with billions of dollars of potential savings on the line.


Analysis: India's new rules to hit Amazon, Walmart; may benefit local tycoon

The new regulations prohibit foreign-funded platforms from selling products of entities they have equity stakes in, selling products exclusively on their platforms and influencing prices.

Estée Lauder sees China sales 'strong but somewhat moderating'

The cosmetics maker's top executives said Feb. 5 that they still see room to grow in China as sales to young people and travelers continue to grow.

Retail group: Sales expected to grow 3.8%-4.4% in 2019 despite trade volatility

The National Retail Federation said strong online sales, job growth and lower taxes could boost retail sales in 2019 but warned that a failure by China and the U.S. to reach a deal on tariffs would impact key metrics and its forecast.

Ralph Lauren sees Q3'19 sales growth in China, Europe but eyeing macro trends

The New York-based company is keeping a close eye on the economic slowdown in China and uncertainty surrounding Brexit.

Food, Beverage & Tobacco

Bankers: As tastes change, beverage producers ramp up, shift M&A focus

M&A activity increased in 2018 to its highest level in at least a decade as consumers flock to different types of drinks and companies try to adapt to those changes, investment bankers covering the industry said.

Papa John's shares surge on Starboard deal; analysts point to sales 'surprise'

The pizza chain's comparable sales for the end of fiscal 2018 and first month of fiscal 2019 came in lower than expected as analysts weighed how the activist hedge fund could help the struggling company rebound.

Tyson still has 'several billions' it could deploy for deals, CFO says

The remarks made during a Feb. 7 earnings call comes after Tyson reportedly discussed paying $2 billion for privately held rival Foster Farms.

Yum! Brands CFO: Telepizza alliance could serve as template for other deals

"All of our brands are out there looking for deals like that," Yum! Brands President, COO and CFO David Gibbs told analysts on an earnings call.

Consumer Edge is a weekly collection of critical developments across the automotive; retail; and food, beverage, and tobacco industries that draws on exclusive analysis and value-added content from the Consumer News team at S&P Global Market Intelligence.

Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

Learn More About Credit Analysis
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