Monday, August 24, 2015

"Market Correction" Consequences for American Automakers Doing Business in China

From Detroit Free Press, an article by Greg Gardner.

Investors' wild roller coaster ride dove in early, panicked selling and enjoyed a mid-day climb, only to be whiplashed through an extremely shaky final hour -- all sparked by deepening uncertainty over how severe China's economic slowdown could be.
So what does it mean for those whose livelihood is tied to the auto industry?
It's natural for Americans to wonder why this is happening when auto sales in the U.S. are running at the strongest pace in more than a decade. The short answer is that GM and Ford are increasingly dependent on Chinese operations. In GM's case, the company sells more vehicles in China with its partners than it does in the U.S.
As a result, the Detroit Three automakers' stock fell by greater percentages Monday than the broader market indices.
GM has sold more vehicles in China than North America for most of this decade. There's no question that falling sales in China will weaken GM and Ford earnings for the second half. Fiat Chrysler has a much smaller presence in China.
The silver lining here is that North America is the overwhelming profit center, acting as a shock absorber for the turmoil overseas.  Whether it's enough to restore confidence among investors still fretting about China won't be known for weeks, if not months.
Perspective was hard to come by Monday. The Dow Jones Industrial Average was losing 100 points a minute at the opening bell. Trading algorithms were driving an avalanche of selling. At the close, the Dow was down 588.40, or 3.6%  after the worst week in four years.
The S&P 500 plunged 77.68, or 3.9% to 1,893.21, while NASDAQ, which is loaded with technology stocks, tumbled 179.79, or 3.8% to 4,526.25.
GM shares, which fell from $29.60 to as low as $24.62 in the first 30 minutes, closed at $27.80, down 6.1%. Ford nosedived from $13.86 to $10.44, and trading even halted briefly. Then Ford closed at $13.19, down 4.8%.
“Several stocks were halted for a few minutes this morning due to the volatility in the stock market,” Ford said in a statement. “Ford stock resumed trading shortly afterward.”
FCA, which has only a marginal presence in China, plummeted from $14.57 to $12.56 shortly after the market opened, and closed at $13.74, 5.7%  for the day.
The sell-off was triggered by more bad news in China, where the key index on the Shanghai stock exchange fell 8.5%,  one of the sharpest one-day declines in a volatile period that began in early July.
Despite the Chinese government's decision two weeks ago to devalue its currency, the yuan, and to use its substantial cash reserves to buy shares selectively, it has not been enough to reverse a downward trend that has come after a meteoric rise when China's stock market soared 150% from July 2014 to June 2015.
Sales of new cars in China have been slowing for several months, and many manufacturers have dropped prices to stimulate demand, with not much success.
For more perspective, consider that China is essentially the only other part of the world where GM and Ford are making a profit.
The main lesson for all multinational corporations is that China, guided by an unelected, central planning Communist Party government, can't sustain an illusion forever that a market-driven economy only grows. Despite currency devaluations, government bans on executives selling shares or pumping a seemingly limitless supply of cash to prop a falling stock market, markets will expand and contract. Those of us who have been raised in an authentically capitalist economy take that as a given.

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