S&P: Global Automakers' Silk Road to China Also Paved With

Press Release:

S&P: Global Automakers' Silk Road to China Also Paved With Potential Pitfalls, Report Says

Press Release
News Article January 2004

S&P: Global Automakers' Silk Road to China Also Paved With Potential Pitfalls, Report Says

FRANKFURT, Jan. 7, 2004--The Chinese automotive market offers global automakers good chances to increase sales and profitability, but also poses risks, Standard & Poor's Ratings Services noted in a report published today.

"China's automotive market currently offers sales growth rates and profitability that are well above industry trend, but Standard & Poor's is concerned about the supply/demand balance over the medium to longer term," said Standard & Poor's credit analyst Maria Bissinger. "The Chinese market could follow the global trend and be plagued by overcapacity within the next few years."

In terms of profitability, the report says it is uncertain whether original equipment manufacturers (OEMs) will ultimately be able to generate satisfactory returns on their large investments, given the highly uncertain nature of the Chinese market and increasingly tough competition. In addition, although legally possible, it is onerous under the country's current taxation system to transfer dividends out of the country.

"This has not been a major issue for OEMs investing in China so far, as all cash flows generated were reinvested to enable further expansion, but it could gain in importance in the future," said Ms. Bissinger.

Nevertheless, any OEM that decides against investing in the Chinese market might forego an important growth opportunity, thereby risking falling behind its major competitors.

The report also states that the effect of the Chinese activities on the credit quality of rated global automakers will vary depending on the extent of their exposure to this market. In Standard & Poor's view, OEMs with particularly aggressive growth plans in China, including the current market leader Volkswagen AG (A/Stable/A-1), as well as Nissan Motor Co. Ltd. (BBB/Stable/A-2), and Hyundai Motor Co. and its subsidiary Kia Motors Corp. (both BB+/Positive/--), would potentially suffer the most from any adverse market developments. The report classifies OEMs rated by Standard & Poor's, according to "high", "medium" or "limited" exposure to China.

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