What model is this article? 1. Porter\'s Diamond Model 2. The Griffin\'s Model 3

Question

What model is this article?

1. Porter's Diamond Model

2. The Griffin's Model

3. Porter's Five Forces

Car Makers Have a Lot to Lose From China’s Slowdown

But precisely how much? Investors need a better idea what’s at stake in the world’s largest auto market

Car sales in China have shifted into reverse, but figuring how exposed the world’s biggest auto makers are to the world’s biggest car market is almost impossible.

Most major car makers have done very well in China, including through joint ventures with Chinese peers. Nissan and Volkswagen get nearly a quarter of their pretax profit from those businesses, and General Motors isn’t far behind.

What the car companies don’t tell investors is how much they earn from exports, royalties and parts sales in China, which can be significant and aren’t fully disclosed.

Fragile ChinaChina's monthly car sales, year-on-yearchangeSource: Wind Info. / China Passenger Car Association

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The same goes for the rare cases where there are losses. For example, the depth of Ford’s China problem isn’t visible in its joint venture, which roughly broke even in the second quarter. Coming clean about its actual exposure, Ford said it lost $483 million in China in the quarter, largely because it is selling fewer imported Explorers and spending more to design new models to be sold by the JV. Ford’s stock has fallen 11% since the July revelation as investors have brought down their profit forecasts for 2018.

After years of rapid growth, the Chinese market is far larger than its counterparts in the West, with more than 24 million cars sold last year compared with roughly 17 million in the U.S. and 15 million in the European Union. But sales fell 7% in August compared with a year earlier, according to the China Passenger Car Association, following declines of 6% in July and 3% in June.

The numbers are likely to get worse in the rest of the year. Sales last fall were boosted by tax incentives, and a crackdown on lending has hurt the lower end of the car market. The trade feud with the U.S., which led to higher tariffs on U.S.-built cars exported to China in July, will also likely weigh on sales.

Red FlagsChinese joint-venture net profits as a share ofgroup pretax profits, last financial yearSource: company reports

VWNissanGMFordDaimlerBMWToyotaFCATesla0%102030

The slowdown makes it important to understand how much money global car giants like General Motors and Volkswagen earn in China. Unfortunately, the complexity of flows between the companies’ Chinese joint ventures and their wholly owned operations makes this impossible to work out precisely. It is likely that global car makers use the opacity to play down Chinese profits in their accounts because investors see them as risky or to avoid extra scrutiny from the government.

Companies need to better disclose sales from imports of high-end cars to China’s wealthy coastal markets, parts sales to joint ventures and royalties from them for designs. For the German brands, these profits are almost certainly greater than those of their joint ventures. Brokerage Bernstein estimates that China contributed roughly €5.5 billion ($6.4 billion) in profit, or more than 40% of the total, to both BMW and Daimler’s Mercedes-Benz last year. Conversely, we wouldn’t know the extent of Ford’s Chinese travails if the auto maker hadn’t spelled them out.

The Germans have the most to lose in China, but have been protected from the slowdown by their strong brands. For them, the tariffs on U.S.-built cars exported to the country are a bigger problem. A decision to split the cost of the tariff with its Chinese customers will hit BMW’s profits by roughly €300 million this year, while Daimler blamed the tariffs in part for a June profit warning.

Sold in ChinaUnit car sales in China, Jan.-July '18 vs Jan.-July '17Source: CarSalesBase*Renault-Nissan-Mitsubishi

Hyundai-KiaDaimlerAlliance*ToyotaVW GroupGMBMW GroupPSAHondaFordFCA0-50%-252550

Mass-market global manufacturers like GM and Nissan may struggle more with the deteriorating market backdrop. GM warned in July that its Chinese JV would face more competition in the second half. And the weaker Chinese currency is a problem for everyone.

Car makers aren’t the only ones overexposed to China. Luxury groups like Moët Hennessy Louis Vuitton LVMH and Gucci-owner Keringtypically make between 30% and 40% of their sales from Chinese consumers, whether they are in their home country or traveling abroad. Because sales are growing faster in China than elsewhere, the industry’s growth is even more dependent on the country. This became clear in late 2015, when the yuan devaluation made Chinese consumers cautious and handbag sales suddenly hit a wall.

The difference is that investors know how important China is to makers of fancy bags and watches. Most of the world’s automotive giants offer no indication of how much is at stake. As warning signs mount, car makers shouldn’t wait for a Ford-style collapse to bring the market up to speed.

Explanation / Answer

The article is about Porter’s Diamond Model as it takes all elements present in model like government role, increasing competition,. Policies in forms of tax where the company and business grow in china. The article is about the car makers and their performance in the country. The article also states as to how important government role to make sure that business runs smooth.

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