Volvo owner Geely, Jaguar-powered Tata Motors’ shares diverge

Bloomberg News, August 14, 2017

By Bloomberg News

Since Geely’s US$1.5 billion purchase of Sweden’s Volvo Cars in 2010, the Chinese automaker has seen the share price of its listed unit increase sixfold in Hong Kong trading. SOURCE: EPA

(Bloomberg) — Tata Motors Ltd. and Zhejiang Geely Holding Group Co. both bought iconic luxury brands from a struggling Ford Motor Co. in the wake of the global recession. Both acquisitions were met with skepticism from investors, who now view the two companies very differently.

Since Geely’s $1.5 billion purchase of Sweden’s Volvo Cars in 2010, the Chinese automaker has seen the share price of its listed unit increase sixfold in Hong Kong trading. India’s Tata Motors, which bought Britain’s Jaguar Land Rover two years earlier for $2.5 billion, has merely doubled in the same period.

The contrast is even starker if one shortens the timeframe: Tata is down about 21 percent this year, while Geely is up 149 percent.  The difference, says Jochen Siebert, a Singapore-based automotive consultant, lies in what the companies have done with their landmark purchases. Under Chairman Li Shufu, Volvo Cars was able to lower its costs and gain economies of scale by manufacturing and selling in China, the world’s largest auto market. Geely in return benefited from the technology of the more established Swedish automaker through the development of common underpinnings, which Volvo Cars also uses for its smaller models.

When Tata Motors wanted a partner to help it break out of the domestic India market, it looked not to its luxury division, but to Volkswagen AG’s Skoda. JLR and its Indian parent were just “too far from each other” in positioning, preventing them from creating any synergies between them, said Siebert.  Talks about a partnership between Skoda and Tata ended last week without a deal as the projected cost savings fell short of expectations, leaving the latter without a global partner.

“Tata sees JLR as a standalone and a financial shareholding,” said Siebert, managing director of JSC Automotive Consulting. “As long as Tata doesn’t want to develop into a higher-positioned brand in its own right, there is just no way to cooperate with JLR.”

Volvo’s Ethos

Tata didn’t immediately offer a comment on the market perception of its acquisition of Jaguar Land Rover. A spokesman for Zhejiang Geely Holding said in a message sent by WeChat that the success of the acquisition “has been down to Volvo’s strong product range and customer-centric design and engineering ethos.”

Tata is now almost entirely dependent on its luxury unit for profits. Jaguar Land Rover accounted for 78 percent of the group’s total revenue and 96 percent of its operating income.

Sales of Tata’s own namesake brand of vehicles contributed 1.3 percent to operating profit, behind that of construction equipment.  This has made the parent vulnerable to any hiccups at the British unit. When JLR said it expects pressure on profit margins to continue due to higher incentive levels, investors sent Tata’s stock down 8.6 percent to a 15-month low on Aug. 10.

Deliveries at JLR grew at a slower 4 percent pace in the April- to-June quarter because of weak demand including for Land Rover’s Discovery Sport and Range Rover Sport SUVs.  JLR also counts China as a major market and Tata can do little to help in the world’s biggest auto market given its lack of presence there, said Bill Russo, managing director of Gao Feng Advisory Co.

By contrast, Volvo Cars was the first Western carmaker to export a premium China-made car to the U.S. in 2015 with the S60 Inscription. The company last year began building high-end versions of its S90 premium sedan in Daqing, China for global exports and plans to assemble vehicles in India this year, starting with the XC90 SUV. Geely and Volvo Cars also worked together to develop a compact-car platform that will be used by Geely’s upscale Lynk & Co. brand.

Geely’s investments in factories and in-house technologies have resulted in a series of new car models, a spokeswoman for Volvo Cars said in an email response. The transformation continues with two new joint ventures formed between Volvo and Geely this month, she said.

Geely has thrown a lot of money at Volvo without concern for an immediate return, a luxury available to an unlisted company, says Janet Lewis, an auto analyst in Hong Kong with Macquarie Group Ltd. This has enabled the Swedish company to invest in technology, whereas it was relatively starved of development money under Ford ownership, she said.  “The longer-term challenge for Volvo is its tiny scale.  Even combined with Geely for volume, it is going to have a hard time meeting the increasing technology needs when it is up against well-funded giants like Toyota, VW, Renault-Nissan-MMC and GM,” said Lewis. “JLR faces similar challenges with its small scale and its main hope is that Tata ties up with a global partner in India.”

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Chua Kong Ho, Abhay Singh

China Falters, and the Global Economy Is Forced to Adapt

The New York Times, August 26, 2015


Chinese officials in Shandong Province preparing to take samples of iron ore imported from India. CreditChen Weifeng/European Pressphoto Agency

With deepening economic fears about China, multinational corporations and countries are having to respond to a new reality as a once sure bet becomes uncertain.

HONG KONG — The commodities giant BHP Billiton spent heavily for years, mining iron ore across Australia, digging for copper in Chile, and pumping oil off the coast of Trinidad. The company could be confident in its direction as commodities orders surged from its biggest and best customer, China.

Now, BHP is pulling back, faced with a slowing Chinese economy that will no longer be the same dominant force in commodities. Profit is falling and the company is cutting its investment spending budget by more than two-thirds.

China’s rapid growth over the last decade reshaped the world economy, creating a powerful driver of corporate strategies, financial markets and geopolitical decisions. China seemed to have a one-way trajectory, momentum that would provide a steady source of profit and capital.

But deepening economic fears about China, which culminated this week in a global market rout, are now forcing a broad rethinking of the conventional wisdom. Even as markets show signs of stabilizing, the resulting shock waves could be lasting, by exposing a new reality that China is no longer a sure bet.

China, while still a large and pervasive presence in the global economy, is now exporting uncertainty around the world with the potential for choppier growth and volatile swings. The tectonic shift is forcing a gut check in industries that have built their strategies and plotted their profits around China’s rise.

Industrial and commodity multinationals face the most pressing concerns, as they scramble to stem the profit slide from weaker consumption. Caterpillar cut back factory production, with industry sales of construction equipment in China dropping by half in the first six months of the year.

Smartphone makers, automobile manufacturers and retailers wonder about the staying power of Chinese buyers, even if it is not shaking their bottom line at this point. General Motors and Ford factories have been shipping fewer cars to Chinese dealerships this summer.

It is not just companies reassessing their assumptions. Russia had been turning to China to fill the financial gap left by low oil prices and Western sanctions. Venezuela, Nigeria and Ukraine have been heavily dependent on investments and low-cost loans from China.

The pain has been particularly acute for Brazil. The country is already faltering, as weaker Chinese imports of minerals and soybeans have jolted all of Latin America. The uncertainty over China could limit the maneuvering room for officials to address the sluggish Brazilian economy at a time when resentment is festering over proposed austerity measures.

The weakness in China is even compelling officials at the United States Federal Reserve to think more globally, as they consider raising interest rates. William C. Dudley, the president of the New York Fed, said on Wednesday that a September rate increase looked less likely than it did a few weeks ago.

“The entire world is focusing now on China, watching this crisis unfold,” Armando Monteiro Neto, Brazil’s minister of development and foreign trade, told reporters on Tuesday in Brasília. “Brazil is already feeling the effects of China’s deceleration. If the situation gets worse, the impact will get bigger.”

The trouble is, the true strength of the Chinese economy — and the policies the leadership will adopt to address any weaknesses — is becoming more difficult to discern.

China’s growth, which the government puts at 7 percent a year, is widely questioned. Large parts of the Chinese service sector, like restaurants and health care, continue to grow, supporting the broader economy. But the signs in industrial sectors, in which other countries and foreign companies have the greatest stake through trade, paint a bleaker picture.

Adding to the worries are recent events like the deadly explosion of a hazardous chemicals warehouse in Tianjin, which has delayed shipments through one of China’s biggest ports. Labor protests, already rising, jumped sharply across coastal China last week over unpaid wages at struggling export factories.

The leadership, concerned with maintaining social stability, has been quick to act, making aggressive moves to prop up the stock market, inject money into the financial system, and generally stimulate the economy. But President Xi Jinping doesn’t have much experience managing a downturn, and some economists worry that the government is making knee-jerk decisions that will do more harm than good.

Many company executives and global economists say that forecasting China’s growth has become so hard that they are hedging their bets for the time being. “This is a complete black art right now,” said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a large Hong Kong shipping company. “I can’t make any long-term decisions based on what is happening today, and so I just keep our fleet running until we get a bit of direction.”

The problems have been building for months in areas like commodities and industrials where just modestly slowing growth in China has been having outsize effects.

For more than a decade, prices surged for iron ore, a main ingredient in making steel, as new skyscrapers, rail lines and other infrastructure were built across China. Last year, BHP Billiton shipped enough iron ore each day to China to fill the Empire State Building.

Now, the industry is retrenching in the face of China’s weaker prospects and diving commodity prices.

Vale, the Brazilian mining giant, is racing to unload assets. In Australia, Vale and its Japanese partner, the Sumitomo Corporation, sold a coal mine in July for just $1, after it had been valued at more than $600 million three years ago. In Argentina, Vale is trying to sell a potash mine in which it invested more than $2 billion.

The fallout in commodities has been especially painful for emerging markets that depend on sales of those resources.

With Brazil’s revenues declining sharply this year, President Dilma Rousseff’s government is coming under criticism over the country’s dependence on China, which surpassed the United States as the top trading partner in 2009. Brazil’s exports to China fell 23.6 percent, to $24.7 billion, in the first seven months of the year from the same period in 2014.

In an editorial on Tuesday, the newspaper O Estado de S. Paulo described Brazil’s relationship with China as “semi-colonial,” claiming that the country’s economy “depends in excess on Chinese prosperity.”

Ilan Goldfajn, chief economist at Itaú Unibanco, one of Brazil’s largest banks, said he was already forecasting the economy to contract about 2.3 percent this year, without factoring in the possibility of a hard landing in China. “China is the most important risk factor for Brazil,” Mr. Goldfajn said.

China was supposed to be the financial savior for Russia.

Last year, Russia signed a $400 billion natural gas deal with China. China would help finance a nearly 2,500-mile pipeline to ship fuel from Siberia. Russia trumpeted that it would eventually sell more natural gas to China than Germany, now its biggest customer.

But the prices that China is willing to pay for the gas are dropping so low that it may no longer be worthwhile to build a pipeline. The Russian energy giant Gazprom has cut its planned capital outlays this year for the first leg of the pipeline by half, Dozhd television reported.

“China is an unclear country for us, opaque,” said Aleksandr Abramov, a professor of finance at the Higher School of Economics in Moscow. “We don’t know what to expect,” he said, adding, “Clearly, the situation will worsen in Russia.”

Some of the latest pressures reflect a belated recognition by businesses and politicians that China had been slowing down.

Automobile manufacturers cut their shipments of new cars to dealers by 7 percent in July, compared with a year earlier. Retail sales had not suddenly tanked, said Cui Dongshu, the secretary-general of China’s Passenger Car Association, which represents manufacturers.

Rather, too many cars had been sent to dealers’ lots in previous months, he said. In other words, manufacturers were slow to see the economy’s deceleration and waited too long to throttle back their factories.

“What manufacturers are doing is adjusting inventory levels to the ‘new normal,’ ” said Bill Russo, a former chief executive of Chrysler China, using a favorite phrase of President Xi Jinping of China in recent months to describe an economy that is expanding at a slower pace.

Similar adjustments are taking place around the globe.

For years, Germany has been well positioned to profit from Chinese growth because it specializes in machine tools and other factory equipment. Most important, China acted as a counterweight to the chronically slow-growing markets in Europe.

Now, major German exporters are seeing signs of pressure.

Trumpf says that sales of its signature product, machines that automakers use to cut sheet metal that sell for about 500,000 euros ($566,000) each, have continued to grow in China. But in May and June, sales of less-expensive cutting machines flattened and began to decline. At the bottom of Trumpf’s product line, sales have fallen sharply since November for machines often purchased by start-up companies.

How industries and economies ultimately fare will depend on how long the slowdown and how deep the economic woes.

Demand remains strong at Boeing for its 777-300ER and 787 jets, models that are capable of flights lasting 10 hours or longer, to Europe or North America. Long-haul international travel from mainland China soared nearly 30 percent in the first half of this year compared with the same period last year, Randy Tinseth, the vice president for marketing at Boeing’s commercial aircraft division, said during a visit to Beijing on Tuesday.

So far, it has been mixed for technology players. Timothy D. Cook, the Apple chief executive, said on Monday that business had stayed strong in China in July and August. But Meg Whitman, the chief executive of Hewlett-Packard, said in an earnings call last week that China’s consumer market for printers and computers was “pretty soft,” although demand from businesses was holding up better.

In the end, much of the China story will come down to whether the expectations meet the reality. Andrew Mackenzie, the chief executive of BHP, captured a broader corporate view on Tuesday when he spoke glowingly about China’s potential in the decade to come and predicted continued profitability. But he conceded that the country’s steel production would most likely “grow a little more slowly,” citing a forecast that works out to just 1.4 percent annually — a figure that sounds more like Europe than the formerly go-go economy of China.

A similar realization is taking place in various corners. “We had five fabulous years in China, of course, where we grew strong double-digit, and it has been gradually slowing down,” Frans van Houten, chief executive of Royal Philips, the Dutch conglomerate, said on July 27. “I think, going forward, we need to be much more modest on expectations with regard to China growth: That’s just being realistic.”


Reporting was contributed by Simon Romero from Brasília, Brazil; Jack Ewing from Athens; Andrew E. Kramer from Moscow; Paul Mozur from Hong Kong; and Vinod Sreeharsha from São Paulo.

A version of this article appears in print on August 27, 2015, on page A1 of the New York edition with the headline: Global Economy Forced to Adapt as China Falters. 

Shanghai in slow lane as market crash accelerates slump in luxury car sales

The Guardian, August 1, 2015


Shanghai: the roads are impressive but car sales are not motoring.
Photograph: Bloomberg via Getty Images

Business appears to be slow at the Mercedes-Benz showroom in the Jing’an district of Shanghai. There are no customers and the staff look bored. A family comes in to look at the cars but appears to have no intention of buying. A salesperson is tight-lipped when asked whether they are seeing fewer customers through the doors.

Car sales in China are slowing after years of rapid growth, and have slumped in the last few weeks. According to the China Association of Automobile Manufacturers, numbers sold in June fell 5.3% from May; this drop coincided with the stock market crash that saw the Shanghai Composite Index lose 14% in July. The association previously estimated that sales would grow 7% this year; now it thinks that figure will only be 3%.

A number of international car manufacturers such as Peugeot, Citroën and Ford have warned of sluggish sales in China, while Audi lowered its global sales forecast last week because of slumping demand there. State media reports that some companies have been cutting prices since April in an effort to boost sales.

The sales staff at the Mercedes-Benz dealership would also not comment on whether they had been offering discounts. However, there were signs offering new deals for lower interest financing when purchasing some of the more expensive models on display.

Bill Russo, managing director of management consultancy Gao Feng Advisory Company, confirms that the sector is slowing down. The recent stock market crash is “noise in the system”, he says, but admits that “there could be a short-term impact”. Nonetheless, he believes that the industry should be optimistic about China: “The expansion of the market will be guided by the number of people who have enough money to buy a car, and that number will grow.”

The economic slowdown is also having an impact on the luxury goods market and there are concerns that the share crash will make it worse. “The luxury market has been in slowdown mode since 2012, the start of the anti-corruption campaign,” says Liz Flora, editor-in-chief of Jing Daily, a website covering the luxury industry in China. She adds that the crash “throws a new wrench into the system, and brands are worried it will create even more problems in terms of consumer confidence”.

At the Gucci store at the IAPM shopping centre on Huaihai Road in Shanghai on Friday, there were no customers. It is the largest Gucci store in China; on its two floors, sales staff were chatting to each other and two lingered by the entrance, ready to pounce on anyone walking in.

Many luxury brands have outlets in the IAPM centre, one of Shanghai’s most prestigious addresses. In the Prada store there were a few customers looking at bags but they were outnumbered by staff by two to one. In contrast, the shopping centre itself was buzzing, with many people strolling around, and the food court was doing brisk business.

Mr Kong and Mrs Li were walking around leisurely having a chat. They were in the mall “to take a walk”, said Mrs Li. “I don’t buy designer goods but my daughter does.” Wang Cheng was heading to the Nike store and said he didn’t think most people were there to shop. “Most are here for the air conditioning,” he laughed: temperatures this summer have hit almost 40C.

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Competing in the China Truck Market

Gao Feng Insights Report, February 2015

We are pleased to share with you a report titled: Competing in the China Truck Market.

While global brands have enjoyed success in China’s passenger vehicle market, the same cannot be said for the commercial vehicle market. This segment has been dominated by local Chinese manufacturers who have relied on sales to local buyers seeking low-priced equipment. However, we anticipate that several factors will be reshaping the market and competitive landscape in the commercial truck sector, creating a “window of opportunity” in China for participation in what has historically been a predominantly local market.

We believe that market conditions and regulatory challenges will create a need within China’s truck industry to form alliances with foreign partners to secure capabilities which are lacking in the commercial vehicle sector in China. China’s truck manufacturers will need to upgrade their technology to meet demanding new regulations, and will need to improve their service and distribution business practices as the market matures. The changing mix of products towards a higher concentration of line-haul HT, along with anticipated policy changes brought about from China’s intention to reform its State-Owned Enterprises, are driving forces which will alter the landscape of competition in the commercial truck sector.

We welcome your comments and feedback on our report or in general about our firm.  We would be glad to meet you in person to share our data and perspectives in a fuller manner.  Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights.

Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

In this paper, we offer our “deeply rooted in China” perspective to the analysis of the impact of each of these developments.

Best Regards,

Dr. Edward Tse
CEO, Gao Feng Advisory Company

Bill Russo
Managing Director, Gao Feng Advisory Company

Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Gao Feng website:

China in 2025 and Implications for Automakers

Gao Feng Insights Paper, January 2015

As we know, China’s economy has been growing dramatically for more than two decades. China is now the world’s second largest economy. Recently, we see rising concerns over the impact of a deceleration in overall economic growth, especially on the automotive sector.

China’s economic growth is likely to continue over the next decade, driven by a mix of continued (albeit more selective) fixed-asset investment and growth in consumption. Continued investment in infrastructure to support a more than 60% urbanized population is anticipated. Household consumption levels will rise as a result of the growth in the population of middle-class wage earners and overall rising incomes. A broad transformation is expected to continue and will present an environment that is characterized by a long term and sustained shift towards a middle-income, consumption-based economy. This trend would lead to a profoundly different economic landscape.

We believe discontinuities in the political, social and economic landscape have the potential to reshape China dramatically in the next decade. While the outlook is positive, there will likely be discontinuities – some upward and some downward – along the way. We believe that the key to sustainable success for businesses in China will depend on their ability to anticipate those trends and challenges that are in the “blind spots” today – but which can create disruptive threats or discontinuous opportunities for those who are able to respond rapidly. In essence, an “early warning system” is needed which leverages unique insights that can be brought to bear on the question of how the market, the regulatory system, and business models may develop over the next decade in China.

In this analysis, we will apply such a thought process to anticipate plausible scenarios for the China auto industry in 2025.

Click here to view the full paper: