Analyst sees profit problems in China

Automakers and suppliers will see their "excessive" profit margins in China decline from current levels, says an analyst at J.P. Morgan Securities' Tokyo office.

And he names names, saying which Japanese companies are most exposed to China's problems. His report follows one by Standard & Poor's in May, which flagged the U.S. and European automotive companies with the greatest exposure to China.

J.P. Morgan analyst Kohei Takahashi isn't particularly worried about the impact of the current anti-Japanese violence in China. His Sept. 19 report notes the possibility of both short- and long-term damage from the fallout of a Sino-Japanese territorial dispute. But that's not, in his opinion, the real problem.

Rather, he's concerned about three broader trends in China that could hurt margins at all automotive companies, whether Japanese, American, European or even Chinese. Those trends:

1. The "deteriorating supply and demand balance," as automakers continue to add capacity even as sales soften.

2. The "sustained downtrend in prices."

3. The "ongoing price declines and slowing growth" in the large-sedan segment, dominated by luxury brands. Falling prices for Audis and BMWs are putting downward price pressure on vehicles a notch below them, including Toyotas, Nissans and others.

Who is most exposed? Takahashi says Nissan and suppliers Toyota Boshoku and TS Tech derive the highest percentage of their net profit from China.

Here are highlights from a table in his report that looks at Japanese companies' exposure to China:

China's contribution to net profits
 Fiscal year ending March
Company201120122013 estimate
Toyota Boshoku70-75%100%*25-30%
Aisin Seiki25-30%25-30%20-25%
TS Tech25-30%45-50%20-25%
*-China-related net profits were greater than total net profits, which were dragged down by losses elsewhere.
Source: J.P. Morgan Securities

In a May 29 report, S&P examined U.S. and European automotive companies' exposure to the slowing Chinese market. The S&P report isn't directly comparable to the J.P. Morgan one, but they're close enough in intent.

China's share of ...
Automakers' total unit sales Suppliers' revenues
GM29% Cooper Tire21%
VW27% Autoliv12%
BMW16% Lear10%
Daimler15% GKN*9%
Peugeot12% Tenneco9%
Ford9% Visteon7%
Chrysler Group3%   
Figures are for 2011.
*Automotive division only
Source: S&P

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