SHANGHAI -- "When the water level drops, the stones are exposed," says a Chinese saying. There are no other words that can better describe the dire situation in which domestic Chinese carmakers find themselves.
Benefiting from tax incentives for small vehicles, the domestics, which mainly build small cars and microvans, achieved explosive sales growth in 2009 and 2010. But now that China's auto market has slowed to single-digit growth, the weakness of those companies has been laid bare.
Just how shaky are the domestics? Well, they are even weaker than their stagnant sales would suggest.
Except for Chery Automobile Co., every major Chinese auto manufacturer is listed either in Hong Kong or on a domestic stock exchange.
According to their financial reports, only FAW Car Co. was unprofitable in the first six months, with a loss of 61 million yuan (about $9.6 million).
But if we dig deeper, we discover that most domestic automakers would have lost money without government subsidies and profits from their international joint ventures.
Take Changan Automobile Co. Its financial report says it earned $89.8 million in the first half of this year.
But that profit was achieved after the company received a $15.8 million subsidy from the government of Chongqing, where it is headquartered. Changan also received an $86.2 million profit from its joint venture with Ford Motor Co. and Mazda Motor Corp.
In China, it is common for municipal and provincial governments to subsidize local carmakers that generate tax revenue and jobs. The governments often dole out the subsidies in the form of grants for r&d activities.
Government subsidies sometimes constitute a big chunk of an automaker's profit. For example, Zhejiang Geely Holding Group received a $99.9 million subsidy in the first half of this year, accounting for 62 percent of its profit.
Likewise, Chinese automakers that have joint ventures with global brands derive most of their profits from those partnerships.
Among domestic carmakers, SAIC Motor Corp. was the most profitable company in the first six months. But nearly all of its $1.70 billion profit was generated by its joint ventures with Volkswagen AG and General Motors.
If you exclude government subsidies and joint-venture profits, most Chinese carmakers failed to generate a profit in the first half of 2012.
Did any domestic Chinese carmakers make money on their own?
Sure. It's likely that Geely and Great Wall Motor Co. had profitable domestic operations during the period.
In the first six months, Geely reported profits of $157.6 million. If you subtract government subsidies of $99.9 million, it still earned $57.7 million on its own.
Meanwhile, Great Wall says it earned $378.3 million during the same period.
The company did not disclose its government subsidies. But since Great Wall is headquartered in Hebei province, which is not very wealthy, it isn't likely that the company received a bigger subsidy than Geely.
Two other Chinese carmakers that might have profitable automotive operations are Lifan Industry Group Co. and BYD Co. But it's impossible to verify that since both companies have nonautomotive businesses and neither disclosed separate results for their carmaking units.
Chinese carmakers are not very profitable, in part, because they have steadily lost market share to global competitors. Domestic automakers, which sold 3.2 million vehicles in the first six months, saw their share of China's light-vehicle market plunge 3 percentage points to 41.4 percent.
Because of their weak brands, it will be extremely hard for domestic automakers to reverse market share losses. Without government subsidies and profitable foreign partners, Chinese automakers appear doomed to lose money for years to come.