In recent months, a growing concern surrounding high debt levels in China's automotive industry has caught the attention of industry media and professional investors alikeReports have circulated, with some foreign short-selling firms attempting to capitalize on China's elevated debt profile to drive down the stock prices of Chinese car manufacturers.
From a professional perspective, measuring a car company’s financial health solely by its debt ratio is both simplistic and shortsighted.
Although the full annual reports for 2024 have not yet been disclosed, an analysis of the 2023 financial reports and the mid-2024 results indicates that the global automotive industry is entering an era characterized by high debt levelsThis trend is particularly evident among overseas manufacturers, which have seen their interest-bearing liabilities swell to astronomical figures, surpassing trillions in some instancesIn stark contrast, companies such as BYD have demonstrated surprisingly robust balance sheets.
Let's explore the underlying factors contributing to this phenomenon.
The trend of high debt in the global automotive industry is undeniable, yet understanding this overall trend requires more than just a binary comparison of high versus low debt levelsAfter all, from the perspective of international financial markets, the low-interest environment over the past decade has allowed foreign car manufacturers to continually expand their balance sheets, resulting in a dramatic increase in total liabilities.
For example, in 2023, among the top ten automotive companies, Volkswagen reported revenues of 2.5 trillion yuan and total liabilities of 3.2 trillion yuan, while Toyota's revenues were 2.1 trillion yuan against total liabilities of 2.6 trillion yuan
Advertisements
Volkswagen’s debts amounted to 128% of its revenue, with Toyota and General Motors at 124% and 119%, respectively.
These staggering figures reflect not just the industry’s reliance on technological advancements and the integration of supply chains, but also the inherent characteristics of the automobile sector as a capital-intensive industry.
In the automotive realm, especially for multinational corporations, investments in a single automotive production line can exceed 10 billion yuan, with new models typically taking three to five years to generate a return on investmentData from 2023 indicates that Volkswagen’s capital expenditures represented 9.2% of its revenues, while operational cash flow only covered 75% of capital needsThis, combined with the dual-track pitfalls of technological transformation, especially against the backdrop of electric vehicle (EV) prominence in China, has compelled traditional automotive giants to “support their combustion engine vehicles with one hand while investing heavily in electrification with the other.”
Moreover, the long-standing low-interest rate environment globally has further fueled the leveraging expansions of car manufacturersSince the 2008 financial crisis, low global interest rates have led these companies to raise capital through bond issuance rather than equity dilutionIn 2023, the average bond yield for US firms was merely 3.2%, significantly lower than the cost of equityAs a result, an increasing number of automotive firms prefer bond financing over equity to fund their growth.
According to financial reports, by 2023, Toyota’s interest-bearing debt ratio reached 67%, Volkswagen’s was at 34%, and Ford’s stood at 65%, with each company’s total interest-bearing debt exceeding 100 billion yuan.
Thus, the combination of heavy assets and long cycles makes the automotive industry inherently debt-driven; however, this does not necessarily mean that the industry is at risk of financial troubles.
In contrast, leading domestic manufacturers practice greater caution in financial leverage
Advertisements
For instance, in 2023, SAIC Motor's total liabilities stood at 663.7 billion yuan, equivalent to 89% of its revenue, while BYD reported total liabilities of 529.1 billion yuan, or 88% of its revenue, and Geely's totaled 451.7 billion yuan at a ratio of 91%.
More crucially, regardless of the absolute amounts of debt or their proportions relative to revenue, top Chinese manufacturers exhibit significantly lower total liabilities than their international counterparts.
In terms of interest-bearing debt, compared to the thousands of billions faced by many overseas firms, Chinese car manufacturers display more disciplined financial behaviorAmong the major domestic players, the highest interest-bearing debt belongs to SAIC Group and Geely Holdings, with liabilities just slightly exceeding 100 billion yuan each, while BYD’s interest-bearing debt is even lower at 30.3 billion yuan, representing less than 2% of the corresponding figure for Toyota.
Analyzing the ratio of interest-bearing debt to total debt reveals that Geely Holdings has a 24% ratio, SAIC Group at 16%, and BYD at just 6%. Lower interest-bearing debt leads naturally to reduced operational risks.
The markedly superior debt performance of Chinese automakers compared to their international rivals can be attributed to their ability to capitalize on the transformation opportunities presented by electric vehicles and effectively manage supply chain integration.
According to data from the China Automotive Industry Association, by November 14, 2024, China's annual production of new energy vehicles is expected to surpass 10 million units, marking China as the first nation globally to achieve such a milestone within a year.
In this context, the surge in electric vehicle sales has catalyzed the rapid maturation of China’s electric vehicle supply chain, leading to the formation of a complete integrated supply chain under the guidance of leading manufacturers
Advertisements
Companies like BYD, which develops all its core technologies in-house, have managed to strike an impressive balance between technological and market costs.
Firms such as BYD, Geely, or Changan have particularly focused on reusing technology to mitigate research and development costs, thereby establishing a trend of multi-platform diversification driven by core technologies that reduces the ratio of growth rates to liabilities further.
This shift also creates a need for new metrics to evaluate the financial health of Chinese car manufacturers.
When discussing liabilities, accounts payable may provide a more accurate reflection of Chinese automakers' financial statusExperienced auditor Mana notes that the level of accounts payable indicates an automotive firm’s operational condition—larger car companies with higher revenue typically engage in more significant external procurement and collaboration, thereby contributing more distinctly to economic growthIn financial reports, this is represented by the increase in accounts payable.
Research compiled by BT Finance shows that the ratio of accounts payable to revenue is 84% for Seres, 57% for Dongfeng, 50% for Changan, 40% for Great Wall, 36% for SAIC, and 33% for BYDIn 2023, turnover cycle for accounts payable ranged significantly, with SAIC at 140 days, Great Wall at 163 days, Changan at 185 days, Dongfeng at 226 days, and Seres at 313 days, while BYD maintained a notably agile cycle of just 128 days.
Among the major domestic car manufacturers, BYD's extensive supply chain yields a relatively high amount of accounts payable
Advertisements
Advertisements