Why Chinese tremors will rock Indian companies like Tata Motors

China is one of the biggest consumers of products, and any adversity can cause much pain for firms with an exposure there.

 |  3-minute read |   09-08-2015
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When the Chinese stock markets crashed in early July, there were at least some who pronounced that China’s loss would be India’s gain. China’s stock markets lost $3.25 trillion in a month to July 9, as a result of "margin trading" where retail investors used borrowed money to hoard shares. The Indian markets, too felt the jitters, with the bourses registering huge falls in early July, in tandem with China’s exchanges. But there was recovery, and Indian bourses are presently finding their own "unsteady" rhythm, characterised by big falls on a day, and big gains on another. Amidst this uncertainty, caused partly by poor performance of companies in their quarterly earnings, and high inflation that is holding the central bank back from reducing key interest rates, and partly by global cues, much is happening. The most significant among these is the retail investors’ confidence slowly returning to the market, as the success of the initial public offerings (IPOs) of companies such as Syngene, VRL Logistics and Inox Wind demonstrate.

Read more: Can a falling China mean India shining?

However, it is now becoming clear that China’s loss is not always India’s gain. China is not only the manufacturing hub of the world, it is also one of the biggest consumers of products, and any adverse eventuality can cause much pain for Indian companies with an exposure there. On Friday, Tata Motors, India’s largest auto maker by revenues, said its first-quarter net profit fell by half to Rs 2,769 crore as sales at its UK luxury car unit, Jaguar Land Rover Automotive Plc (JLR), declined as Chinese demand slipped. China, which became the world’s largest car market surpassing the US, is also the biggest market for JLR. At one point, it was the Chinese market that saved JLR and Tata Motors from slipping into the red, as sales in Europe slowed. But as China’s economic boom slows down, so does the demand for luxury cars, including those from BMW and General Motors. JLR sales dropped 33 per cent in China in the first quarter. By a strange twist of events, the company is now betting on revival in other developed countries to pep up sales, including Europe, the UK and the US, where JLR sales grew 27 per cent, 20 per cent and 13 per cent, respectively.

Read more: Lessons for India from the Chinese stock market crash

The trouble in China is not going to get rectified too fast. The country’s GDP grew seven per cent in the second quarter, but according to a Bloomberg analysis, when the GDP is adjusted for price changes, growth could be two percentage points below than that achieved last year. Moreover, the jury is still out on the credibility of the growth numbers that China puts out. That is not good news at all for Indian companies such as the Tata Group and Mahindra & Mahindra, whose units have been doing brisk sales in China so far. Mahindra, which had two joint ventures for sales of its tractors in China, consolidated its operations there a few years back and is one of the top players in the Chinese market. M&M had said in February that its tractor sales will be under pressure in the following months, and it will be expanding its focus on the US, Africa and Latin America, with no mention of China. Larsen & Toubro folded up its manufacturing facility in China years ago as it found it difficult to compete in the Chinese electrical market against cheap products from competitors. Early last year, component maker Bharat Forge exited its eight-year joint venture in China, which had Rs 600 crore in revenues and made parts for the Chinese auto industry.

The signs are clear. Tremors in the world’s second largest economy will have their aftershock in India for sure, and Indian companies will need to devise ways to mitigate the pains.

Writer

MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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