Hitting a glass ceiling

Cao: a tycoon facing tough times

The 2020 Oscar winner American Factory was a fly-on-the-wall look at the workings of Fuyao’s glass factory in Ohio acquired in 2014 (see WiC464). It also brought a federal investigation into Fuyao, thanks to sequences showing Chinese executives discussing the firing of workers that were trying to unionise. The outcome could lead to disciplinary action against Fuyao, which has received close to $10 million in tax subsidies from the Ohio government, reports The Columbus Dispatch, a local newspaper.

But for now the more pressing issue for China’s largest producer of car windscreens is how to stop the slide in its earnings. Last year net profit tumbled 30% to Rmb2.9 billion ($409.69 million) in the first decline since 2008. Revenue growth also halved to 4% in the same period.

A sluggish market for new car sales in 2019 was largely to blame. With the withdrawal of purchase subsidies, the number of cars sold was down 8% year-on-year to under 25.8 million units, according to the China Association of Automobile Manufacturers, an industry body.

Fuyao has looked overseas for new markets. Last year it took over Germany’s SAM Automotive, a bankrupt parts manufacturer specialising in aluminum components. It also added capacity at its plant in Moraine, taking its total investment in Ohio to $600 million, the largest by a Chinese company.

“We command over 65% of China’s automotive glass market. To further push our market share to 100% is simply unrealistic. On the contrary, we only have 20% of the overseas market, meaning much more room for growth. Our strategy is therefore to maintain our stronghold at home, and to build more factories abroad in order to win more foreign orders,” a representative of Fuyao told Gasgoo Autobiz, an online trade publication.

Last year overseas markets contributed as much as 49% to Fuyao’s turnover as sales jumped 23% on the year, compensating for the slowdown at home. But while the strategy was credited with helping Fuyao to weather the downturn in China, it is also exposing the company to wider risks amid the Covid-19 outbreak.

With the number of coronavirus infections surpassing 2 million, activity at more than 150 car manufacturing plants around the world has been disrupted or suspended. IHS Markit, a research firm, also projects an 18% drop in new vehicle sales to 73.3 million units worldwide for 2020, assuming that containment measures are extended.

For Fuyao, the hollowing out of both demand and supply in the auto market is knocking at least Rmb150 million off its profits every month, a a fall of about a third compared to normal times, its chairman and founder Cao Dewang was reported as saying.

“The company had planned to raise the output of its American factories in 2020 from 3.8 million units [windshields] to 5.5 million. Given Fuyao’s competitive advantage, the target is conceivably achievable – if only there were no coronavirus outbreak,” an analyst told China Times.

To fight “the tough battle in 2020”, as Fuyao puts it in its annual report, the company says it has implemented a series of anti-epidemic measures to stabilise production, but it could cut employee salaries if the situation worsens.

The uncertain outlook has sent Fuyao’s Hong Kong-listed shares to a four-year low. Fortunately, it can still borrow relatively cheaply in the onshore Chinese bond market. It only needed to pay a 2.85% coupon for Rmb600 million of short-term paper in February and 3.19% for another Rmb600 million of notes due in three years. The proceeds will be used to repay bank loans, Fuyao said.

Meanwhile Cao told the Beijing News this week that the coronavirus is going to be a gamechanger for the supply chain. “After the epidemic, the global industrial chain will reduce its dependence on China,” he said.

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