China is flexing its muscles. Perhaps emboldened by an increasingly strong leadership, regulators are taking to task foreign companies. Car manufacturers are the latest victims. On Monday, antitrust officers raided the Shanghai offices of Daimler subsidiary Mercedes-Benz. Others in trouble include Chrysler, Audi and BMW. Shares in Daimler, Volkswagen and BMW are down one-tenth since mid-July, when investigation murmurs began.
This reaction seems mild. Good results – notably from BMW – may have helped. There may also be a degree of ennui: China has been complaining about high prices of foreign luxury cars for at least a year. But indifference is dangerous. China’s complaint has already started to have an impact on pricing, with Daimler, Audi and Jaguar Land Rover cutting prices pre-emptively.
The financial hit could also be significant. China accounts for 15 per cent of Daimler’s revenues and one-fifth of BMW’s. Neither company reveals China profits, but foreign carmakers, which dominate two-thirds of that market, seem to be raking it in. Bernstein estimates that at least half of BMW’s earnings before interest and tax comes from Chinese sources, including royalties and the company’s local joint venture. Not only will operating income suffer. China can levy up to a 10th of sales as punishment for monopolistic practices. Applied to BMW’s China sales last year, that would wipe out around half, or €1.5bn, of BMW’s stellar net profits from this year’s first half.