The Wall Street Journal - 07.10.2019

THE WALL STREET JOURNAL. Monday, October 7, 2019 |B11

made a dent in the long-term

trend.”

Some investors said the re-

cent run of mixed data suggests

growth may be faltering. De-

clines in the prices of commod-

ities such as oil and copper—

which tend to fall when

investors fear slackening

growth will hurt demand for

raw materials—have under-

scored that message. A Bank of

America Merrill Lynch survey

of fund managers earlier this

month showed recession con-

cerns at the highest level in a

decade.

That doesn’t mean investors

should abandon stocks or other

riskier investments, several

fund managers said.

Even without a thaw in trade

tensions, many expect growth to

slow but not stall. The most

likely scenario, analysts at UBS

Global Wealth Management be-

lieve, is that the U.S. will imple-

ment its already announced tar-

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Shareoftotalpassenger-vehicle

salesinIndia,April-August2019

Sources: Society of Indian Automobile Manufacturers (share);

Organisation Internationale des Constructeurs d'Automobiles (vehicle sales)

MarutiSuzuki

Hyundai

Mahindra

Tata

Toyota

Honda

Ford

Renault

VW/Skoda

Nissan

498%

184

8.

54

49

46

.7

24

16

07

Passenger-vehiclesales

inthetopfivecountries

30

0

5

10

15

20

25

million vehicles

2005 ’10 ’15

India

Germany

China

U.S.

Japan

China’s beleaguered auto sector
has received all the attention, but
car sales in India also have been in
free fall this year.
The good news for investors is
that global manufacturers have sur-
prisingly little to lose in the world’s
fourth-largest car market by
sales—and will soon have even less.
Ford Motorlast week sounded a
partial retreat from the country. On
Tuesday, it signed a deal with In-
dian manufacturerMahindrathat
involved transferring ownership of
the U.S. company’s local assembly
factories to a joint venture that its
partner will run.
Ford, which is in the middle of a
major restructuring program under
Chief Executive Jim Hackett, had
its own reasons to move. Still, a
rough patch for the Indian car mar-
ket—a difficult one for Western
brands at the best of times—likely
made the decision easier.
From April through August, sales
of passenger vehicles were roughly
one-quarter lower than the compa-
rable period last year, according to
the Society of Indian Automobile
Manufacturers, or Siam. There are
no signs that September will prove

different. Market leaderMaruti Su-

zukilast week said its domestic

sales fell 24.8% in September ver-

sus the comparable period in 2018.

One big problem has been the

weakness of the nonbank lenders

on which Indian car buyers, dealer-

ships and small businesses all rely.

The collapse a year ago of Infra-

structure Leasing & Financial Ser-

vices, one of India’s largest shadow

banks, triggered a funding squeeze

from which the sector still hasn’t

recovered.

Another is rapid vehicle-price in-

creases as manufacturers try to re-

coup the costs of stricter regula-

tion. A number of safety features,

such as ABS brakes, air bags and

seat-belt warnings, became manda-

tory in India this year. Next year, a

stricter emissions regime enters

force.

Even in better times, India is a

headache for most global car mak-

ers. It is a big market—only China,

the U.S. and Japan bought more

passenger vehicles last year—and

offers strong growth potential. At

the same time, gaining the local

scale necessary to make fair re-

turns has proven to be challenging.

Only a couple of East Asian small-

car specialists have really suc-

ceeded.

Japan’sSuzukiis one, through

its controlling stake in Maruti Su-

zuki. The subsidiary sells roughly

one in every two cars in India—an

unusually dominant position by any

standards, let alone those of the

fragmented auto industry—and

made a 9.6% operating margin for

the year through March. Then there

is South Korea’sHyundai, which

sold 18% of India’s passenger cars

from April through August, accord-

ing to Siam data.

That leaves only scraps for a

long tail of remaining players, in-

cluding both locals such asTata

Motorsand global manufacturers

such asToyotaandVolkswagen.

Luxury marques likeBMWand

Mercedes-Benz, so important in

China, account for a negligible 1%

of total sales.

Given this competitive backdrop

and the currently dismal market,

Ford’s decision to pool resources

with Mahindra makes a lot of

sense. The Indian company, already

the No. 3 player in the market, will

manage the joint venture alongside

its much bigger wholly owned busi-

ness, which specializes in utility ve-

hicles. Mahindra gets access to

Ford’s technology and global net-

work, while Ford gets a cheaper en-

gineering base and better local

knowledge—a crucial combination

in India.

General Motorsstopped selling

cars in India in 2017 as part of its

global retreat. For those mass-mar-

ket manufacturers intent on keep-

ing a toehold in the country, Ford’s

merge-and-withdraw deal provides

a useful template for how returns

might be improved.

As Warren Buffett said, “it’s bet-

ter to have a partial interest in the

Hope Diamond than to own all of a

rhinestone.” —Stephen Wilmot

HP Doesn’t Have Any Easy Way to Repair This Printer Jam

MARKETS

iffs by year-end. That outcome

would push U.S. growth to below

1% in the first half of 2020 from

2% in the second quarter but is

unlikely to tip the economy into

recession, the bank said in a re-

cent report.

More tariffs or another

breakdown in talks, however,

could be enough to end the re-

covery and shave between 15%

to 20% from global stocks, the

bank said.

While the bank has reduced

exposure to equities, “we also

do not recommend investors

hold significant underweight

positions as if they were pre-

paring for a recession, and be-

lieve that from a strategic

perspective it is important to

stay invested,” wrote Mark

Haefele, the firm’s chief invest-

ment officer.

And investors’ worries could

help cushion the blow when a

recession does come, said

Campbell Harvey, a Duke Uni-

versity finance professor whose

1986 dissertation at the Univer-

sity of Chicago showed that an

inverted yield curve preceded a

recession by 12 to 18 months.

A Duke quarterly survey of

chief financial officers in Sep-

tember showed that nearly 70%

expect the U.S. to enter a reces-

sion by the end of 2020. Opti-

mism among finance chiefs

stands at its lowest level in

three years, with a less-than-1%

increase in capital spending ex-

pected over the next 12 months.

That compares with an ex-

pected 5.7% increase in Septem-

ber 2018.

That could make a downturn

more likely as companies, in-

vestors and consumers curb

spending and investment ahead

of an expected drop-off in

growth, Mr. Harvey said. At the

same time, it could curb poten-

tially risky behavior such as ex-

cessive borrowing, helping to

make the next downturn less

severe. “The key thing is that if

there’s a recession next year,

it’s not going to be a surprise,”

he said.

Investors are trying to de-
termine whether recent contra-
dictory signals on U.S. growth
mark the start of a prolonged
slowdown or another speed
bump in the 10-year economic
expansion.
For many who have ridden
stocks to near records, it feels
like a turning point is close.
Signals of slowing growth or
even recession have mounted:
The latest came last week,
when data showed steep de-
clines in the U.S. manufacturing
and service sectors. Other in-
vestors point to the rise of
short-term Treasury yields
above longer-term ones, a phe-
nomenon known as an inverted
yield curve that typically pre-
cedes recessions.
At the same time, Friday’s
U.S. jobs report showed em-
ployers continuing to add jobs
at a steady pace. Unemploy-
ment remains near multidecade
lows and wages show little sign
of pushing up inflation—data
that did little to bolster the
case for an impending down-
turn or a shift in the Federal
Reserve’s wait-and-see ap-
proach to interest-rate policy
that many expect to continue
boosting share prices.
Investors hope that minutes
from the Fed’s most recent mon-
etary-policy meeting, to be re-
leased on Wednesday, will shed
light on the central bank’s think-
ing. Meanwhile, several said that
betting against stocks has been a
losing strategy over the past de-
cade, even during previous occa-
sions when it appeared that eu-
rozone troubles or a sharp
slowdown in Chinese growth
would drag the rest of the world
into a recession.
“We’ve seen this market
shift from periods of worry to
periods of ebullience over the
years,” said Michael Farr, presi-
dent of the money management
firm Farr, Miller & Washington.
“That has resulted in some
short-term fragility but hasn’t

BYIRAIOSEBASHVILI

Mixed Signals on Growth Challenge Investors

U.S.Treasuryyields

Sources: Ryan ALM (Treasury yields); FactSet (ISM, copper); CQG (crude oil); Duke University’s Fuqua School of Business (capital spending)

*Front-month †Based on a survey of chief financial officers

Expectedincreaseincapital

spendingovernext12months†

10

0

2

4

6

8

%

2017 ’18 ’19

3.2

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0%

%

2018 ’19

10-year

1 .515%

Three-month

1 .702%

Friday U.S.crude-oilprice*

$80

40

50

60

70

a barrel

2018 ’19

Copperprices

$3.40

2.40

2.60

2.80

3.00

3.20

a pound

InstituteforSupplyManagement^2018 ’19

manufacturingindex

60

46

48

50

52

54

56

58

2010 ’12 ’14 ’16

CONTRACTING

EXPANDING

’18 ’19

U.S.imposestariffs

on$ 200 billionin

Chinesegoods

U.S.threatensto

escalatetariffs

Fed cuts rates

Projection

HP’sprinting-suppliesrevenue*

Source: the company (actual); FactSet (projection)

*Fiscal years 2008-14 as part of Hewlett-Packard.
Note: Fiscal year ends October.

$20

0

5

10

15

billion

FY2008 ’10 ’12 ’14 ’16 ’18 ’19

about 4,000 workers from its rolls.

The company’s workforce has ac-

tually risen by about 12% in that

time.

The other part of the plan is

targeted at HP’s struggling print-

ing business. That segment has

long depended on the “razorblade”

model, meaning printers were sold

at a loss and the profit came from

supplies of ink and toner. But the

rise of alternative supplies such as

remanufactured, third-party ink

cartridges makes this more chal-

lenging. So HP plans to start offer-

ing customers a choice between

subsidized printers that would

only work with the company’s own

already had lost 9% this year fol-

lowing a string of disappointing

results for this segment, and Fri-

day brought another decline of

nearly 10%.

Granted, HP needed to do some-

thing. Since the company split off

its enterprise tech side in 2015, HP

has depended on the printing seg-

ment for 80% or more of the com-

pany’s total profit. But people and

businesses are simply printing less

these days, which has led to HP’s

supply revenue shrinking by an av-

erage of 3% annually over the past

decade. Charging customers more

for printers won’t get them to

print more. —Dan Gallagher

supplies or pricier hardware that

would accept supplies from other

sources.

That will take years, given the

huge installed base of HP printers

out in the world. It also is no sure

thing, though the company points

out it is already trying this ap-

proach in China, where it has

worked well. But the other prob-

lem is that the company’s new

stated goal to maximize operating

profit in printing amounts to a

tacit admission that the supplies

business is no longer growing. His-

torically, HP’s stock hasn’t worked

when its high-margin supply busi-

ness is under pressure. The shares

Cutting its expenses by $1 bil-

lion will prove easy compared with

the other taskHPInc. has set for

itself: getting people to pay more

for printers.

The maker of PCs and printers

laid out an ambitious restructuring

plan in a meeting with analysts

last Thursday. The plan involves

laying off as many as 9,000 work-

ers, which would amount to about

16% of its workforce. The company

says this should yield annual sav-

ings of about $1 billion once com-

pleted.

Note that this comes three

years after HP announced a similar

plan originally intended to remove

Car Makers Struggle in India

Ford’s local deal shows

how global peers might

improve returns there

Maruti Suzuki said its domestic sales fell 24.8% in September from a year earlier.

DHIRAJ SINGH/BLOOMBERG NEWS