Financial Times Europe - 12.09.2019

14 ★ FINANCIAL TIMES Thursday12 September 2019

COMPANIES

TO M H A N C O C K— SHANGHAI

US companies in China have grown

more pessimistic about their revenue

prospects in the country, but say the

main reason is slowing economic

growth rather than the impact of tar-

iffs, according to a business group poll.

The proportion of companies surveyed

by the American Chamber of Com-

merce in Shanghai that expect revenue

to grow in China this year dropped by

one-third from last year to 50 per cent.

Those expressing optimism about their

prospects over the next five years

dropped by one-fifth to 61 per cent.

However, they cited China’s slowing

economy as a greater concern than the

deepening trade war between Beijing

and Washington.

“Optimism about the three- to five-

year business outlook is the lowest in

many years,” said Ker Gibbs, head of the

chamber. “An economic slowdown

within the same period is the significant

challenge anticipated by the most

members.”

Growth in China has slowed to its low-

est level since the early 1990s, which

economists attribute to weakerinvest-

ment ue to Beijing’s deleveraging cam-d

paign.

US companies surveyed are more

affected by domestic growth because

more than half said they now primarily

pursued an “in China for China” strat-

egy, producing for Chinese domestic

consumers and businesses rather than

for export markets.

Still, 51 per cent of the 333 companies

surveyed reported a drop in China reve-

nues as a result of tariffs imposed by

both sides on hundreds of billions of dol-

lars in trade since last year.

Three-quarters ofcompanies said

they opposed Washington’s tariffs on

Chinese exports. “A pick-up in China’s

economy would clearly shift some of the

gloom, but an end to tariffs would be the

most welcome news,” said Mr Gibbs.

The poll, whichrepresented compa-

nies in Shanghai and surrounding prov-

inces engaged primarily in financial

services, pharmaceuticals and light

manufacturing, found 77 per cent of US

companies in China were profitable.

Industrials

US groups in China fret more

about slow growth than tariffs

A L I STA I R G R AY— NEW YORK

US lingerie brandVictoria’s Secret ash
become the latest group to warn that it is
feeling the pinch fromsterling’s drop,
saying theslideposes a challenge to the
“fundamental economics” of importing
merchandise into the UK.
Speaking ata c onference for investors

in parentL Brands, the group’s interna-

tional headMartin Waters aids a rela-

tively weak UK economywas under-

mining efforts to revive the group’s loss-

making businessthere.

Three years ago, he said, the UK busi-

ness was “nicely profitable and posi-

tioned for growth”. Nowthepriority was

to break even in Britain. “That doesn’t

sound like any great shakes... but with

the UK being in the position that it is, we

don’t think it’s safe to be investing heav-

ily. We’ve seen significant [forex ] pres-

sure that has impacted the business nda

actually challenges the fundamental

economics of importing American mer-

chandise into the UK.”

The remarks highlight theeffects for

corporate America of thedepressed

pound, which is down 5.5 per cent

against the dollar in the past six months

even after a recovery in the past week.

Sterling eakness has made UK assetsw

cheaper foroverseas buyers, spurring

deals including US toymakerHasbro’s

£3.3bn agreement o buyt Entertain-

ment One, the group behindPeppa Pig.

However, the falling pound increases

import costs for businesses based in

Britain anddents sterling revenues for

foreign groups that repatriate them.

Tilda, the London-based rice brand,

wasrecently sold or $342m byf Hain

Celestial, a New York consumer goods

group. “While a solid business with

accretive margins, given the premium

valuation we received, currency volatil-

ity, Brexit uncertainty and the long-

term business headwinds, it was the

right time for Hain to divest it,”Mark

Schiller, chief executive,said last week.

Other US companies to caution about

thepound includePost Holdings, the

New York-listed owner of British cereal

brandWeetabix. Last month hief exec-c

utiveRobert Vitale saidthe company

expected Weetabix full-year profits to

be down by between $2m and $3m.

Victoria’s Secret is dealing with pres-

sure on its underlying business in the

UK similar to whatit faces in the US. The

companyhas gone out of fashion as con-

sumers have turned to “body positive”

alternatives.

While it has26 stores in the UK and

Ireland compared with more than 1,

Victoria’s Secret outlets in the US, it is a

stalwart in severalUK cities.

Mr Waters said the group was basing

its UK turnround plan on a push into

digital, less discounting, and converting

footfall in stores into spending.

L Brands’ market capitalisation has

fallen about $24bn since 2015.

The group hasfaced scrutiny over his-

toric ties between founderLes Wexner

andJeffrey Epstein, the deceased

accused sex trafficker. Mr Wexner told

the conference he was “embarrassed”

by the relationship.

B E N JA M I N PA R K I N— MUMBAI

Indian businesses typically enter Sep-
tember full of optimism about the
spending boost that celebrations includ-
ing Navratri and Diwali will bring as the
country embarks on its biggest annual
festive season.
But this year, car manufacturers, sup-
pliers and dealers are facing the festivi-
ties with something closer to dread.
I n d i a’s ve h i c l e m a r ke t , u n t i l
recently projected to beon track to
become he world’s third largest, is fac-t
ing its worst crisis since records began
more than two decades ago.
Car sales in August fell 41 per cent
from a year earlier, according to the
Society of Indian Automobile Manufac-
turers (SIAM), extending a dismal run
in which sales have fallen more than 20
per cent each month since April.
“We have never seen a crisis as painful
as this one,” said Puneet Gupta, an auto-
motive analyst at IHS Markit. “When
the market is flat we see people getting
worried. This time it’s minus 40 per
cent, which is unimaginable... We are
moving backwards rather than moving
forwards.”
The auto industry has borne the brunt
of a year-long liquidity squeeze. Its woes
are the most severe symptom of a broad
slowdown in the economy, with growth
in gross domestic product slowing to a
six-year low of 5 per cent in the latest
quarter. Sales of motorcycles and scoot-
ers — a key gauge of rural economic
health — fell 22 per cent in August, while
those of commercial vehicles such as
trucks dropped 39 per cent.
Lured by the promise of fast growth
and unbridled demand from a burgeon-
ing middle class,foreign companies
includingHyundai,Toyota nda Honda
established a sizeable presence in India.
They competed alongside domestic
operators such asMaruti Suzuki —the
largest — andTata Motors.
Many are now feeling the pain. Car-
makers collectively cut production
almost 30 per cent in August from a year
earlier, according to SIAM, while Maruti
Suzuki andMahindra & Mahindra aveh
acknowledged letting go thousands of
contract workers.
Since the start of the year, India’s Nifty
auto index has fallen more than 20 per
cent, comparedwith a flat performance
by the Nifty 50 benchmark. “The fear is

whether 20 per cent becomes 30 per

cent or 40 per cent or 50 per cent over

the next six to eight months,” saidRajan

Wadhera, president of Mahindra’s auto-

motive business and president of SIAM,

referring to sales. Mr Wadhera said the

association estimatedthat almost

300,000 jobs had already been lost

across the sector, out of some 37m peo-

ple directly and indirectly employed.

Associated industries have been hit

hard. Ashish Kale, an auto dealer in

Nagpur and president of the country’s

largest dealer association, representing

90 per cent of the market, said his mem-

bers hadclosed hundreds of outlets nda

laid off about 8 per cent of their collec-

tive workforce. “It’s gone from bad to

worse,” Mr Kale said.

Executives admit to having been

caught off guard by the severity of the

downturn. Key to the collapse is the

hefty role India’s enormous shadow

banking companies played in fuelling

growth, providing almost half of all

loans for vehicle purchases.

The high-profilebailout ast year ofl

infrastructure lenderIL&FS nd subse-a

quent liquidity crunch caused much of

that funding to dry up: overall lending

by non-bank financial companies in the

quarter that ended in June fell 30 per

cent from a year ago,the Finance Indus-

try Development Council found.

Demand for relative luxuries such as

cars was quick to evaporate. “People are

unsure about the future, their jobs,” said

Prabodh Agrawal, chief financial officer

atIIFL, a non-bank financial lender that

this year sold its auto loan business.

But the industry is also undergoing

deeper structural changes as India bol-

sters regulations to include stricter

safety norms such as new braking sys-

tems. Vehicles sold from March 2020

willhave to meet tougher emission

standards, and upgrading assembly

lines accordingly will add as much as 15

per cent to production costs,said Fitch.

Thecar industry is pressing the

government to help by cutting taxes

on automobiles from 28 per cent to

18 per cent.

Tax authorities are expected to

debate the issue next week, but econo-

mists are sceptical that the government

can afford another dent in its already

sagging revenues.

Members of other industries are less

sympathetic, arguing the auto sector

should cut prices itself rather than seek

government intervention. Sajjan Jindal,

chairman of JSW Group, one of India’s

largest steelmakers, saidautomakers

should take advantage of a drop in metal

prices to slash their own rates.

“The steel industry has cut prices to

face the slowdown,” he said. If “the auto

industry also corrected prices, I think

the demand would come back.”

Executives and analysts say thefes-

tive season will be a crucial test, and

many are optimistic sales will bounce

back. But Mahindra’s Mr Wadhera

expects any boostto prove fleeting.

“Maybe the demand will come back

for these two months,” he said. “That

does not mean we have turned around.”

Automobiles. ownturnD

Festival season set to test India’s stalling car market

Alarm spreads in traditionally

busy period as industry faces

worst crisis in two decades

Retail

Sterling weakness takes toll on Victoria’s Secret

Priority is to break even

in UK, says international

boss at parent L Brands

India car sales have fallen

sharply

 change (year on year)

-

-







    

Sources: SIAM; Refinitiv

India’s automakers enjoyed

years of growth

Domestic passenger vehicle sales (m)

















    

Years:  months ended March

Carmakers, suppliers and dealers are facing tough times in India as sales continue to disappoint in the wake of a liquidity squeeze —Dhiraj Singh/Bloomberg

M U R A D A H M E D

SPORTS CORRESPONDENT

Formula E, the electric-car racing

series, has made a profit for the first

time in its five-year history, with new

sponsorship deals giving a financial jolt

to a business that was on thebrink of

collapse n the months after it firsti

launched.

The London-based company that

organises the city-centre races almost

ran out of money during its first season.

However, investment in March 2015

from “Cable Cowboy”John Malone’s

Liberty Global nd from broadcastinga

companyDiscovery helped keep it

afloat.

Since then the contest has expanded

to 14 races across four continents, with

leading carmakers such asMercedes-

Benz,Porsche,Audi,BMW,Nissan nda

Jaguar aking part.t

Alejandro Agag, chairman and

founder of Formula E, said the com-

pany’s revenues were more than €200m

in the year to July 31, a period that cov-

ers the group’s fifth racing season.

He said earnings before interest, tax,

depreciation and amortisation for the

year were positive for the first time, at

about €1m. Mr Agag added this had

been achieved without cutting the

group’s marketing budget of about

€30m.

“Reaching break-even is a historic

moment for us,” said Mr Agag. “For

a business that almost didn’t make it

after three races, now after 60 races we

reach break even — and with strong rev-

enue growth — and that is going to con-

tinue.”

He declined to provide a full financial

breakdown of Formula E’s results,

which are yet to be lodged with Compa-

nies House. But he saidsponsorship,

which accounts for about half of total

revenues, had grown 25 per cent last

year.

That was on the back of four new cor-

porate endorsements, with German

electricals groupBosch;Heineken, the

Dutch beer maker;Moët & Chandon,

the French champagne brand andSaudi

Arabian Airlines.

Sponsors “keep coming, and they

keep renewing for longer and longer”,

Mr Agag said. “What they want, and

what they perceive, is that Formula

E... is definitely a bet for the future.”

Travel & leisure

Sponsors help

Formula E

inch over the

profit line

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