In a remarkable turn of events, the year 2024 marks a significant milestone for China's automotive industry, as it has once again claimed the title of the world's largest automobile exporter, continuing to outpace Japan for the second consecutive year. This extraordinary achievement has been complemented by the success of two Chinese automotive giants, BYD and Geely, both of which have made their way into the top ten global automotive companies in terms of sales volume. These developments undeniably highlight the accelerating momentum of China's automotive sector.

However, amidst the triumphs, a dissonant narrative has emerged online, with several voices casting doubt over the financial stability of certain Chinese car manufacturers. Despite the continuous growth in sales, revenue, and research and development investments, cynics have chosen to focus primarily on the issue of debt. Some foreign short-sell firms have even released ostensibly rational analyses, unfairly branding BYD with the “high debt” label, attempting to undermine confidence in the capital markets and hoping to profit from a decline in stock prices.

To examine these claims, it is worth delving deeper into the financial health of leading automotive companies around the globe. Are Chinese automotive manufacturers indeed burdened with excessive debt compared to their foreign counterparts? To uncover the truth, we have scrutinized the annual reports of both domestic and international auto giants, seeking clear insights from their financial data.

The debt heights reached by “Volkswagen + Toyota” = 6 trillion yuan

The automotive industry is a heavy asset sector, demanding substantial investments for factories and ongoing R&D funding. Globally, the major automotive manufacturers are characterized by high levels of total debt, with larger companies naturally accruing greater revenues and, consequently, higher total liabilities. In 2023, reports indicated that Volkswagen Group generated 2.5 trillion yuan in revenue while accumulating a staggering 3.2 trillion yuan in total debt—28% higher than its revenue. Similarly, Toyota recorded a revenue of 2.1 trillion yuan, amassing a total debt of 2.6 trillion yuan, which amounts to 24% of its revenue. Combining the debts of just Volkswagen and Toyota already totals nearly 6 trillion yuan, with other major players such as Ford, General Motors, BMW, and Mercedes-Benz also surpassing 1 trillion yuan in debt.

In stark contrast, the overall debt levels of Chinese automotive firms appear relatively modest. Taking BYD as an example, in 2023 it achieved sales figures that were approximately one-third of Volkswagen’s, yet its total debt sits at a mere one-sixth of Volkswagen's. This disparity raises questions about the narrative surrounding Chinese manufacturers’ alleged financial peril.

Foreign car companies are “enthusiastic” about interest-bearing debt

It is crucial to recognize that total debt can be further categorized into interest-bearing debt and non-interest-bearing debt. Interest-bearing debt stems from loans from financial institutions or debts issued in capital markets, involving actual liabilities that accrue interest. Meanwhile, non-interest-bearing debt refers to operational liabilities with no interest costs, such as payments owed to suppliers, employee salaries, and taxes.

To illustrate the difference, consider the distinction between a household's car loan or mortgage versus everyday expenses. The latter represents a risk that can spiral out of control, primarily due to interest-bearing debts.

The data reveals that leading foreign automotive firms hold exceedingly high levels of interest-bearing debt. In 2023, Toyota's interest-bearing debt reached 1.7 trillion yuan, making up 67% of its total debt; Volkswagen's interest-bearing debt hit 1.1 trillion yuan, comprising 34% of its total debt; Ford’s interest-bearing debt is roughly 1.08 trillion yuan, totaling 65%. Other manufacturers like General Motors, Mercedes-Benz, BMW, and Stellantis also carry significant interest-bearing debts in the hundreds of billions.

Analysts suggest that foreign automotive manufacturers are keen on financing through interest-bearing debt partly due to the prolonged low-interest-rate environment experienced previously in Europe, America, and Japan. This situation rendered loan interest significantly affordable. Furthermore, many foreign manufacturers have extensive automotive finance operations, resulting in considerable financial liabilities.

Conversely, Chinese automotive manufacturers demonstrate notably lower levels of interest-bearing debt. Geely Holdings reports interest-bearing debt of 108.2 billion yuan, with it constituting 24% of its total liabilities while BYD’s interest-bearing debt stands at 30.3 billion yuan, merely 6% of its total liabilities.

If we accept that interest-bearing debt more accurately reflects the genuine debt pressure on an enterprise, does this imply that foreign automotive firms bear a greater risk of debt than their Chinese counterparts?

Debunking accounts payable

Analysis of financial reports clearly indicates that foreign companies often have a heavier burden of interest-bearing debt, whereas Chinese companies predominantly carry non-interest-bearing liabilities. Within this latter group, a significant portion consists of accounts payable, reflecting unpaid supply bills and operating expenses.

It's important to dispel the misconception that a straightforward comparison of accounts payable can accurately represent the unpaid supply costs a company faces. The logic here is straightforward: the larger a company grows, the higher its revenue tends to be, escalating the volume of purchases and collaborations, which consequently enhances its role in economic growth.

Additionally, suppliers are more inclined to partner with sizable, high-selling, and profit-stable leading automotive firms. The assurance of order stability lowers their risk exposure while collaborating with such manufacturers.

Thus, utilizing the ratio of accounts payable to operating income as a metric indicates that a lower percentage signifies reduced unpaid supplier payments related to a company's substantial revenue. The data reveals that despite SAIC and BYD's accounts payable being among the highest among Chinese automakers, their ratio to total revenue remains the lowest.

Furthermore, when comparing the payment terms between Chinese automakers and their suppliers, we observe that Chang’an averages 185 days, Great Wall 163 days, SAIC 140 days, and BYD 128 days. Firms like SAIC and BYD, which boast stable orders and swift payment processes, undoubtedly appeal to suppliers.

Conclusion:

By analyzing the financial data, a clear picture emerges regarding the operational realities of these companies. Chinese automotive manufacturers do not bear the high debt levels as propagated by critics; rather, it is the international giants that display debt levels much higher than what many might expect.

Thus, arguments labeling BYD and other Chinese firms as being high-risk due to supposed debt concerns are evidently unfounded. Even as negative sentiments may thrive online and external short-selling entities may push their agenda, the relentless growth in Chinese automotive sales and the continued positive performance metrics stand as a robust rebuttal to such criticisms. Strength and performance are, after all, the most potent responses to skepticism.