Geely Auto: Safe Haven From Auto Tariffs?

 | Jul 11, 2018 | 12:59 PM EDT
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Car tariffs aren't Geely Auto's problem. Impending economic tailwinds are.

While the auto/auto supplier industry is certainly under some serious threat from the continued implementation of U.S. tariffs, I see Geely Automobile Holdings (GELYF) as being relatively safe from the turmoil. The company only has a stake in two brands that have any significance to the United States market; Volvo and a small stake in Daimler (DDAIF) . The bulk of its sales stem from China, meaning tariffs won't be its number one concern. Now, the catch 22 here is whether the tariffs implemented by the United States have a wide scale economic effect on China. If that happens, Geeky Auto could suffer from weaker sales growth as a byproduct of a weaker economy.

The United States market doesn't matter much for Geely

I'm a staunch "buy American" guy. That said, my principles don't come into play very much on this one. The only real exposure that Geely can get in the United States is through Volvo. Even then, the bulk of the company's sales appear to be from domestic business within China, and through sales of its brands in Europe. As some have noted, the company is the second biggest domestic brand in China. This is definitely where their seems to be, and where it should be. 

Those sales have been pretty fantastic. The company more than doubled profits in 2017, with sales increases of 63% year over year. Now obviously 1.24 million vehicles isn't that huge compared to United States standards, but the middle class consumer base for cars in China isn't nearly as robust. The company is younger, and is succeeding in hitting some pretty great growth rates. The robust profits of what equates to $1.7 billion in US dollars in 2017 certainly doesn't hurt either. That's a 108% increase from 2016. 

In June Geely sold 128,449 cars. Out of those units, 126,000 vehicles were sold in China. It's clear from this that the company is relatively safe from tariffs on its brands. On the Volvo side of things, the Swedish (though Geely owned) carmaker sold a little under 10,000 cars in the US in June. That's less than 20% of the company's global June sales of 53,539. To that end, I don't view the US tariffs as a big threat to Geely's bigger picture. I personally expect them to start pushing the Volvo brand harder in China, an act that will compete with makers like Cadillac and BMW. I'd include Daimler on that list, but Geely owns a 9% stake in Daimler.

This is another avenue of revenue for Geely. Regardless of the trade drama, Daimler is doing well, and they pay a solid dividend. That stake is certainly an indirect source of income for Geely. 

Overall, China remains their main market. To that end, the thing that I could see hurting them isn't export woes. The thing that could hurt them is an economic slowdown.

A China slowdown would hurt

If Trump carries through with further pressure on trade, I don't think China actually has the tools to counter it. They can talk a big game about retaliatory measures on our exports into their country, but when you look at the numbers, China needs us far more than we need them. According to the sources I used, China exported around $500 billion in goods to the United States. In contrast, the United States exported $130 billion in goods to China. They have far less negotiating ability in regards to what they can slap tariffs on, relative to what we can. To that end, I don't think that China can keep up with any tariffs implemented by the United State over the long term. We simply have more goods that can be taxed than they do. To that end, I don't think the country can pressure us into stopping the current action. 

China's economy was already starting to slow down prior to the implementation of trade tariffs. Economists have sighted slowing exports, slower consumer spending, and less investment by companies as key signs that things are beginning to wane. Now, I won't get into the massive debate of China's economy, but I will say that this is the key figure that investors should watch in relation to Geely Automotive. Their major expansion has been in China. With tariffs complicating their export potential, the domestic market will remain their place for major expansion. To that end, slowing gross domestic product within the homeland is what should concern shareholders. If consumer spending declines, you'll see fewer auto sales. That is what can damage the stock. As far as exports to the United States, it's a small piece of the puzzle for Geely. 

Outside of China, I would pay close attention to Europe's economic situation. It's a big market for Geely's subsidiaries like Volvo and Lotus. If turmoil erupts there, which could very well happen when you factor in the Brexit, US tariffs, and pressure for allies to coincide with America's stance on Iran, their European sales could flatline. Another factor to consider is rising global oil prices. This will pressure consumer's pocketbooks, and decrease the cash available for car buying.

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