China no Moat for SUV

After years of losing ground in the world’s largest car market, local Chinese car makers such as Great Wall Motor are winning it back. They have a new weapon, but one they won’t be able to wield for long.

Chinese brands raced to a 37% share of the country’s passenger-vehicle market in the first quarter from 31% a year before, according to consultants at LMC Automotive. Spurring that increase was their production of cheap sport-utility vehicles. Local makes comprised eight of the top 10. SUV sales rose by 49%, year over year, or more than five times as fast as the broader market. SUVs offer more status, space and safety on rough Chinese roads.

Local brands have capitalized because their SUVs, which typically cost less than 120,000 yuan ($19,308), are more competitive with sedan prices than foreign SUVs. Similar to the way the Japanese and Koreans created a beachhead in the U.S. with small, cheap sedans, locals in China today have carved a niche for themselves with low-end SUVs, says Bill Russo at consultants Gao Feng Advisory. This is one reason the Hong Kong shares of Great Wall, the top local SUV maker, are up 33% this year.

The bigger threat is to Great Wall Motor. The firm’s costs already are rising as it tackles more complicated cars. At 11.1 times forward earnings, its stock is richer than the 10 times average of seven local peers. Like its cost advantage, Great Wall’s premium could be subject to erosion.

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