Volkswagen and General Motors hit by Chinese profit engine breakdown image

Germany’s Volkswagen AG and America’s General Motors, the second and third largest automakers in the world, respectively, have been hit by the shockwaves caused by the slowdown across Chinese auto sales.

The impact has stirred Wolfsburg, Germany and Detroit, Michigan, with the two major global carmakers being weighed down by the effects of the recent sales slowdown in the world’s largest auto market – which is now bearing the brunt of the slowest economical growth in more than two decades and a revolving stock market. The surprise is the Chinese development is coming at a time when no financial crisis in actually evolving and the two companies now have to channel their resources to address concerns from a market that acts as their largest profit source. Both companies are way more exposed to China then others – and this happens while the country remains on a (feeble) growth trend, with sales forecasts being cut, not sent into negative areas.

Both source big chunks of their profits and cash flow from China and neither has come up with a plan explaining how they would handle the delivery slowdown in the world’s largest car market through other regional businesses. Barclays even downgraded GM’s stock to “equal weight” from “overweight” on Thursday, adding all the auto manufacturers and suppliers it covers would be hit by the sharp Chinese headwinds. Volkswagen sources more than 50 percent of its net profit and a whopping 71 percent of its free cash flow from China, say auto industry observers. Barclays says GM sources from China about 40 percent of net income and around 20 to 30 percent of operating cash flow.

Via Reuters