Chinese automakers, including BYD and Geely Automobile Holdings, reported much larger foreign exchange losses in the first quarter, as rising overseas sales and exports left them more exposed to a stronger yuan.
The yuan’s spot exchange rate climbed 809 basis points, or more than 1.1 percent, against the US dollar in the quarter, strengthening to 6.9081 per dollar from 6.9890. It touched 6.8310 on Feb. 26, its strongest level during the period, News.az reports, citing Yicaiglobal.
BYD’s exchange losses exceeded CNY2 billion (USD276 million) in the first quarter, while Geely Automobile recorded a nearly CNY500 million (USD69 million) net forex loss, according to their financial reports.
Automakers are expected to increase hedging and accelerate overseas localization to reduce the impact of currency swings, industry experts told Yicai.
Profit Impact Widens Across Major Carmakers
Geely Automobile’s net profit attributable to shareholders fell 27 percent from a year earlier to CNY4.2 billion in the first quarter, mainly because of the forex loss. In the same period last year, the company booked more than CNY3 billion in net foreign exchange gains.
Excluding non-core foreign exchange gains and losses, Geely Automobile’s core net profit attributable to shareholders rose 31 percent to CNY4.6 billion.
The loss was mainly due to the euro and the US dollar weakening against the yuan during the period, Geely Automobile told Yicai. The company’s overseas units hold monetary assets and liabilities in multiple currencies, which resulted in book valuation losses during period-end revaluation, it said, adding that the unrealized fair-value changes did not affect actual operating cash flow.
BYD also suffered from forex losses. Its financial expenses totaled CNY2.1 billion in the first quarter, up more than threefold from a year earlier, mainly because of exchange losses during the period, compared with exchange gains a year earlier, according to its quarterly report.
Changan Automobile’s financial expenses rose 129 percent to CNY314 million in the first quarter, mainly due to lower foreign exchange gains. Its net profit attributable to shareholders fell 74 percent to CNY351 million.
GAC Group reported a first-quarter loss of CNY656 million, narrowing 10 percent from a year earlier. Great Wall Motor’s net profit attributable to shareholders fell 46 percent to CNY945 million. Both companies said exchange rate changes caused forex losses during the period.
Hedging and Localization Seen as Key Responses
Geely Automobile said it has consistently used tools such as hedging to actively manage foreign exchange exposure, reduce the impact of multi-currency exchange rate fluctuations on profit, and keep overall risk under control.
Pan Helin, a member of the Expert Committee for Information and Communication Economy under China’s industry and information technology ministry, told Yicai that multinationals with global operations will inevitably face cross-border exchange rate risks.
The solution is to use financial derivatives to hedge such risks, Pan said. For example, if a customer delivers in the US dollar and the US dollar is at risk of depreciation, then an option to short the US dollar can be used to hedge against the risk. But markets are constantly changing, so derivatives cannot fully solve the problem, he said. A more ideal situation is a global localization strategy, so that exchange rate risks can be hedged against through diversified supply chains in different regions, he added.
Cui Dongshu, secretary general of the China Passenger Car Association, told Yicai that automakers should raise their foreign exchange hedging ratio to 50 percent to 60 percent in the short term and use futures and options to lock in order revenue. They should also promote yuan settlement in Southeast Asia and the Middle East, add clauses allowing price adjustments based on exchange rate fluctuations, and shorten payment periods, he said.
In the medium term, carmakers should speed up overseas factory construction and localize component sourcing to match revenue and spending currencies, Cui added.
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