GM: China Drove Half of the World's 2017Q3 Growth in Vehicle Sales.

General Motors Company (NYSE:  GM) competes in the Chinese market through a number of joint ventures under its global Buick, Chevrolet, and Cadillac brands and its local Baojun and Wuling brands. In the three months ended September 30, 2017, the company’s joint ventures in China generated US$12.1 billion in sales. That represents an 11.1% growth rate over the same period in the previous year. Although the company increased estimated market share to 14.2%, up 90 basis points from the third quarter of 2016, the company is performing poorly in China on a profitability and cash flow basis.

Within China, the company’s 11.1% increase in sales only generated a 0.8% increase in net income. Net income as a percent of revenues declined from 8.7% in the third quarter of 2016 to 7.9% in the third quarter of 2017. The company is selling more, but less profitably.

In addition to lower profitability, the company’s cash flows are suffering. In the first nine months of 2017, General Motors generated US$34.1 billion in sales and earned US$2.9 billion in net income in China. However, since the end of 2016, cash and cash equivalents in China declined by US$709 million, despite debt increasing US$145 million. This would indicate the company is funding sales to its customers by increasing its accounts receivables.

The company also reported global data of interest. General Motors Company estimates 23.1 million vehicles were sold worldwide in the third quarter of 2017, up 0.7 million from the third quarter of 2016. Based on the company’s estimates of regional sales, we can calculate that 53.5% of the world’s growth in vehicle sales came from China. That seems unbalanced.

General Motors Financial Company also reported results for the three months ended September 30, 2017. It did not provide China-specific data, but did state: “Equity income in our China joint venture increased due primarily to growth in asset levels driven by increased retail penetration.”

While General Motors Company is financing vehicle sales with its own cash, General Motors Financial Company is also financing consumer debt to purchase vehicles. Both of these activities are driven by artificial credit creation.  When China's artificial credit boom ends, the worldwide auto industry will experience a bust.

WABCO is Paying More to be Paid Now in China.

WABCO Holdings Inc. (NYSE:  WBC) is primarily a manufacturer of braking systems for commercial vehicles. In the three months ended September 30, 2017, the company generated US$827.8 million in sales globally, up 22.5% over the same period last year. In the first three quarters of 2017, the company generated US$250.2 million in net income, up 47.6% over the same period last year. Although sales and net income have increased, the company’s cash flows have suffered.

Globally, the company generated US$226.6 million in cash flow from operations in the nine months ended September 30, 2017. This is a decrease of 21.4% or US$62 million. The primary contributor to the decease in cash flow from operations was a US$68.2 million increase in accounts receivables.

Sales in China, which grew 43.4%, were financed at an increasing cost to the company. In the first nine months of 2016, WABCO had discounted with banking institutions or transferred to suppliers in China US$83.6 million worth of notes receivables. In the first nine months of 2017, that amount had more than doubled to US$182.7 million. Not only is the company waiting longer to be paid, the company’s expenses related to discounting these notes have increased at an even higher rate, from US$0.2 million to US$1.6 million.

Although discounting expense is increasing, it is probably safer to transfer the risk of account receivable repayment from a state-owned or public enterprise to a bank. This will allow more cash to be available at a sooner, more certain date. Many other companies are simply recording the sale today and then hoping to collect accounts receivable at an unknown future date.