The truth about the global automotive industry's debt has finally been clarified.

The momentum of China's automotive development is becoming increasingly strong. According to the latest ranking of global vehicle sales by 2024, for the first time two Chinese auto companies have entered the top ten, with BYD Company Limited ranking fifth and Geely ranking tenth, while overseas car companies are generally showing weak growth, exacerbating market concerns about the operational risks of car companies, with the two most worrying signals being declining profits and increasing debt. In fact, whether the debt of car companies poses a risk or not, besides paying attention to the debt numbers themselves, it is also important to focus on whether the debt can bring about certain growth. Four reasons for high debt in car companies High debt is a common feature of traditional car companies, with the asset-liability ratio of mainstream global car companies generally exceeding 60%, with some even exceeding 80%. In addition, the total debt of global car companies is also very high. Based on the most recent complete financial year data, car companies with debts exceeding trillions include Volkswagen, Toyota, General Motors, Ford, BMW, and Mercedes-Benz, with Volkswagen exceeding 3 trillion yuan, Toyota exceeding 2 trillion yuan, far surpassing BYD Company Limited and Geely, the two leading car companies. Careful study reveals that car company debt mainly consists of four types: "passive debt," "active debt," "hidden debt," and "dangerous debt," each with different risks. Different risks of the four types of debt 1. Passive debt - fixed asset investment This part of the debt can be understood as the fixed costs of car company operations. Only car companies experiencing rapid growth will see a rapid increase in passive debt because they need to expand capacity and make large investments in fixed assets such as factories and equipment. In this case, whether high debt poses a risk depends on whether new capacity can be realized as sales and revenue. Whether passive debt resulting from capacity construction investments will pose risks largely depends on whether products are selling well. For example, with BYD Company Limited, the huge investments in capacity have led to explosive sales growth. As long as sales can absorb the new investment in capacity, the growth of passive debt is not a risk, but rather an engine of growth. 2. Active debt - research and development investment "Active debt" is a key variable in judging whether there is risk in car company debt, and this part mainly consists of research and development investments. The automotive industry is currently undergoing a major transformation, and all car companies are making significant investments in research and development. For example, European and American car companies have made significant investments in intelligence, such as Volkswagen's Cariad software business accumulating losses of over 60 billion yuan in four years without producing competitive results, which could pose a risk. Looking at Chinese car companies, take BYD Company Limited as an example. From 2021 to the third quarter of 2024, total R&D investment exceeded 100 billion yuan, leading to continuous iterations of the DM-i hybrid technology, blade batteries, Yun Chen, and many other technological achievements. When high R&D investments can bring competitive results, they are enough to cover the risks of "active debt." 3. Hidden debt - accounts payable The "hidden debt" formed by supply chain management mainly consists of accounts payable and promissory notes, which are interest-free debt. An increase in this type of debt is often seen as a sign of a car company's weak payment ability, creating risks. However, whether accounts payable are high or not needs to be seen in conjunction with revenue scale. Looking at the data from the most recent complete fiscal year for Chinese mainstream car companies, SAIC Motor Corporation and BYD Company Limited have relatively low accounts payable as a percentage of operating income. SAIC benefits from its large stock scale, while BYD Company Limited mainly benefits from rapid revenue growth. To determine whether interest-free debt primarily in the form of accounts payable poses a risk, one cannot just look at the amount of debt but should also consider whether income growth can cover the growth of debt. For suppliers, the most important thing is the growth in cooperation volume, as Chinese manufacturing companies are better at using economies of scale to reduce costs. Therefore, the larger the purchasing volume, the higher the revenue, and the larger the volume of external procurement and cooperation, the more obvious the role in driving economic growth. In addition, a car company with relatively short payment terms means that its suppliers can receive payments faster, reducing the financial pressure on suppliers and strengthening supply chain stability. Data shows that in 2023, BYD Company Limited had an accounts payable turnover of 128 days, SAIC had 140 days, Great Wall Motor had 163 days, Chongqing Changan Automobile had 185 days, Dongfeng Group had 226 days, and Chongqing Sokon Industry Group Stock had 313 days. 4. Dangerous debt - interest-bearing debt To assess the level of risk of "dangerous debt," it is essential to look at interest-bearing debt, as interest-bearing debt usually signifies a rigid debt repayment cycle and higher interest costs. Looking at the proportion of interest-bearing debt to total debt, the proportion of interest-bearing debt for overseas car companies is generally higher, with Toyota and Ford both exceeding 60% and General Motors reaching 59%. The proportion of interest-bearing debt for Chinese car companies is generally lower, indicating lower short-term debt risks. Among the major Chinese car companies, BYD Company Limited, Chongqing Sokon Industry Group Stock, and Changan have a proportion of interest-bearing debt below 10%, and particularly BYD Company Limited, despite rapid expansion, has not experienced a rapid increase in interest-bearing debt. Comparing BYD Company Limited's debt structure in recent years, starting from 2022, the proportion of interest-bearing debt has consistently been below 10%, reaching below 5% at its lowest. Such a debt structure is unlikely to pose a debt risk. The ultimate question: Does debt point to a certain future? In an environment where the automotive industry is undergoing significant transformation, relying solely on numerical analysis to determine the level of risk in car companies is unreliable. Judging the debt of car companies should focus on whether it leads to a certain future.The key to managing risks lies in whether the debts help the automotive companies to form critical competitiveness. When the direction of trillion-dollar debt flows resonates with the wave of industrial revolution, the debt figures on the balance sheet become the ticket to the future.I am sorry for the delay.