Growing Content In China Could Add To Lear’s Growth This Year
Lear Corporation (NYSE:LEA) is a leading automotive interiors manufacturer, reporting 2.5% year-over-year growth in revenue through the first half, on 2% growth in global automotive production. The stronger U.S. dollar has been one of the main reasons for lower revenue growth for Lear so far this year, but the company has continued to grow sales by more than the growth in global automotive production nonetheless. China has been a shot in the arm for Lear this year. Sales for the company in the country, excluding the impact of currency, grew 6% year-over-year in the second quarter, more than the automotive production growth of 4%.
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Lear is well-placed in China with 44 manufacturing facilities in the country. Revenue from China formed ~12% ($2.1 billion) of Lear’s top line in 2015, and non-consolidated sales in the country were another $1.5 billion. Why Lear has been able to grow sales by more than the automotive production is because of the growth in content-seating and electrical, per vehicle. Emerging markets tend to have lower content per vehicle, but growth in disposable incomes and in lower-tier cities in China, are boosting the content per vehicle in the country. In particular, the growing demand for SUVs and Crossovers is aiding in growing content. Customers are opting for SUVs and Crossovers, which combine the looks of a car with the functionality of a utility vehicle. Why this benefits Lear is because these vehicles typically require more seating and electrical content per unit.
According to China Association of Automobile manufacturers, while production of passenger vehicles was up 10% year-over-year in the country through the first seven months, production of SUVs was up 44%. Just like in the U.S., the bigger, more spacious, vehicles have piqued customer interest. In the U.S., while the overall passenger vehicle market was up only 1.4% through July, SUV/Crossover sales were up 8%.
In addition to the growth in larger vehicles, growth in premium vehicle sales is also expected to aid the growth in content per vehicle. Luxury vehicles require more elaborate seating and electrical content, and this bodes well for Lear. For the first seven months of the year, growth in sales for premium automakers outpaced that for the overall market. Lear supplies interiors to BMW, Audi, Mercedes-Benz, and Jaguar Land Rover — the leading luxury automakers in the world. In fact, BMW was Lear’s third-largest client last year, constituting 10.5% of the top line.
Lear’s equity earnings from its Chinese joint ventures doubled to $50 million in 2015 from $24 million in 2010. Lear now expects these joint ventures to continue to grow strong and surpass $3 billion in sales by 2018, based on its 3-year non-consolidated sales backlog of $700 million. [1]
What works for Lear is that its business is well-balanced, in terms of product segment, customer and platform mix, and by geography. So basically, when one market isn’t doing well, growth in another market offsets that sluggishness. For example, in China the company has maintained strong relationships with foreign automakers in the country, as well as domestic automakers such as FAW, BAIC, Dongfeng, and SAIC. Local brands are outpacing growth in foreign joint ventures, but this isn’t a problem for Lear, as a considerable 30% of its seating business in China is with major domestic automakers. Why this matters is that local businesses are rising in China. Domestic automakers improved their market share in the country’s passenger vehicle market by 1.2 percentage points to 42.5% through July. Having adequate business with the local companies ensures that the trend of increasing sales for the domestic carmakers doesn’t hamper Lear’s sales.
Global vehicle production is expected to grow by 3% in 2016, up from 2% in 2015. China is expected to spearhead this growth, while growth in the U.S. is expected to weaken after the refilling of fleet (following the recession) in the previous three years. Demand is expected to be subdued in struggling economies that are major oil and commodity exporters. In this case, the growing production and content per vehicle in China becomes even more significant for Lear Corporation.
Have more questions on Lear Corporation? See the links below.
- Lear Earnings Review: Profit Rises On Solid Performance Across Seating And Electrical Segments
- What’s Lear Corporation’s Fundamental Value Based On Expected 2015 Results?
- Where Will Lear’s Revenue And EBITDA Growth Come From Over The Next Three Years?
- What Is Lear Corporation’s Revenue And EBITDA Breakdown?
- Lear Corporation: Year In Review
- By What Percentage Have Lear’s Revenues And EBITDA Grown Over The Last Five Years?
- How Has Lear Corporation’s Revenue And EBITDA Composition Changed Over 2011-2015?
- What Is Lear Corporation’s Geographical And Client-Wise Revenue Breakdown?
- Why Lear’s Stock Has Appreciated 90% In The Last Five Years
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