Summary of Key Points
In the first half of 2026, China's automobile exports exceeded 5 million units for the first time, making overseas business a crucial pillar for automakers in terms of revenue, sales volume, and profits. However, exchange rate fluctuations, such as the depreciation of the US dollar, have caused significant exchange losses that have eroded a large portion of the profits of many automakers and supply chain companies. Although companies have used financial measures such as hedging to mitigate risks, these methods have limitations, including incomplete coverage and a limited range of available tools for smaller currencies. The overseas KD (Knock-Down) assembly model has reduced transportation and tariff costs, but since core components are still purchased domestically, it has not completely eliminated the risk of exchange rate fluctuations. Deep localization—increasing local procurement and financing—offers a solution, but it comes with high costs and the challenge of adapting the supply chain. Exchange rate volatility has become an unavoidable issue for the already marginally profitable Chinese automobile industry.
Detailed Analysis
1. Exchange Losses: The Hidden Killer Eroding Profits
How severe are these exchange losses? Simply put, when automakers sell cars and agree on a foreign currency price, the amount of RMB they receive upon payment decreases due to a decline in the exchange rate. For example, if they sell a car for $1 million and the exchange rate at the time of signing the contract is 1 USD = 7 RMB (expected revenue of 7 million RMB), the actual revenue upon payment might be only 6.8 million RMB, resulting in a direct loss of 200,000 RMB.
The losses incurred by several companies in the first half of the year were alarming:
- Chery: A net exchange loss of 2.092 billion RMB, compared to a profit of 3.398 billion RMB in the same period last year, a difference of 5.49 billion RMB;
- ZeroRun: An exchange loss of 104 million RMB, which is equivalent to half of its net profit for the first half of the year (208 million RMB);
- Ningde Times: A loss of 2.81 billion RMB; Fuyao Glass: 803 million RMB; Linglong Tire: 342 million RMB (exceeding its forecasted net profit).
What's more concerning is that the profit margin of the automobile manufacturing industry in the first half of the year was only 3.8%. Every penny saved on materials and production could be wiped out by a single exchange rate fluctuation.
2. Hedging: A Buffer, but Not a Complete Solution
Companies are not unprepared; the scale of hedging increased by 40% year-on-year, with a hedging rate of 35.3%. Hedging is like insuring foreign currency income. For instance, if a company expects to receive $1 million in three months, it agrees with a bank on the exchange rate at the time of payment, ensuring that the amount of RMB received remains fixed regardless of exchange rate changes.
However, why can't hedging completely protect against risks?
- Uncertain Orders: It takes several months for automakers to receive payment after receiving orders. If they expect to sell 100 cars but only sell 80, the extra 20 cars' worth might be lost due to exchange rate fluctuations.
- Limited Coverage for Smaller Currencies: There are many hedging tools for major currencies like the US dollar and euro, but for less common ones like the Indonesian rupiah and Brazilian real, bank products are scarce and expensive, and additional conversions to the US dollar are required, adding another layer of risk.
- Discrepancy between Book and Actual: The exchange losses shown in half-year reports may represent uncollected amounts (e.g., the value of unreceived US dollars as of June 30th), not actual cash outflows. Hedging gains might be recorded in other accounts, so financial report losses do not necessarily mean that no hedging was conducted.
For example, even after hedging, Great Wall Motor still had a comprehensive loss of 266 million RMB. Hedging can reduce losses, but it cannot completely eliminate them.
3. KD Assembly: Saving on Costs, but Not Avoiding Exchange Rate Risks
Many automakers use the KD model, where components are shipped overseas for assembly. This approach saves 30% on transportation and tariffs and requires less investment. However, the core issues remain:
- Core components such as engines and batteries are still purchased domestically (in RMB), and when cars are sold in local currencies (e.g., Indonesian rupiah), exchange rate fluctuations still affect profits.
- Even if a portion of components are locally sourced (e.g., BYD's factory in Thailand sources 50% of its components locally), the remaining 50% still incur domestic costs, exposing the company to exchange rate risks.
Joint-venture automakers facing additional risks through reverse exports. For example,悦达起亚 exported 173,000 units from China (68% of total sales), with costs in RMB and revenue in foreign currencies, increasing their exposure to exchange rate risks.
4. Deep Localization: The Solution, but at a High Cost
To completely reduce exchange rate risks, it is necessary to align overseas income with overseas expenses—i.e., to use local currencies for procurement, financing, and research and development, so that profits and costs are in the same currency and exchange rate fluctuations are offset.
Deep localization comes with significant costs:
- High Investment: Building complete factories, developing local suppliers, and conducting research and development require substantial financial investment.
- Limited Markets: In some countries with low automobile sales, the investment may not be recouped.
- Supply Chain Adaptation: The quality and capacity of local components may not meet standards, potentially increasing manufacturing costs.
Volkswagen's approach is to first produce locally to match revenue and costs and then use hedging to manage any remaining risks. This can serve as a reference for Chinese automakers, but they need to weigh the investment against potential returns.
5. The Entire Industry Under Pressure: Margins Already Thin
The automobile industry is already struggling, with a profit margin of only 3.8%, lower than many other industries. Exchange rate losses have exacerbated this situation:
- Full-Fledged Automakers: Companies like Chery and Great Wall have seen a significant reduction in profits.
- Supply Chain: Companies in the battery (Ningde Times), glass (Fuyao Glass), and tires (Linglong Tire) sectors have been severely impacted.
- Smaller Manufacturers: With weaker hedging capabilities, their losses may be even more devastating.
Although China's automobile exports are growing, the challenge of exchange rates must be carefully considered by every company. Should they continue to rely on hedging, or should they embrace deep localization? This is a critical decision for their survival.
Conclusion
While the expansion of Chinese automakers overseas is a major trend, exchange rate fluctuations have become a significant threat to their profits. Financial measures like hedging can provide temporary relief, while strategic measures like deep localization can address the root causes. However, both approaches come with significant costs. For consumers, this could lead to price increases by automakers to offset exchange rate losses. For the industry as a whole, those that successfully balance overseas expansion with exchange rate risk management will have a better chance of gaining a foothold in the global market. There is no standard answer to this challenge, but it must be addressed effectively.