Higher materials costs eat into automakers' margins

As the rising cost of materials continues to post a threat to the nation's saturated auto market, local vendors have to find ways to improve their eroding margins, analysts said yesterday.

"The increasing cost of materials prompted by China's burgeoning auto market has eaten into local vendors' margins," Sam Wu (吳鴻昇), an analyst at Yuanta Core Pacific Capital Management (元大京華投顧), said.

But the effect of soaring oil prices on local consumers will not be that significant compared with their Chinese counterparts, because when it comes to car purchases, Taiwanese have a greater spending power, he said.

According to Wu, sport utility vehicles (SUVs), with their higher petrol consumption are, in fact, the major force this year in driving vehicle sales.

The recreational vehicle segment, which includes SUVs, has reported growth of 33.2 percent during the first eight months of this year. The segment expanded 32.5 and 29.9 percent last year and 2003 respectively, he said.

Automakers might, therefore, want to diversify their product lines by increasing the proportion of their SUV models to bring in higher margins, he said, adding that they should also streamlining procurement and manufacturing costs.

While most companies will report declining margins this year, Toyota-distributor Hotai Motor Co (和泰汽車) is expected to report 22 percent of margin growth compared with last year, with after-tax earnings per share reaching NT$7.7, according to Wu's forecast.

"The company is not affected by materials costs as it does not have a plant in the mainland," he said, adding that Hotai Motor has been steadily expanding its Toyota brand in both headquarters resources and its variety of products.

According to Peter Tzeng (曾耀德), an analyst at Polaris Securities Co (寶來證券), the weaker margins are attributed to the fact that makers are lowering average selling prices of cars, in a bid to push more sales to boost market share.

"The rise in quantity will drag down margin performance," he said.

Though weaker margins are expected, the nation's total automobile sales will still see minimal growth this year to over 500,000 units, up from 484,000 units a year earlier, he said.

Riding on the growth momentum, Yulon Nissan Motor Co (裕隆日產), the nation's third-largest automobile vendor, is confident to meet its target sales of around 70,000 units by December.

"The nation's auto market demonstrates healthy growth this year," said company spokesman Jack Wu (吳新發), on sidelines of the launch on the 2006 model Teana 3.5L on Thursday.

Stable monthly sales of the Teana sedan and X-Trail SUV will help push up the company's overall sales, he said.

For the first eight months, Yulon Nissan commanded a local market share of 13.2 percent with sales of 47,802 units, cementing its No. 3 position, according to the statistics from the Ministry of Transportation and Communications.

The top two players were Hotai Motor with 28.3 percent of 102,481 units and China Motor Corp (中華汽車) with 17.4 percent of 63,056 units.