China’s auto market, which had been the single most important element in the convoluted recovery of GM and other global automakers, was getting battered even before the yuan devaluation. But now elements coagulate into a toxic mix.

Sales of passenger vehicles in July dropped 6.6% from a year ago, to 1.27 million, according to the China Association of Automobile Manufacturers, a 17-month low, after they’d already fallen 3.4% in June, and after they’d relentlessly trended down since late last year.

This debacle happened even though automakers had cut prices and heaped incentives on the market to stem the decline. GM and VW started it, and it has now turned into a price war.

GM’s sales through its joint ventures fell 4% in July year-over-year, to 229,175 vehicles. Despite falling sales and ballooning price cuts, GM remains, at least in its press release, optimistic about sales and profit margins in China, its second largest market, and simply blamed “model changeovers and the phasing out of older Chevrolet vehicles.” So no biggie.

Ford’s sales through its Chinese joint ventures plunged 6% year-over-year, its third monthly decline in a row, to 77,100 vehicles. Unlike GM, it’s publically worried:

“Longer term, we’re still very bullish on China,” Hau Thai-Tang, head of Ford’s global purchasing, told an industry conference in New York. But the company would move to lower output in China if there is a “prolonged period of recessions.”

While some automakers booked gains, like Daimler whose sales surged 42%, others got clobbered, like Nissan whose sales plunged 14%. And VW said today that its Audi sales in July had plummeted 12.5% in China, Audi’s largest market. It sells about a third of its cars there.

Unlike the folks at GM, Audi sales chief Luca de Meo fretted today: “The market situation in China has remained challenging as expected, exacerbated by the stock market turmoil.”

Global automakers assemble in China most of the vehicles they sell in China. In the first half of the year, imports – mostly luxury brands – dropped 24% to 531,900 as a consequence of the corruption crackdown. They made up only about 5% of the 10.1 million passenger vehicles sold in the first half. The remaining 95% were assembled in China.

The global component makers – dominated by US, German, and Japanese firms – that supply these automakers have gravitated to China as well in order to avoid hefty import tariffs. Hence many of the components for cars assembled in China are made in China.

Thus the auto industry is a critical part of the manufacturing story in China, and it had been booming and driving growth, even as other manufacturing sectors swooned, but now it’s the next brake shoe to drop.

So already declining auto sales, in an already slowing economy, got hammered by the stock market rout in July. But global automakers like GM and Ford, and global component makers too, are now facing the prospects of getting slammed on their financial statements – though they haven’t announced it yet – by an additional problem from their operations in China: the devalued yuan.

The thing is, they have to translate their yuan-based revenues and profits into their home currencies – dollars, euros, and yen. And for some automakers, it is a biggie, particularly for, well, GM.

Nearly half of GM’s earnings are generated by its operations in China, as are a third of VW’s earnings. VW, the other German automakers, and the Japanese automakers have been benefiting from the sharp decline of their home currencies against the yuan over the past year when they converted their yuan-based revenues and earnings into euros or yen. So now, with the yuan getting devalued, they will have to give up some of these glorious paper gains.

But GM, Ford, and Chrysler are getting hit hard. The yuan and the dollar had moved in near lockstep until this week when the People’s Bank of China knocked down the yuan by about 3%, with more devaluations likely to come. This will dent the numbers when US automakers and component makers translate their yuan-based revenues and earnings into relatively stronger dollars.

Nearly half of GM’s earnings are generated by its Chinese operations. They will get hit by a toxic mix of lower unit sales (-4% in July), steep price cuts and incentives, and now suddenly unfavorable currency exchange rates. And forget raising prices to make up for it; the market is already steeped in a price war.

This is going to get messy. And some of the debris from the hard landing of the growth miracle that China used to be is going to hit US automakers, and not only them, but other US manufacturers with operations and sales in China. They too are wallowing through the same toxic mix.

Problems from all directions are piling up in China. “We could see relatively strong downward pressure,” the Chinese government admitted. Read… China’s Hard Landing Suddenly Gets a Lot Rougher

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.