VW hails speed of car sales recovery in China

Volkswagen says demand for its cars in China is almost as high as it was this time last year, underlining the speed of the recovery in the brand’s most profitable market.
The German carmaker said it suffered just a 2 per cent fall in sales in April, despite the overall auto sector in the country declining by an estimated 7 per cent in the same period.
It added that it expected business in China to reach the same monthly levels in May as it did in 2019.

“China is quickly closing the gap,” Jürgen Stackmann, VW brand’s board member for sales, told reporters, after the group’s boss in the country Stephan Wöllenstein predicted the carmaker could see a “yearly result that is not so far away from our original plan,” if the region’s “outstanding economic comeback” continued.
However, Mr Stackmann warned that the so-called V-shaped recovery in China was unlikely to be replicated in Europe, where the economy would be slower to improve.
Although VW’s market share grew in every region around the world in 2020, “China is quite unique as it has such a stunningly strong underlying demand still of first-time buyers,” the executive said.
“That doesn’t exist in Europe. We all have cars. So it’s like a repeat purchase for a majority of Europeans.”
Mr Stackmann’s caution was echoed by BMW chief Oliver Zipse on Wednesday, who warned that China was “only of limited use as a blueprint for development in other markets.” 
“In our most important sales region, Europe, the picture is extremely mixed,” Mr Zipse said.

“It is clear that automotive demand in countries that have been hard hit by the pandemic, like Spain, Italy and the UK, will probably remain relatively low for the rest of the year.” 

Figures released on Wednesday showed that the German auto market had contracted 61 per cent in April, with just 121,000 new passenger cars registered — the lowest number since reunification in 1990. The UK, Spain and Italy suffered declines of about 97 per cent.
Mr Zipse’s comments came after BMW warned that profits in its carmaking division might be reduced to zero in 2020, as it grapples with factory shutdowns and plummeting sales.
Margins at the unit, which includes the Mini and Rolls-Royce brands, were likely to range between 0 and 3 per cent, the Munich-based company said, adding that it no longer expected to achieve a positive free cash flow in its automotive business this year.
“Measures to contain the coronavirus pandemic are lasting longer in several markets and are thus leading to a broader negative impact than was foreseeable in mid-March,” BMW said in a statement.
The premium manufacturer, which also announced it was postponing a decision to build a plant in Hungary, said its updated forecast did not take into account the implications of a possible second wave of infections, and subsequent lockdowns.
Despite signs of a recovery in China in late March and April, BMW said sales in Asia, also its most profitable market, fell by a quarter.
Official Chinese car sales figures for April are not due to be released until next week.
Additional reporting by Christian Shepherd

HSBC seeks to remove management of ZenRock Trading

HSBC has taken steps to remove the management of Singapore-based ZenRock Commodities Trading, seeking to have the company put under judicial management in the latest blow to the city-state’s natural resources sector.
Investment banks have tightened credit lines and scrutiny of existing loans to commodities traders in response to the crash in global oil prices and the collapse of Hin Leong Trading, one of Asia’s biggest fuel traders.
Hin Leong is under judicial management after its founder Lim Oon Kuin revealed last month that $800m of losses had not been reflected in its financial statements and sought protection from creditors, who are owed almost $4bn.

That sent other oil traders, including ZenRock, scrambling to reassure investors they could survive the historic oil price falls rocking energy markets.
HSBC on Monday lodged an application in Singapore’s High Court to have ZenRock placed under judicial management, according to a filing seen by the Financial Times.
If approved by the court, an independent judicial manager would be appointed to run the business while a debt restructuring agreement is hammered out with its creditors. 
At least 10 banks have exposure to ZenRock, according to regulatory filings and people with knowledge of the situation.
The person added that there were questions about some of the company’s financial transactions.
ZenRock did not immediately respond to a request for comment. HSBC declined to comment on its filing.

Last month ZenRock, which describes itself as “one of the fastest-growing independent commodity trading houses in the world”, sought to reassure investors and distance itself from Hin Leong’s woes.
In a letter seen by the Financial Times, ZenRock said it had the “ability and experience” to navigate “profitably” the challenges facing the industry.
Its revenue more than doubled to $6.1bn in 2018 from the previous year, according to filings in Singapore, while net income from continuing operations was $6.1m, up from $2.1m. The company’s 2018 results were audited by Ernst & Young.
Other banks with exposure to ZenRock include ING and Crédit Agricole, according to people familiar with the situation. ING declined to comment, while Crédit Agricole did not immediately respond to a request for comment. Citi, which also counts ZenRock as a client, declined to comment.
Producers around the world have grappled with wild oil market swings in recent months, including a drop into negative for US prices with producers forced to pay buyers to take crude off their hands because of a lack of storage capacity.
ZenRock was founded six years ago by Xie Chun, a former executive at Unipec, the Chinese oil trader owned by state-run Sinopec, and Tony Lin, an ex-Vitol executive.
The crisis at the company follows a string of scandals and failures including the implosion of Hin Leong, the collapse of Agritrade International and the debt crisis at Noble Group.
That has alarmed Singapore regulators, which have urged lenders not to pull back from the sector.
This week several government agencies including the Monetary Authority of Singapore, the de facto central bank, met 15 big trade finance banks to discuss the fallout from Hin Leong’s collapse.
MAS could not immediately be reached for comment.

The demise of the US department store

The fight to acquire Neiman Marcus in 2005 drew in some of the biggest names in private equity.
The price tag on the department store chain: $5.1bn. It was a plum sum for the much-admired purveyor of Chanel handbags and Loro Piana cashmere; its chief executive at the time, Burton Tansky, was so venerated in the retail world that he won the nickname “Mr Luxury”.
The group’s attention to detail was legendary; the New York Times marvelled in 1980 that the White Plains, New York, location sourced its smoked salmon and herring from Manhattan’s famous Murray’s Sturgeon Shop — not standard fare at the Texas-based company’s other stores.

That combination of rare goods and exceptional service is what made department stores — a concept imported from Europe in the mid-1800s — a hallmark of sophisticated urban life. The names adorned on the stores — B Altman, Stern’s, Marshall Field’s, Lord & Taylor — were known in households across the country. And, for a time, these department stores came to dominate retail in America.
Even as shoppers began to turn to the internet, Warburg Pincus and TPG — who ultimately won the 2005 bid for Neimans — were willing to bet that the newly well-to-do would continue to turn to the merchandisers they had long trusted. In 2013, sharing a similar vision, buyout group Ares Management and the Canada Pension Plan Investment Board bought Neiman for $6bn.

Neiman Marcus’s department store in Manhattan’s Hudson Yards development. The company faces financial difficulties and missed debt payments in April © New York Times/Redux/eyevine
Now Neiman Marcus, which carries $4.8bn of debt and missed an interest payment to its lenders, is on the brink of bankruptcy. Other department stores are likely to follow. People briefed on the matter expect the company, which operates 43 namesake stores, 22 off-price locations and two Bergdorf Goodman flagships in New York, to file for protection from its creditors and landlords in the coming days. It comes less than a year after its New York rival Barneys did the same, a move that ultimately ended in liquidation.
If there was ever an event to test the mettle of retail chieftains across the US, the coronavirus pandemic has been it. Malls have shut. Consumer spending has flatlined, with sales at department stores down a staggering 23 per cent in March from a year prior, the largest decline since at least 1994, according to data from the Census Bureau. And all the while rent and interest payments have been accruing.

“Stores will reopen but we certainly don’t think things will snap back to where they were six months ago or six years ago,” says Erik Nordstrom, who leads the department store that bears his family’s name. Nordstrom announced on Tuesday that it plans to close 16 of its 116 locations. “Debt is much more of a problem in our environment right now.”
Neiman Marcus isn’t the only department store chain facing potential bankruptcy. JCPenney is seen as particularly vulnerable and could turn to bankruptcy protection to wipe out burdensome liabilities. Lord & Taylor, which was acquired by clothing rental startup Le Tote last year, is planning to liquidate when its stores reopen, CNBC reported on Tuesday.

Stores will reopen but we certainly don’t think things will snap back to where they were six months ago or six years ago

Macy’s, meanwhile, has hired advisers to help it shore up its balance sheet. J Crew, another staple of the American shopping mall, filed for bankruptcy protection on Monday. When the pandemic is over, the American mall won’t look the same.

How did we get here? The coronavirus is not entirely to blame for the problems presently facing Neiman Marcus and JCPenney; both were already suffering from bloated debt levels that left them little able to respond to the sweeping changes in American retail over the past two decades, including the rise of e-commerce and the migration of young people from the suburbs to cities after the financial crisis.
“In this environment it’s just impossible when you have such massive fixed costs,” says David Shiffman, the co-head of investment bank PJ Solomon’s consumer retail group. “These businesses are enormous and consume huge amounts of capital. That has been ongoing for years.”
Debt has “paralysed” Neiman’s potential growth, adds Robert Burke, the chief executive of retail consultancy Robert Burke Associates. Burke, who previously oversaw luxury and fashion brands for Neiman Marcus’s Bergdorf Goodman, says the company had been hamstrung by its financial obligations as luxury brands and rivals such as Nordstrom were investing heavily in their online businesses and finessing supply chains to allow for in-store pickup and same-day delivery.

“While we all talked about the importance of omnichannel, few of the department stores actually offered that, even though they said they did,” he says. “And to the consumer it’s all the same, whether they buy online or in store. That was a hard pill for the department stores to swallow.”
The troubles facing luxury goods department stores have been further exacerbated by the brands that they themselves helped incubate over many decades. Throughout the 2000s, labels such as Louis Vuitton, Prada and Gucci began to compete with the department stores by increasing their own retail footprint.
The expansion allowed them to establish a direct connection with their customers and exert more control over the presentation of their product and the cadence of discounting. And it shifted the power back in their favour: if a season’s merchandise was not critically well received, the brands still had an avenue to sell.
It was welcomed at first, making malls in Boca Raton, Florida and Short Hills, New Jersey bigger draws for an increasingly affluent clientele. But it began to splinter the consumer. If the same Burberry trench coat was available in Nordstrom, Saks Fifth Avenue or Macy’s-owned Bloomingdale’s, and at the Burberry outpost the brand owned itself, where would the consumer choose to shop?

E-commerce was also beginning to bite. Department stores, which had long differentiated themselves by sourcing the must-have product, were facing scores of new competitors. Gucci sunglasses and Diane von Furstenberg wrap dresses could now be found on dozens if not hundreds of websites, amplifying price competition. At the time of the Neiman buyout, consumers spent $40bn more at department stores than they did on goods online. Within two years, e-commerce sales had vaulted above.
William Taubman, the chief operating officer of mall operator Taubman, which owns the Beverly Center in Los Angeles, likens the shifts by consumers away from department stores to the declining ratings of broadcast networks.
“At one time the network anchors on ABC, NBC and CBS had a 90 per cent market share,” he says. “Today they have a much lower market share but they still represent a cultural consensus. They still attract a cross-section of America that comes together for different reasons at different times. The department store is the same thing. Their share is definitely lower, but they still have a unique drawing power.”
The fight among mid-market department stores such as JCPenney and Macy’s, which had a far larger footprint than upmarket rivals like Nordstrom or Saks, has been just as brutal. Amazon has encroached on their territory, while fast fashion purveyors such as H&M have continuously nipped away at marketshare.

Better days: shopping for shoes at Neiman Marcus during a golden era for US department stores © LIFE Picture Collection via Getty

A gift wrapper at the Neiman Marcus store in Dallas in 1945 © LIFE Picture Collection via Getty

Can they recover? While retailers have attempted to ramp up sales through their e-commerce channels during lockdown, analysts expect many to face bankruptcy and that a new round of department store closures is in the offing. Consolidation has also been suggested, with Saks Fifth Avenue owner Hudson’s Bay seen as a potential white knight for Neiman Marcus if the business does indeed fall into bankruptcy. Hudson’s Bay chief executive Richard Baker has expressed his interest in acquiring the store before.
But Hudson’s Bay is now mired in its own challenges; its real estate joint venture decided to skip April payments owed on its mortgage obligations.
Analysts with the brokerage Cowen estimate that Macy’s, which in February was stripped of its investment grade credit rating from S&P Global, has enough cash to weather four months of closures. They expect Nordstrom, by contrast, could survive for a year with its doors shuttered.
It is a view that has market backing. While the yield on $500m worth of Macy’s debt that matures next year has shot above 13 per cent, underscoring the financial strain on the company, the yield on a $500m Nordstrom bond that comes due next October has climbed to a modest 5.4 per cent.

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Erik Nordstrom predicts a bout of discounting by retailers across the country when stores begin to open, given many are inundated with out-of-season merchandise. Nordstrom has moved swiftly to preserve its balance sheet and access to capital; it has drawn down a credit line from its banks, suspended its dividend, furloughed employees and cut management pay. It has also raised new debt to bolster its cash levels.
“A crisis is a good time to get very focused, to get very clear on priorities and drive the change that’s needed,” he says. “We have had to pull a lot of levers to ensure we’ve got the strength in our balance sheet and the financial flexibility to continue . . . in uncertain times.”
Others have not had the same good fortune. It is unlikely that department stores will ever regain the place they long held in the American consciousness, even if Americans flock again to the suburbs. But there is reasonable hope that not all department stores will go extinct, even if the vast majority struggle and ultimately fail.
A glimmer lies in the fact that for other battered-down retailers, the elimination of rivals has meant at least one or two brands can survive in some segments. The market is already placing bets on who that will be.

US weighs matching anti-China rhetoric with economic action

Washington is weighing up more aggressive economic measures against China amid rising anger over Beijing’s handling of the pandemic, threatening the commercial truce reached less than four months ago.
As the disease swept across the US killing tens of thousands of people and devastating the economy, US president Donald Trump accused China of covering up its coronavirus outbreak and failing to prevent its spread around the world.
The White House and Capitol Hill are now looking to match the anti-Beijing rhetoric with steps to curb supply chains and investment flows, according to public remarks by administration officials, congressional aides, and industry lobbyists in Washington. However, it is unclear how far they are willing to go, given fears of inflicting more damage to the US economy.

“US-China tension was an issue before Covid-19 for sure, but Covid-19 has acted as an accelerator,” said Stephanie Segal, a former US Treasury official and senior fellow at the Center for Strategic and International Studies.
“You could have foreseen a scenario where there was a recognition that the pandemic requires multilateral co-operation and co-ordination. Instead, it has devolved where both sides are blaming the other for the state of the world,” she said.
The deterioration in US-China relations has been particularly jarring given the trade truce reached in January by Mr Trump and China’s president Xi Jinping, which ended almost two years of tariff threats between the world’s largest economies.
While limited in its scope, the agreement raised hopes that it could deliver some stability to the economic relationship until after November’s US presidential election. But Mr Trump is now warning China that Washington could ditch the agreement if Beijing fails to follow through on its planned purchases of American goods, reviving the threat of higher tariffs on Chinese imports.
“If they don’t buy, we’ll terminate the deal. Very simple,” the US president said during a Fox News town hall meeting on Sunday night.
For Mr Trump, there is a pressing political rationale for reverting to a tough stance towards China: his re-election bid is less than six months away, and Joe Biden, his presumptive Democratic challenger, has attacked him for playing down the threat of the virus while praising Mr Xi’s leadership in the final stages of the trade talks.

The White House has already taken some economic steps that will unnerve Beijing. It has tightened export controls curbing semiconductor sales to China, opened the door for the government pension fund to stop investing in some Chinese companies and moved to limit imports of electrical equipment used in the US power grid.
With hawkish, anti-China sentiment growing on Capitol Hill, the concern particularly in the business community, is that the crackdown could harden further, slashing trade and investment flows between the two countries and deepening the US and global recessions.
US officials have ruled out radical steps such as cancelling Treasury debt-related payments to China. However, potentially disruptive proposals to reduce the US’s dependence on Chinese supply chains, particularly in the technology and healthcare sectors, are back on the radar, along with the possibility of a new tariff flare-up.

“In this politically charged environment, it’s easy to play the blame game, but we should not pursue solutions that would undercut our own economic recovery and at a time when we need the two governments to have a functional and pragmatic relationship,” said Myron Brilliant, head of international affairs at the US Chamber of Commerce. “The most immediate challenge for the two countries is to work together to combat the virus and restore global growth,” he added.
In Congress, the desire to confront China has been accompanied by anxiety that the country could emerge as an even stronger strategic and economic rival following the pandemic. Some lawmakers are hoping that some measures could be considered alongside a new round of fiscal stimulus, which is expected to make its way through Congress this month.
“There’s huge appetite to legislate on China,” said one Republican congressional aide. “The pandemic has put China on the map, and a lot of people have been talking about how do we hold China accountable,” the aide said.
Steven Mnuchin, the US Treasury secretary, on Monday told Fox Business that Mr Trump was “reviewing all these issues very very carefully”, when asked about new ways to clamp down on US pension fund investments in China that could benefit companies tied to the military. In Congress, there is also a push to ensure that Chinese companies listed on American exchanges abide more strictly to US accounting standards.
The Treasury secretary said he expected China to meet its obligations under the trade pact but also warned Beijing against reneging. “I have every reason to expect that they honour this agreement. And if they don’t, there would be very significant consequences in the relationship and in the global economy as to how people would do business with them,” he said.
Matthew Pottinger, the US deputy national security adviser, offered a more veiled critique of Beijing on Monday as he delivered remarks to a University of Virginia symposium. Praising the May 4 anti-imperialist protests in China more than a century ago, Mr Pottinger suggested China could benefit from “a little less nationalism and a little more populism”. Washington was not interested in “punitive measures” against the country, but a “reciprocal and fair relationship”. “Not one in which the US allows ourselves to be taken advantage of in the hope that somehow China will just automatically liberalise,” he said.