The Capital Cycle Podcast - Auto Heaven & Hell

Episode Date: August 28, 2026

While the capital cycle in autos appears dire, auto glass-making looks altogether different. Edward Chancellor talks to Yixuan Yang, an Emerging Markets Equities Analyst.For more information, or to access select articles from Marathon’s Global Investment Review publications which accompany this podcast series, please visit www.thecapitalcycle.co.uk Hosted on Acast. See acast.com/privacy for more information.

Hello, this is Edward Chancellor and welcome to another episode of the Capital Cycle podcast. I have with me, Yishuan Yang, who is an analyst on Marathon Asset Management's emerging markets portfolios. Welcome. Thank you. Now, the automobile industry is prone to suffering from destructive capital cycles. First of all, as Marathon has often pointed out in the past, these businesses are political footballs. They employ lots of people and in downturns, governments intervene to stop them consolidating and laying off workers. Carmakers also face technological disruption. The arrival of

battery electric cars, for instance, led to a destructive burst of capital spending by established players in Europe and the US. And thirdly, it's an industry that's now open, I think always has been open to global disruption. The US car makers have faced competition over the decades from Europe, Japan and now China. And that's what we're going to talk about. We're going to talk about the Chinese car makers that have been taking market share globally, but not exactly prospering either. They too are experiencing a negative capital cycle. So Altos have long been prone to the destructive power of access supply. We saw the rise of Chinese electric vehicles forced global competitors into losses, and this has also led to severe overcapacity in China.

China only sells around 25 million cars to the local consumers, but the factory capacity is estimated to be about 55 million, twice as much. And this is enough to supply two-thirds of the global demand. So not only does China's auto industry suffer from structural overcapacity, something we've seen in a lot of Chinese industries over the years, but the domestic market at the moment is relatively weak. Yes. So this year we've seen headwind from policy changes. The domestic demand is under pressure after Beijing halved the purchase tax exemption for electric vehicles. and they also reduce trade-in subsidies. So the demand has been very weak compared to the previous two years.

And this resulted in a 20% decline year-on-year in the first half. Even though there's 50% increase in exports, this is not enough to offset the decline. So the total electric vehicle shipment has fell by 4% in China this year. And what's more Chinese car buyers are not exactly, short of choices. Yes, absolutely. So because there's so much competition, the automakers are in a race to release new products. About 650 new or refreshed models were introduced in the first half, and that is nearly four per day. This intensive competitive pressure has met with an even weaker demand leading to lower profits for all the auto manufacturers. Remarkable piece of information. And actually,

this hyper-competitive market is hurting carmaker's profits. So despite Chinese carmakers topping sales leader boat worldwide, profits at the even strongest car makers are evaporating. So in the first quarter, 26 results, profit fell by 27% year-on-year for Gili and 10% for cherry. And these are the number two and three carmakers in China. The market leader, BYD, which was set to be one of Charlie Munger and Warren Buffett's favorite investments, saw profit decline by 55%. And Berkshire has wisely sold out of the stock entirely in 2025.

Interesting. And now, in this very dismal industry picture, you have found a bright investment spot. To differentiate themselves, the Chinese carmakers are desperate to refresh and I'm. upgrade their models, and that create an opportunity for the component suppliers. And we notice one component that make up a small share of the cost, but a large part of the car's driving experience and appearance has stood out, which is glass windows. And what company stands out in your view? In this highly competitive market, Fu Yao glass, as the largest car glass makers in China and globally, has emerged as a dominant place.

And can you tell us a bit about the firm? Sure. So the company was funded in 1987 by Cao De Wang. The Ohio factory plant famously became the center of a culture class by the Chinese management and the American workers. And this was featured in the Oscar-winning documentary American Factory, which you can find on Netflix. I seem to remember Tao complained that American workers were lazy, unmotivated, or something. like that and how carry on? So full-yard glass spent four decades making car windows and today is,

as I said, the world's largest manufacturer. The global share has risen from 20% in 2015 to 35% today. So their market share in China, which is the world's largest auto production market is about 70%. So it's highly dominant. And a decade ago when Japan's AGC was the worldly, leader. Fou Yao glass is almost twice AGC size by sales and eight times operating profit and with far superior margin and returns on capital. So what's the secret behind its success? So continuous innovation and collaboration with customers has been a key driver of Fou Yao's success. Global players such as Japan's AGC and France, St. Guban, has diversified production across construction and industrial materials.

While Ful Yao has one single focus, they invest heavily in R&D for auto glass, which has led to them being an industry leader. And you have numbers to back this up? So we noticed that Ful Yao spent 4 to 5% of their revenue in R&D throughout the cycle. This compared to AGC's 3% and single balance 1%. So in absolute terms Fou Yao spends over two, and a half times of its nearest rival AGC based on our estimates.

And the carmakers are upgrading the use of glass in their conventional vehicles, but the arrival of electric vehicles is a further bonus. Yes. The arrival of EVs has been a positive for the economics of auto glass, because EVs use more glass and more functional glass than the vehicles they replace. So automakers have raised to adopt windows with UV insulation, soundproofing, head-up displays and dimming features. And these high-value products are once nice to have, but now standard features. And so this is led to rising proportion of the car's value being in class?

So we know that between 2015 and 2020, glass value per vehicle rose by a modest 3% per year. but over the last five years, this growth has accelerated to 9% a year as high-value products lifted the prices. But glass still is below 1% of the car's total cost, which means Fou Yao's customers are relatively insensitive to price. Fou Yao has a cost advantage compared to Western competitors, which suffer from shrinking domestic car markets and much higher energy costs. So outside China, auto production has been shown. shrinking for about a decade. In the US, they assemble about 10 million cars a year and in Europe

about 17 million. Both is 10 to 20% below their peak pre-COVID. For the incumbent glass makers, we're talking about Japanese makers AGC, NSG, which is NEPON sheet glass and France, Saint-Gban. The lower volume have collided with European energy costs running at twice the Chinese levels. And this is a unhappy combination for the business that melts sand in gas-fired furnaces. So Fuyall is also a cost leader benefiting from scale, low energy costs and operational discipline. And the capital cycle, you think, is moving into a benign phase for the auto-glass industry. Yes. So the contraction of car production in the West has led to meaningful cuts in glass manufacturing

capacity. So Japan's NSG, whose auto glass revenue is about half of Fuyall's, was taken private by Apollo earlier this year in March, and they seem to be more likely to sweat their assets than expanding them. And France, St. Gaban, has closed their automotive glass plants in Germany and Spain in the second half of last year, citing energy costs and low-cost competition. In the next five-year strategic plan, they seek to shrink or sell underperforming industrial assets. Alto-glass is likely to be one of them. For AGC, the Alto Glass Capax is also expected to decrease in absolute terms this year. On the other side of the world, Fu Yao is expanding incapacity by over 30% in the last two years and will soon be able to glaze half of the words

car production every year. And so what are the risks for this company, do you believe? So we saw a danger of high return inviting new entrants into the market. A Chinese listed company lens technology. They are a manufacturer of mobile phone screens and cockpit components. They have been building auto glass capacity in the recent years, and they are starting to supply side windows. Our research suggests that its scale is currently very small relative to Fuyall, so it remains a distant risk, but it is worth monitoring. And another potential risk is that Europe might become increasingly worry of Chinese exports, with additional tariffs and carbon-adjusted taxes

added to Chinese goods, such as steel and aluminum we saw this year. Fou Yao supplies European customers entirely from China and the European market is expected to contribute significantly to future growth. So this risk, we believe, would be mitigated by the exit of local European competitors. The car manufacturers in Europe will rely more heavily on Fou Yao for functional and competitively priced glass products. So it would be relatively easy for Fou Yao to pass on the tariffs on. onto their customers.

You think that these risks are reflected in its low current valuation, but also that the business is friendly to shareholders, which is not true of every business on the Chinese mainland, but this is a shareholder friendly business. Yes, absolutely. We saw Fou Yao's return on invested capital climbing towards 30% and return on equity approaching 26%. this is very rare for an industrial business. And relative to most Chinese companies, Fou Yao is generous to shareholders,

as they have paid out over 60% of their earnings continuously over the last decades as dividends. This accumulate to 40 billion of R&B, which is around 30% of the Asia market cap. And you share a final word on valuation? Yeah, we believe the valuation is very attractive at the moment as investors are fixated by the depressed auto sales in China and have marked down Fuliao's shares to a decade-low multiple of 12 times forward earnings with a 4.5% dividend yield giving us what we believe is an excellent entry point. Thank you very much, yeshuan, and I hope to see you again. Thank you. Thank you for your time today. I hope you will listen to the next edition of the capital cycle.

This communication is provided for information purposes only. Please refer to Marathon's website and the Global Investment Reviews for further information, including important disclosures.