The Significance of Credit Rating for Chinese Auto Industry - Essay Example

Owing to the limitations of the data, conclusions based on the data are not reliable enough for the project’s objectives. Hence, qualitative analysisis required for the study. The benefits of credit rating for whatever investors, debt borrowers and lenders will be stated below. For Investors, generally, credit rating is a convenient instrument to evaluate an issuer, which is easy to be understood and contains a lot of information. Gaurav Akrani (2011) points out that credit rating gives an idea to the investors about the credibility of the issuer company, and the risk factor attached to a particular instrument. With referencing the results of credit rating of a security issuer, investors may be able to decide whether to invest in such companies or not. Normally, high credit rating can be treated as an assurance to the investors about the safety of the instrument and minimum risk of bankruptcy. Hence, investors will necessarily pay attention to the credit rating before deciding investments and higher the rating, the more will be the willingness to invest in these instruments and vise-versa. Moreover, that rating agencies provide a list of companies in one industry gives investors choices to make up their portfolio. Also, the rating results of given issues are regularly updated by rating agencies, meaning that investors may obtain the latest information, which allows investors to decide whether to keep or sell current investments. Thus, investors reduce the investment risks by considering the results of credit rating of issuers. Furthermore, analysing financial strengths of an issuer for investors is very difficult due to lack of information and ability of calculations. Credit rating agencies provide comprehensive reports of issuers whose information covers not only financial strengths, which apparently saves investors’ time and efforts. Besides, rating agencies evaluate issuers’ risks more actually than investors themselves. Therefore, credit rating is an efficient instrument for investors. Graph 01: On the whole, the majority of the respondents to the question have clearly validated the perception that raw suppliers’ credit rating scores have no significance and effect on the Chinese auto makers. . The survey highlights numerous findings. First, majority of the respondents, which are represented by the blue and green colors in the graph, have equally reflected that the suppliers’ credit rating scores are highly influential as they deal with the auto maker companies and such kind of dealing is done on a massive scale in which strategic partnership deals and bulk discount offers are normally agreed between the component suppliers and auto making companies in China. For suppliers, it is highly important that the auto makers companies should be financially stable and strong enough to timely return back their dues and retain a positive goodwill gestures through obtaining a stable and sustainable credit rating from different credit rating companies. It is the benefit of this positive and sustainable credit rating scores that many component suppliers take into account such measures and adjust, revamp or disengage with the auto maker companies. Based on this perception, majority of the respondents have authenticated and validated this perception that they highly regard the credit ratings scores and they take into account such rating before entering into business deal with the Chinese auto maker companies. The auto dealers have a strategic importance for auto industry. The auto industry has various stages through which a car is required to undergo before reaching the premises of the auto dealers. in other words, before going to be sold, cars are made available to the auto dealers for the purpose of selling. Consequently, the auto dealers have significant influence and importance in the auto industry. For consumers, brand cognitive has received the highest number of points. First, it is an established fact that auto industry served by certain international car brands who have certain features, including car engine performance, fuel efficiency, latest features and other factors that have become essential components for cars. In other words, it is the power of brands and their images that attract the Chinese car users and enable them to construct their perception and opinion about their car brands. As a result, many Chinese car users do more importance to other factors, such as auto maker policies, cost performance and other factors but they know and subscribe to the brand cognitive. Interestingly, it is important to see that the respondents have provided the least points to the cost performance. In other words, the respondents do not much take into account the issues pertaining to finance and economic aspects of the cars but they attach considerable support for brand cognitive as the main factor drives their thinking and decision making process in the auto industry. Investors separately monitor the different factors operational within the Chinese auto industry. They take into account a range of factors that directly or indirectly affect the financial and operational performance of auto companies and auto market as well. Since they are owners and bear all direct and indirect effects and benefits from the policies pursued by auto companies, they very closely monitor the performance of the auto companies. Investors will become in a position to understand the financial integrity of the Chinese auto firms. the financial integrity has been defined as a financial condition in which firm’s financial performance remains stable and there are chances that the firm will be able to invest inside the firm or into a new business. It is the benefit of this integrity and certain factors that enable credit rating agencies to take into account the financial and operational performance of the auto companies and rank their credit rating scores as per their financial integrity and bearing as well. In other words, they do not take into account other factors and measures that are also highly relevant for the auto firms. More specifically, in the policies, the auto firms highlight their current financial and operational performance and achievement of certain strategic objectives. In addition, they also include different sources of finance they avail for satisfying their short term and long term requirements. Moreover, in the financial policy, the auto companies highlight their current situation and methods to make this policy stable and sustainable as well. and in the operational policy, the auto firms report their corporate and operational performance in which the previous year performance indicators are also provided for making comparison with the current and past financial and operational performance. Similarly, investors also attach brand cognitive as the second highest priority for them. For this aspect, the respondents have provided 66 points. It means the respondents are of the opinion that the brand cognitive is that factor which represents the overall perception of auto firms in the mind of consumers and its overall market performance and reputation as well. Also, the competitive car spectrum received 62 points from the respondents; external support (36 points) and price (3 points) have been obtained. Consequently, it can be highlighted that the minimum numbers are secured by price. As a result, this indicates that the investors do not attach considerable significance to the issue of price as far as the Chinese auto makers are concerned. . The government policies directly influence on the credit rating scores of auto companies. In the government policies, monetary and fiscal policies are mainly important in which the monetary policy highlights the interest rate and availability and circulation of money in the country (Arnold, 2011; Prasad and Ghosh, 2005; Jain and Khanna, 2007) whereas the fiscal policy highlights taxation policy of government (Tanzi, 2006; Langran and Schnitzer, 2007; Guscina et al., 2010; Dwivedi, 2010). In this regard, it is important to mention that both government policies considerably affect the auto industry. For example, if an auto firm has not paid its corporate and other forms of taxes and it has also been declared tax defaulter firm, this situation would substantially impact on the credit rating scores of the firm and there are chances that the credit rating agencies may downgrade the credit rating of that firm which could make difficult for the firm even to obtain short term and long term strategic loans from different local and international financial institutions. As a result, the above mentioned graph is clearly and appropriately highlighting the importance of government policies for the Chinese auto firms. Graph 07: In this regard, it is important to mention that the inclusion of new cars will improve and increase the sale of autos in the Chinese market and this sale will have a direct effect on the overall Chinese auto industry in which not only auto firms, but components providers, dealers, credit providers and other industry stakeholders will also experience the benefits of this rise in the industry. In addition, the survey also highlights that 13 points have also been attached with strategic planning. Strategic planning and credit rating scores have a very important correlation. For example, if an auto firm has established a strategic planning department charged with determining and achieving the long term strategic objectives of the auto firm, there would be chances that the auto firm would operate more strongly and generate better financial and operational performance and that will have direct effect on the credit rating scores of the firm. Subsequently, the respondents attach significant importance to the contribution of core component suppliers, highlighting that the better relationship, coordination with the suppliers put positive effect on the overall outlook and financial plus operational performance of the auto firms working in the Chinese auto industry. Conclusion The paper has certain limitations. Consequently, it would not be correct to say that all of the findings and results are appropriately reflecting the ground situation of the Chinese auto industry. For example, the survey sample only consisted of 74 individuals in which 38 were employees working in the auto industry, 17 were the staff members of a credit rating agency and 19 were from common individuals. In other words, the opinion and observations of 74 individuals is not sufficient enough to represent the on-ground auto industry situation. In addition, the official position and job description of auto industry employees have not been provided. As a result, this ambiguity also blurs the findings and results of this survey because only the senior management and employees with higher ranks in the auto industry are mainly equipped to understand and describe the answers and situations highlighted and required by the questions mentioned in the questionnaire. Credit rating refers to credit worthiness of debt, securities, firms (Fuchs-Schundelin and Funke, 2001; Das, 2009; Sasidharan and Mathews, 2008).The significance of credit rating scores is moderately increasing for the Chinese auto industry. Although the Chinese auto industry is rapidly growing and recording new heights of rise in the recent history, it still requires more experience and benchmarks that enable dealers, car makers and components suppliers to understand the significance and essence of the credit rating scores. Despite this fact, the findings and results clearly demonstrate that the significance and role of credit rating agencies and credit ratings are rapidly gaining momentum throughout the Chinese market. Not only investors, but also dealers have become more interested to know and apply the concept of the different credit ratings while dealing with the auto makers and other dealers. Further research on the positive effect of credit ratings on auto firms should be carried out. In this type of research, more concentration should highlight that how auto firm should consider such rankings and what operational and financial matters are included for improving the credit rating scores. In addition, the firms should also incorporate such policies and procedures that upgrade their credit ratings besides highlighting those operational and financial policies that provide reasons for downgrading the credit rating scores. By knowing such information, the auto firms will become in a position to improve their credit rating outlook in both short and long term. References Arnold, R.A. (2011). Macroeconomics. 10th edn. Ohio: South-Western Cengage. Das, S. (2009). Perspectives on Financial Services. Mumbai: Allied Publishers. Dwivedi, D.N. (2007). Macroeconomics: Theory and Policy. New Delhi: Tata McGraw Hill. Fuchs-Schundeln, N. & Funke, N. (2001). Stock Market Liberalizations: Financial and Macroeconomic Implications. IMF Working Paper WP/01/193. Washington: International Monetary Fund. Guscina, A. Ilyina, A. & Kamil, H. (2010). Does Procyclical Fiscal Policy Reinforce Incentives to Dollarize Sovereign Debt? IMF Working Paper WP/10/168/. Washington: International Monetary Fund. Jain, T.R. & Khanna, O.P. (2007). Macroeconomics Management. New Delhi: V.K. Enterprises. Langran, R. & Schnitzer, M. (2007). Government, Business, and the American Economy. Maryland: Rowman & Littlefield Publishers Prasad, A. & Ghosh, S. (2005). Monetary Policy and Corporate Behaviour in India. IMF Working Paper WP/05/25. Washington: International Monetary Fund. Sasidharan, K. & Mathews, A.K. (2008). Financial Services and System. New Delhi: Tata McGraw Hill Tanzi, V. (2006). Fiscal Policy: When Theory Collides with Reality. CEPS Working Document. No. 246/June. 2006. Centre for European Policy Studies. Read More