Auto Heaven & Hell (August 2026)
The Capital Cycle is the official podcast that Marathon Asset Management (the London firm founded in 1986) launched in 2024, hosted by financial historian Edward Chancellor, who interviews Marathon's investors about each Global Investment Review letter — applying the firm's long-term, contrarian "capital cycle" supply-side approach.
In plain words
This report says China's auto market is oversupplied and fiercely competitive, but upstream glass maker Fuyao Glass is a big winner. The author thinks Fuyao, with 40 years of focus and high R&D spending, has over 35% global market share and cost advantages, while European rivals are exiting due to high energy costs. Now Fuyao's stock is at a decade-low, with a P/E of 12 and a dividend yield of 4.5%, offering a buying opportunity. Key holdings: Fuyao Glass (favored for low costs and rival exits), BYD (sold by Buffett, profits down 55%), and Lens Technology (a new entrant but small, a long-term risk).
At a Glance
One-sentence summary: Amid overcapacity and intensifying competition in China's auto market, upstream glass supplier Fuyao Glass benefits from cost and R&D advantages as a "fisherman," with its current low valuation offering a buying opportunity. [Bullish]
- China's auto production capacity reaches 55 million vehicles, far exceeding annual sales of 25 million vehicles, but upstream Fuyao Glass holds a global market share of over 35%, with R&D spending at 4-5%, far ahead of competitors.
- Fuyao Glass currently trades at 12 times forward P/E with a dividend yield of 4.5%, which the author considers an attractive entry point.
- Electric vehicles drive an 8.6% annual increase in glass value per vehicle, and glass costs account for less than 1% of total vehicle cost, making customers price-insensitive.
- European competitors (Saint-Gobain, NSG) are exiting capacity due to high energy costs, while Fuyao has expanded capacity by over 30% in the past two years, soon covering half of global annual vehicle production.
- Key risks: new entrant Lens Technology (long-term risk) and European tariffs, but the author believes Fuyao can pass tariffs on to customers.
China's Auto Market Overcapacity Benefits Upstream Glass Suppliers
China's auto industry faces severe overcapacity with declining domestic sales, yet upstream glass supplier Fuyao Glass benefits from automakers' upgrade demands. China's annual domestic auto sales are approximately 25 million units, but factory capacity is estimated at 55 million units, enough to supply nearly two-thirds of global demand. In the first half of 2026, domestic sales fell 20% year-on-year as the government halved EV purchase tax breaks and reduced trade-in subsidies; despite a 53% surge in exports, total Chinese EV shipments still declined 4%. During the same period, about 650 new models were launched (nearly four per day), intensifying competition. On profitability, Geely's Q1 2026 profit fell 27% year-on-year, Chery dropped 10%, and BYD declined 55% (Charlie Munger once called it "Berkshire's best investment ever," but Berkshire had fully exited by early 2025).
Fuyao Glass: Focus and R&D Forge Global Dominance
With four decades of dedication to automotive glass and high R&D investment, Fuyao Glass has raised its global market share from 20% in 2015 to over 35%, and above 70% in China. Its R&D spending accounts for 4-5% of revenue, far exceeding AGC (3%) and Saint-Gobain (1%), while absolute R&D expenditure is 2.6 times that of AGC. EVs drive glass value growth: per-vehicle glass value increased 8.6% annually from 2020 to 2025 (versus 3.3% from 2015 to 2020), yet glass cost remains below 1% of total vehicle cost, making customers price-insensitive. Fuyao's sales are nearly double AGC's, operating profit is eight times higher, and return on capital far exceeds competitors.
Cost Advantage and Competitor Exits Strengthen the Moat
Fuyao leads on cost through scale, low Chinese energy costs, and operational discipline, while European and American competitors exit capacity due to high energy costs and shrinking demand. US annual production is about 10 million units, Europe about 17 million, both 10-20% below pre-pandemic peaks. European energy costs are double those in China, prompting competitor exits: Japan's NSG (automotive glass revenue roughly half of Fuyao's) was taken private by Apollo in March 2026; Saint-Gobain closed automotive glass plants in Germany and Spain in H2 2025, and its 2026-2030 strategic plan aims to shrink or sell industrial assets; AGC's automotive glass capex is expected to decline in absolute terms this year. Meanwhile, Fuyao has expanded capacity by over 30% in the past two years, soon able to cover half of global annual auto production.
Strong Financials but Low Valuation Offer a Buying Opportunity
Fuyao's return on invested capital approaches 30% and return on equity nears 26%, yet the market has driven its stock to a decade-low due to China's auto market downturn. The company has distributed over 60% of profits as dividends over the past decade, returning approximately RMB 40 billion to shareholders (about 30% of its A-share market cap). At the current price, it trades at 12x forward P/E with a 4.5% dividend yield, which the author considers an attractive entry point.
Risks: New Entrants and European Tariffs
Key risks include new competitors (e.g., Lens Technology) and European tariffs on Chinese goods. Lens Technology (a mobile screen manufacturer) has built automotive glass capacity and begun supplying side windows, but its scale is far smaller than Fuyao's and remains a distant risk. Europe has imposed additional tariffs on Chinese steel and aluminum and a carbon adjustment tax this year; Fuyao supplies European customers entirely from China. The author argues that local European competitors' exits will force automakers to rely more on Fuyao, and that Fuyao can pass tariffs on to customers. The author concludes: "The snipe and the clam show no sign of releasing each other, and we believe Fuyao can continue to harvest sound returns with an even more formidable industry position."
Position Moves
| Position | Action | Logic & Data |
|---|---|---|
| Fuyao Glass | Hold & Watch (Marathon holding) | Global automotive glass leader with >35% market share, 4-5% R&D spending, significant cost advantage; currently at 12x forward P/E and 4.5% dividend yield, valuation deemed attractive by the author |
| BYD | Liquidated (Berkshire) | Q1 2026 profit down 55%, Berkshire fully exited by early 2025 |
| AGC | Hold & Watch (not explicitly stated) | Automotive glass capex expected to decline in absolute terms this year, facing Fuyao competition |
| Saint-Gobain | Reduce/Exit | Closed automotive glass plants in Germany and Spain in H2 2025, 2026-2030 strategic plan aims to shrink or sell automotive glass business |
| NSG | Hold & Watch (not explicitly stated) | Taken private by Apollo in March 2026, more likely to milk existing assets than expand |
| Lens Technology | New Position (potential competitor) | Has built automotive glass capacity and supplies side windows, but scale far smaller than Fuyao's, considered a distant risk |
Position Moves
| Ticker | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Fuyao Glass | Hold & Observe | Global leader in automotive glass with significant cost and R&D advantages; current low valuation offers a buying opportunity | Global market share >35%, China >70%; 12x forward P/E, 4.5% dividend yield; capacity expansion >30% over the past two years |
| BYD | Liquidate | Berkshire had already liquidated by early 2025; Q1 2026 profit fell 55% | Q1 2026 profit down 55% YoY |
| Saint-Gobain | Reduce/Exit | Closed automotive glass plants in Germany and Spain in H2 2025; plans to scale back or sell its automotive glass business | Plant closures in H2 2025; 2026-2030 strategic plan to reduce automotive glass |
| NSG | Hold & Observe | Privatized by Apollo in March 2026; more likely to extract value from existing assets rather than expand | Automotive glass revenue roughly half of Fuyao's |
| AGC | Hold & Observe | Automotive glass capex expected to decline in absolute terms this year; faces competition from Fuyao | Absolute decline in automotive glass capex |
| Lens Technology | New Position | Has built automotive glass capacity and supplies side windows, but scale is far smaller than Fuyao's; a long-term risk | Already supplying side windows, scale far smaller than Fuyao |