Auto Giants Are Shifting Into High Gear

Includes: F, GM, TM, VLKAY
by: Unbigoted Research

German automaker Volkswagen (VKLAY.PK) does not typically get much attention from American investors, even though it is one of the largest automakers, ranking third worldwide. In fact, experts are projecting that Volkswagen could take General Motors' (NYSE:GM) place this year, and become the number two automaker worldwide.

Slow and Steady Wins the Race

Volkswagen has been posting strong sales numbers worldwide. In January, February, and March of this year, its sales increased by more than 5% from the first three months of last year, selling over 2 million vehicles. Sales were up significantly in China, by more than 21%, while sales increased by almost 15% for the North American division. These great sales numbers may be due to the fact that Volkswagen purchased Porsche in 2012, thus adding another popular luxury brand to its already impressive lineup. Volkswagen also sells high-end luxury motorcycles under the Ducati brand name. All told, Volkswagen is expected to sell almost 10 million vehicles in 2013.

Meanwhile, Toyota (NYSE:TM) has experienced many setbacks in the past few years, including recalls for two consecutive years and a tsunami that affected its suppliers. These incidents temporarily knocked Toyota from the top spot as the number one automaker worldwide. Although Toyota has suggested that it will rebuild its business carefully in order to avoid more recalls, it's my view that Volkswagen is all set to overtake the former in the offing.

Troubles in Europe

The debt crisis in Europe has caused financial difficulties for all the major automakers. The record 12% unemployment rate in Europe has resulted in a steep drop in auto sales to the lowest level in 20 years.

Even though Volkswagen made great progress in China and North America, the 6% decrease in sales in Europe in February took a bite out of its gains. Despite this, Volkswagen still came out better than most, since on average industry sales declined by more than 11% in February. Additionally, Volkswagen was able to gain a double-digit sales increase in Russia.

Volkswagen is competing with the American automakers in the European market to set the lowest prices. Profits in China and North American have allowed Volkswagen to slash its prices, essentially forcing Ford (NYSE:F) and General Motors to reduce their prices as well. Apparently the price reductions haven't helped the American automakers much, because GM saw a 20.5% drop for February and Ford was slightly worse yet with a 21.0% decline in sales. The overall result has been devastating to the profit margins in Europe for both companies. Toyota is doing a bit better; it only saw an 8% decline in sales in February.

GM has not given up on the European market, deciding to invest over $5 billion in Opel, its poor performing German brand. GM will be launching new models in an attempt to turn the market around. Ford has openly stated that it has concerns about its future in the European auto market.

Hope in China

However, there is still hope for American companies and it's in the Chinese market. For GM, sales in China increased by 15% in April, while Ford was able to post a very impressive 54% increase in sales. Volkswagen saw an increase of more than 12% in the Chinese market last month. The end result is that Volkswagen's overall sales in March were not as good as sales in February; it only saw a 1% gain compared to last March. On the other hand, March sales were more impressive for GM and Ford, who saw 6.5% and 7% gains, respectively.

Of all the automakers, GM has the largest Chinese operation. The company sells more cars in China than it does in its home country. The Buick and Cadillac brands are doing very well, propping up the lower end Chevrolet models. In China, GM sold over 800,000 vehicles last month while Ford sold almost 200,000. Ford is making efforts to catch up with GM. The Ford Focus does very well in China and Ford owns 30% of Jiangling Motors in China and 50% of Chongqing Changan. This strategy of purchasing Chinese companies is allowing Ford to grow its business in China at a faster rate.

Volkswagen did not provide monthly figures, but said sales were nearly 600,000 in the first quarter of last year. It's harder yet to compare the figures when you account for the fact that Volkswagen includes sales from Hong Kong. It also includes sales in Macau. Both American companies report for Macau and Hong Kong in a separate report. The sales figures would indicate that Chinese consumers are sticking with Volkswagen for luxury vehicles and also favor GM for high-end vehicles. The Focus is popular in the mid-range market. All three companies have seen an increase in sales in China due to a sharp decline in the desire for vehicles made in Japan because of territorial disputes.

With all that being said, China recently missed its GDP, posting 7.7% instead of the expected 8%. Therefore, I believe this will have a negative impact on markets that depend on China, and this includes the auto industry.

The bottom line

Since, GM participated in the 2009 government bailout, it does not have as much debt as the other three companies. GM also has stronger growth figures compared to other companies. Toyota is a good second place finisher, but I'm concerned about its problems in the Chinese market. At the same time, the weak Yen will boost profitability overseas. Nevertheless, it is yet to be determined which will be a more significant factor.

Since it did not participate in the bailout, Ford is struggling with enormous debt. Both Ford and Volkswagen are dealing with the losses in the European market. Unfortunately for Ford, it does not have a strong luxury brand to boost profits. Volkswagen has several popular luxury brands that will help offset the decreased sales in Europe.

At the end of the day, it looks like General Motors is a safe investment, as is Toyota. However, Volkswagen has a great portfolio of luxury brands that will help with sales when the market recovers in Europe. I think Volkswagen has a bright future, and would recommend adding it to your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.