While focusing on developments in China, I've come across two negatives for General Motors (GM) and Ford (F). These are:
- The Chinese auto market, the largest in the world, is cooling rapidly. In the first two months of 2012, sales were down 3% year-on-year. This is a continuation of the weakness seen in the tail end of 2011, when auto production was already running at a 6.5% deficit year-on-year;
- The Chinese government has decided to exclude foreign brands from the list of allowable autos it buys. This represents 0.67 million cars at the cost ceiling officially imposed by the government back in 2011, or more realistically, about 1 million units in a 14.5 million unit market. It's also relevant that in the first half of 2011, about 80% of the cars bought by government entities were from foreign brands, so the change really is substantial.
General Motors might be under greater risk.
While Ford's presence in China is not dramatically large (519,390 deliveries in 2011), General Motors has a much more significant presence - indeed, China already surpassed the U.S. as its largest market. During 2011 GM and its joint ventures sold 2,547,171 vehicles in China.
Prospects
A fuller vision of the worldwide trends can be seen in the very complete presentation by Robert W. Baird & Co, "Global Auto and Truck Markets." Although this presentation paints a sunnier picture of the overall car market, in page 13, dedicated to China, the deceleration in the sales moving average is clearly evident. This is the lull that, together with the government measures stated above, can have a short to medium term unexpected impact on some of the foreign manufacturers.
Obviously, this should be a temporary setback, even though it can have a cyclical impact on share prices that might last months to a year.
Conclusion
The weakness in the Chinese auto market together with this new stance by the Chinese government will probably mean that 2012 will see China contributing negatively to the U.S. automakers - something that's clearly more likely for General Motors given its much larger exposure.
The situation also seems likely to lead to some political wrestling, so it's something that might warrant some monitoring.
Given that China is weakening, Europe is similarly compromised and the U.S. market has recovered much of its previous sales pace, it would seem wise to steer clear of auto stocks as they might be near a cyclical top, even though earnings estimates would seem supportive of higher stock quotes.
These developments will also be relevant for other automakers, such as Volkswagen (VLKAY.PK), which have a large Chinese presence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
