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By Daniel Jennings

The Jaguar division of Tata Motors (NYSE:TTM) has unveiled a new super luxury sedan in an attempt to get business from rich Chinese. The $500,000 XJ Ultimate was unveiled in Hong Kong on Thursday, May 24. The new chauffer-driven vehicle features a luxurious interior modeled on that of a private jet, and Apple iPads embedded in each of the rear passenger seats.

The idea is to compete with Rolls Royce, which is owned by Germany's BMW. BMW is also expanding its operations in China, where automakers are hoping that cars, especially European luxury models, are an important status symbol for the new classes of wealthy entrepreneurs.

Chinese Slowdown Threatens Auto Stock Growth

Sales in China now account for about 17.2% of the Tata Jaguar-Land Rover group's revenue. Unfortunately, this may not be a good time to introduce a new luxury model in China because that nation seems to be undergoing an economic downturn. The rate of economic growth is slowing and manufacturing seems to be contracting. The World Bank is now warning of an impending economic slowdown in China.

The good news is that China's economy is still growing; it's just not growing as fast as it was. This could be very bad news for Tata, General Motors (NYSE:GM), Daimler (OTCPK:DDAIF), and other auto companies that have bet heavily on China as the next big car market. It would be particularly bad on luxury car makers that depend heavily on the upwardly mobile.

Any news of a serious downturn in China is liable to hurt auto stocks badly because the auto industry has invested heavily in China. Tata would be among the most vulnerable because of the huge share of its revenue that comes from China. Those most hurt by an economic slowdown caused by weak demand for manufactured goods would be China's exporters, who would presumably be the people most likely to buy a Jaguar.

There is a potential bright spot in the China's economic woes for luxury car makers like Jaguar. The government there is trying to restrict lending for real estate purchases in order to prevent a real estate bubble. That means rich Chinese could be forced to spend their money elsewhere, perhaps at the luxury car dealership.

Another bright spot for carmakers in the economic downturn in China is that Beijing is reportedly planning its version of a stimulus in an attempt to boost the economy. The stimulus is supposed to include spending on infrastructure, which could include more highway building, which would boost car demand.

General Motors Back in the Driver's Seat in Chinese Operations

The U.S. automaker most vulnerable to Chinese economic woes is General Motors. GM is counting on Chinese sales to make up for losses in Europe that have caused a 61% slide in its fourth-quarter profit. If the Chinese economy starts going down, GM's stock could really slide.

General Motors definitely plans to stay in China; the company just spent $91.4 million to buy back 1% of the Shanghai Automotive Industry Corporation. (600741 on the Shanghai Exchange), its Chinese partner. GM had sold the ownership to help finance its efforts to get out of bankruptcy in 2009.

The move gives General Motors equal say on operational decisions in China. The company reportedly wants to double its deliveries in China to five million cars by 2015. If it succeeds, that move could greatly increase GM's stock value and profits. If this ambitious expansion is halted by a Chinese economic slowdown, GM's share prices could fall drastically, perhaps to under $5 a share.

The purchase still needs the approval of the Chinese government. It's hard to see the Chinese government saying no to something that should boost its economy and popularity with the Chinese people. That means it will probably approve the deal and put GM back in the driver's seat in its Chinese operations.

Having greater say over the operations should boost GM's profits because it has far greater knowledge of automotive technology and automotive marketing than its Chinese partner. General Motors also has a lot more experience with car finance (which it invented). This is important because some mechanism for the financing of cars will be needed if a stable auto market is to be built up in China.

General Motor's possible repurchase of the foreign assets of Ally Financial (the former General Motors' Acceptance Corp) could make setting up an auto finance operation in the Middle Kingdom easier. If General Motors can successfully introduce American style auto finance in China, it would greatly increase its profits and its stock value.

This success hinges on a growing Chinese economy, and if China's economy isn't growing, it won't work. The truth is that GM needs China, because without it, the company has little chance of greatly expanding its customer base or sales. If the Chinese government doesn't approve this deal, GM's stock will definitely fall.

Gas Price Hike Threatens Indian Car Market

Car sales in India could be threatened by record high gasoline prices in that nation. The Economic Times newspaper reported that gas prices were increased by a record 7.5 rupees (roughly 14 cents U.S.) on May 23. This prompted several of the biggest auto companies in India, including Tata Motors, Hyundai (OTC:HYMLF), and Maruti Suzuki, to start offering special discounts to attract car buyers.

This could be real bad news for auto stocks because India is one of the developing markets the auto industry is counting on. Companies like Tata have bet that India's growing middle class will want cars.

The discounts are being offered on gasoline-powered cars, which are less fuel efficient than diesel cars. The big winner here could be Volkswagen (OTCQX:VLKAY), which has had a lot of success selling highly fuel-efficient TDI diesel cars such as the Jetta. Volkswagen's sales in India and its stock could go up on this news.

Another company that could benefit from high gas prices in India would be Toyota (NYSE:TM). Toyota has set an ambitious target of selling 50% of its cars in emerging markets, such as India and China, by 2015, Executive Vice President Yukitoshi Funo told the Associated Press. It already sells 45% of its production, or 3 million vehicles a year, in such markets. This includes India, where Toyota has manufactured 100,000 Eitos cars as of last Friday.

The high fuel prices in India are good news for Toyota because of its reputation for building fuel efficient cars. High fuel prices in India could boost Toyota's sales, profits, and stock prices. Concentrating on India makes sense for companies like Volkswagen and Toyota, because Indians like to spend their money on solid material items, such as well- built cars. Many Indians use such items as a hedge against inflation, so Toyota's reputation of building cars with a high resale value should help it on the subcontinent.

Toyota's strategy seems to be aimed squarely at India's emerging middle class. Funo actually told the AP that he thinks selling cheaper cars in countries like India is a mistake. He thinks that upwardly mobile people in developing countries think of cars as a status symbol, much like Americans do, so they will spend more money to get a fancier car.

If Toyota can generate the kind of brand loyalty in India that it's generated in the U.S., it could have a major profit center on its hands. Toyota's stock should go up in value nicely if it can hit its ambitious sales figures in emerging markets. Even if Toyota only accomplishes part of Mr. Funo's goal, it should greatly increase its stock value.

The only thing that could stop Toyota from achieving record growth in developing nations and higher stock values is a global economic downturn. Unfortunately, that seems to be happening, as many emerging markets are heavily dependent on resources such as minerals, and China is their main customer. If China's economy contracts, so will demand for those natural resources and the profits Toyota is hoping people in such nations will spend on new cars.

Emerging markets like China and India are automakers' best bet for higher stock values. Unfortunately, success in emerging markets depends on continued economic growth, which may not occur. That means we could see a major drop in auto shares if the Chinese downturn continues.

Source: 6 Auto Stocks Hinged On Asian Market Growth