The long-term value of U.S. auto stocks, such as Ford (NYSE:F) and General Motors (NYSE:GM), is now threatened by a declining market share. Not even improved quality and technology has been able to keep foreign competitors from taking market share from Detroit's Big Three, data from the Polk analysis firm indicates. The Big Three includes Chrysler, which is currently controlled by Italy's Fiat (FIATY.PK)
Polk's surveys found that the Big Three's brands lost market share in nine of the ten U.S. states that have the highest auto sales between 2008-2011. The situation was particularly bad in Pennsylvania and Florida states with older, more conservative populations that would usually be expected to buy American. Polk found that sales for U.S. cars in Pennsylvania fell by 3.1% in 2008-2011. The demand for Big Three products in Florida fell by 5.8% in the same period.
Some of this lost market share can be blamed on the economic downturn, but the recent upswing in auto sales didn't seem to help the Big Three. The big winners were German brands such as Volkswagen (OTCQX:VLKAY) and BMW. European brands (mainly German cars) picked up market share in seven of the ten largest U.S. markets. That could be bad news for Japanese carmakers such as Toyota (NYSE:TM) and Nissan (OTCPK:NSANY). The "Made in Japan" label seems to be losing some of its appeal to American car buyers.
The big loser in Detroit appears to be GM, which is struggling in the luxury car market, particularly in affluent states such as California. Polk's data indicates that Cadillac is having a tough time competing with BMW and Mercedes in the Golden State. Lincoln is also losing its share there.
These figures indicate that Detroit's efforts to reinvent itself have failed. Ford and GM may have succeeded in making better vehicles, but they have not convinced the American public of that transformation. U.S. car buyers remain skeptical of the Big Three and reluctant to buy their products.
This news is likely to send both Ford and GM's stocks falling. It is also liable to hurt Toyota, Honda (NYSE:HMC), and other Japanese car stocks. The moat that Japanese brands used to have in the U.S. seems to have vanished. The brand loyalty that some Americans were displaying for Toyota and Honda now seems to be shifting to Volkswagen. Expect to see both Toyota and Honda lose some stock value.
Weak Economy Hurts U.S. Auto Sales
The surge in U.S. auto sales appears to be over. Reuters reported that U.S. vehicle sales failed to live up to economists projections in May. The experts had expected Americans to buy 15 million vehicles in the month; instead, they only purchased 14.5 million. Car sales still increased in the month, just not by the levels that experts had expected.
The big winner was Toyota, where sales increased by 87% in May, which indicates that the negative publicity from the recent safety recalls at that company is fading from public memory. Chrysler also had a good May, with sales growing by 30%. GM and Ford didn't do as well; Ford's sales only increased by 13% and GM's by 11%. Car sales are increasing, but not by the levels experts had hoped for, so this news could lead to a momentary boost for Toyota stock.
These figures will definitely hurt auto stock values because they indicate that car sales may decline for the rest of the year. Part of the reason sales may fall off is that many people who delayed replacing old vehicles, because of the economic downturn, have done so. Another reason is that the economy is not doing as well as expected.
Economic uncertainty, which usually drives auto sales down, is growing. The U.S. Labor Department found that employers added fewer jobs than expected in May. Economists had forecast that American employers would hire 150,000 new employees in May; instead, they only put 77,000 on the payroll. To make matters worse, the unemployment rate actually rose in May from 8.1% to 8.2%.
To make matters worse, the underemployment rate (part-time workers and others making lower wages) increased to 14.8% of the work force in May. Bloomberg also noted that the number of people on government payrolls fell by 13,000, and the construction industry eliminated 28,000 jobs in May, so the percentage of the population with the resources to buy a new car seems to be declining.
This is really bad news for carmakers because the auto industry needed a sustained recovery to maintain those high sales figures. The sales figures were the only things holding up auto stock values in the U.S. Now that they're falling, both Ford and GM are sure to fall.
People worried about their jobs usually don't buy new cars. This means that auto stocks may not be the growth stocks that some investors had figured they were. It also indicates that U.S. car sales may have reached a saturation point.
That means carmakers may have to resort to deep discounting and other tricks to move vehicles. Such measures will undoubtedly affect profits because they will decrease revenues, which will cut earnings per share.
One company in a very vulnerable position is General Motors, which faces huge losses in Europe. Expect GM's stock to take a major hit, particularly with the company still adding workers to its payrolls.
Tata Puts Land Rover Plant in Brazil on Hold
Tata Motors (NYSE:TTM) has shelved plans to build a Land Rover factory in Brazil because of a weak economy in that nation. The company's Jaguar-Land Rover Division division had been planning to build an assembly plant in the South American nation.
Now the plans have been postponed because Brazil's economy, which is based on natural resources, has been hit hard by the global downturn. A major reason for the decision was an increase in auto loan defaults in Brazil. As in the United States, the vast majority of new cars in that country are financed. Another factor is that other South American countries, such as Chile, Peru, and Argentina, are heavily dependent on industries such as mining, so they too have been hard hit by falling commodities prices.
This move could hurt the stock values of companies such as Toyota, Tata, Mercedes, and Volkswagen, which have been counting on car sales in the developing world for future growth. Instead of increased sales, some of the developing markets could quickly turn into a liability for such companies.
It could help Tata's stock value because the company is showing the kind of restraint that seems to be lacking at competitors, such as General Motors, which in particular, seems to be obsessed with growth at the expense of revenue and profit.
Tata has made no announcements about plans to build a Land Rover assembly plant in China. It has entered into a joint venture with the Chinese company Cherry to build such a plant. It is likely that Tata will also put the Chinese plans on hold because of a sales slump in that nation.
Falling Chinese Auto Sales Could Wreck GM Stock Value
China's auto sales fell in the first four months of 2012, something that hasn't happened in the Middle Kingdom in 14 years. That could be very bad news for General Motors, which has bet heavily on the Chinese market.
Interestingly enough, the boss of GM's Chinese operations, Kevin Wale, told Bloomberg that he thinks the market is about to rebound. Wale said he thinks that consumer confidence in China is still high, and he based his assumption on the premise that large numbers of Chinese still don't own cars.
The Chinese government doesn't agree with Mr. Wale; the nation's cabinet recently approved a $946 billion subsidy program to get its citizens to buy more fuel-efficient cars. That move indicates that the Chinese government believes car sales are about to fall. If that happens, GM, which has been counting on the joint venture with SAIC Motor Corporation to make up for losses in Europe, could be in real trouble.
Such unrealistic and unfounded optimism from the company's man-on-the-spot is liable to hurt GM's stock rather than help it. It indicates that General Motors is refusing to take economic realities into account in its planning and change its growth policies. General Motors seems headed for a crash in China, and so does its stock value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.