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American automakers are likely to make gains against their Japanese rivals. Toyota's (NYSE:TM) Lexus brand has been dethroned in the U.S. and the sale of Japanese auto sales in China are being damaged by brewing animosity between China and Japan. These and other factors are brewing a perfect storm for U.S. auto sales growth.

American Cars Claim Luxury Sales

Luxury car makers are starting their end-of-year discounts earlier as they fight to win the sales war of 2012 in the U.S. This is according to the president of Ford (NYSE:F), Mark Fields, who is busy rebuilding the brand.

For example, Bayerische Motoren Werke is offering customers who are leasing their cars an opportunity to buy new models of their cars while being able to skip payment on the cars that they currently own. This move might well be a way to catch up with Daimler, which produces Mercedes-Benz, a brand which trailed BMW sales in 2011. Both BMW and Mercedes-Benz are now ahead of the Lexus, which is produced by Japan's Toyota. The new lead for both these German luxury cars is new, as the Lexus has been the leading brand in the United States for the last 11 years.

In the meantime, Fields is working on rebuilding the Ford Lincoln, the sales of which have fallen 1.5 percent through the third quarter of 2012 in the U.S. During that same period, sales of the Mercedes Benz in the U.S. went up 13 percent; and sales of the BMW rose 4.9 percent in the U.S.

More bad News for Toyota: Recall Scandal

Toyota knew about a defect in its power-window switches as early as 2008. There is speculation that company management was weary of additional recalls after its expensive accelerator pad recalls in 2010. There are questions about whether Toyota delayed action over power-window switches to save face.

In 2009 and 2010 7.43 million Toyota vehicles from around the world were recalled for acceleration defects. In addition to the cost of a recall, Toyota paid a whopping $16.4 million as penalty for not reporting some of the flaws in its vehicle's accelerator pads. A recall was the right thing to do, but it was a huge cost for the firm.

In October Toyota announced another recall, this time based on faulty power-window switches. The company was privy to these problems as early as 2008. The Evidence for Toyota's foreknowledge of this issue surfaced on The U.S. National Highway Traffic Safety Administration's website. It revealed that Toyota's Japanese headquarters received a report that noted an ''unusual smell and ''thermal damage'' in the power-window main switch.

This scandal it might become a serious problem for Toyota if the mainstream media focuses on it. Consumers may resent the company's possible reluctance to take expensive actions for safety.

China Protests Japan: Employee and Customer Riots

Protests across China erupted in response to a long-standing territorial dispute with Japan, leading to lower sales for Japanese products in China. American automakers will likely benefit from this ill-will towards Japan by selling more American cars to the Chinese.

Both China and Japan claim territorial sovereignty over the islands, called Diaoyu in Chinese and Senkaku in Japanese. The islands are thought to sit on substantial fossil fuel reserves and were purchased by a private Japanese buyer. Protests in several Chinese cities and a diplomatic crisis that could continue to damage trade relations between Japan and China.

This animosity has become particularly focused on Japanese cars. Protests prompted widespread shutdowns of manufacturing plants and Japanese-run businesses in China, including car giants Honda (NYSE:HMC) and Toyota. Chinese protesters attacked Japanese businesses, destroying Japanese-made cars, setting fire to Toyota and Honda showrooms, and attacked dealerships of Japan carmakers, including the popular Nissan (OTCPK:NSANY). Aeon stores, also belonging to one of Japan's top car retailers, were also attacked. Honda will still reopen its China-based factories despite the protests, but the closures have made a dent in earnings, according to reports.

Anti-Japanese sentiment was not limited to Japanese automakers. Protesters also ransacked retail outlets, including Fast Retailing, which sells the popular Japanese Uniqlo brand. Estimates show that Fast Retailing sales in China will be down 20 percent due to the protests.

Japanese auto sales in China will probably fare worse than other retailers. Mitsubishi reported that sales dropped 63%. Mazda reported that monthly car deliveries fell 35% to a number below what was shipped after the Tsunami. More data like these are expected to be similarly horrible for Japanese auto sales.

Japanese companies might bounce back from these setbacks, but there no way to know what damage has been done to Chinese views of Japanese autos.

GM and Ford Secure Canadian Labor Agreements

Though U.S. carmakers have had conflicts with labor unions for several years, the outlook for labor relations is improving. Recent negotiations have culminated in several agreements between Canadian Auto Workers (or CAW) and the U.S. automakers Ford and General Motors (NYSE:GM). The labor agreement might extend four-years, avoiding operational friction and massive strikes.

The General Motors agreement ensures that the company will invest close to $700 million to keep its plants in Canada, and will "create or maintain" over a thousand jobs. The agreement will still be ratified by vote by the Canadian workers. Around 5,600 workers from Ontario are part of the agreement, which includes those working in vehicle assembly and engine production.

Ford has also negotiated its own tentative agreement with Canadian workers which provides bonuses and brings in 600 additional jobs, while taking out raises to accommodate the cost of living. The General Motors package matches the Ford deal, which involves lump-sum payments and a ratification bonus instead of raises.

These negotiations are substantial because vehicles that are made in Canada also account for roughly 15 percent of the U.S. automobile sales. They show how Ford and General Motors are capable of negotiating with key stakeholders to secure their futures.

Conclusion

Given today's valuations, there is no reason to favor Japanese automakers:

Ticker

Company

P/E

P/S

P/B

D/E

F

Ford

2.34

0.3

2.33

5.86

GM

General Motors

8.31

0.24

0.9

0.36

HMC

Honda

14.49

0.52

1.01

0.9

TM

Toyota

16.93

0.51

0.92

1.12

Investors looking to gain exposure to carmakers should consider Ford and General Motors. Despite the fact that Ford is highly leveraged and General Motors has recently emerged from bankruptcy, these firms are better bets than Honda and Toyota, which face considerable headwinds while trading at higher valuations.

Source: 2 Strong Auto Stocks To Buy Before 2013