Earlier this week, both Ford (F) and General Motors (GM) reported strong sales growth in China in October. Ford reported a 48% gain to 60,518 vehicles, while GM recorded a 14% gain to 251,812 vehicles to bolster its #1 position in China. Given that China's economy has shown very clear signs of slowing over the past year, these are impressive growth rates in what is quickly becoming the world's largest auto market. Overall sales of passenger cars were up 11.7% in China for the month of October.
Both companies are benefiting tremendously from a dispute between China and Japan over the territorial status of the Senkaku (or Diaoyu) Islands. Many Chinese consumers have reacted to these developments by shunning Japanese products, including cars. Each of the three largest Japanese automakers have reported dramatic sales declines in China since the beginning of the dispute. For last month, Toyota (TM) reported sales down 44.1% in China, Honda (HMC) reported China sales down 53.5%, and Nissan (NSANF.PK) reported sales in China down 40.7%. All three reported similar declines in September. Considering that the three were on pace to sell over 3 million vehicles combined on an annual basis, a significant portion of the Chinese market is now up for grabs.
China is very important to both Ford and GM, because both companies are losing over $1 billion annually in Europe and have identified structural problems in that market. There are plans in place at both automakers to return to profitability in Europe, but it will be a long trek to get there. Moreover, both Ford and GM are experiencing record profitability in North America, which leads some observers to wonder whether there is any profit growth left there. For Ford in particular, the year-to-date pretax margin of 11.2% in North America exceeds the company's stated target of 10%. China is thus likely to represent a substantial portion of future growth for Ford and GM.
I think Ford will turn out to be the biggest beneficiary of the recent consumer backlash against Japanese products. Ford has always been a relatively small player in China (as opposed to GM, which is the market leader). But Ford is in the midst of a plan to double Chinese production capacity to 1.2 million vehicles by 2015 in order to capitalize on growth there. It would be challenging in ordinary circumstances to double sales in three years, but Ford has really seized this opportunity to take market share from Toyota, Honda, and Nissan.
At present, Ford's China presence is heavily oriented around the Focus (which made up nearly half of total China volume through September). This is clearly holding back the brand's overall appeal. Over the next few years, Ford will be entering a variety of new segments in China, which should lead to broader brand awareness and customer consideration. With most analysts expecting a slow recovery in China for the Japanese automakers, Ford has the ability to fill the void and create a better foundation for future growth after new products arrive, beginning next year.
By contrast, for GM, I view this episode as more of a temporary boost. GM already has great brands in China, particularly with Buick and Chevrolet, and it's not clear that the company could sustain higher market share over the long term. Eventually Chinese buyers will begin to consider Japanese vehicles again, and the Japanese automakers are likely to offer big incentives to bring customers back, given the strategic importance of the Chinese market. I therefore expect any GM market share gains to gradually bleed away over the next few years. Nevertheless, I think that continued strong results in China will benefit both Ford and GM, and I see corresponding upside for shares of both companies.
Additional disclosure: I have written $27 covered calls against my position in GM.