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China woes expected to hit GM the hardest

Melissa Burden
The Detroit News

Slowing car sales and the Chinese stock market crash are expected to hurt the bottom line of Detroit’s automakers. And industry analysts expect General Motors Co. to feel the most pain.

Sales in the world’s largest auto market fell 3.2 percent year-over-year in June, the first decline in more than two years, as China markets began their plunge in mid-month. And although forecasters still expect more cars and trucks to be sold in 2015 than last year, most have scaled back earlier projections.

Sales in the world’s largest auto market fell 3.2 percent year-over-year in June, the first decline in more than two years, as China markets began their plunge in mid-month. And although forecasters still expect more cars and trucks to be sold in 2015 than last year, most have scaled back earlier projections.

At least four industry experts expect GM to reduce growth and earnings targets for China; they say Ford Motor Co. also is expected to feel some effects from price cuts in the region. But GM’s presence and reliance on China sales and revenue is bigger than Ford’s, and GM will feel the hurt more, they say.

Fiat Chrysler Automobiles NV relies far less on China than its crosstown American rivals. In 2014, the automaker claimed just 1 percent of the market. That compares to GM’s 14 percent share, and Ford’s 4.5 percent.

Because of deteriorating market conditions in China, Barclays Capital Inc. analyst Brian A. Johnson on Thursday downgraded his ratings on U.S. autos and auto parts companies to “negative” from “neutral” and downgraded GM stock, which closed Thursday at $30.59, down 84 cents on an overall up market day. He also cut ratings on Delphi Automotive, Lear Corp. and BorgWarner Inc., which each have large exposures in China.

“GM is likely to face the sharpest headwinds within our coverage due to softer volumes and pricedowns,” Johnson wrote in a note to investors Thursday. He also reduced GM’s China equity income by $530 million next year.

Johnson estimates 20 percent of GM’s profits come from China compared to 14 percent for Ford. He expects GM will reduce its China targets. Barclays predicts Chinese auto sales will grow at half the rate GM had planned for earlier this year.

GM reports second-quarter earnings Thursday, and Ford on July 28. A GM spokesman declined to comment on earnings ahead of the release.

When Ford released its first-quarter earnings, it cut its forecast for 2015 industrywide China sales by 500,000 cars and trucks to between 24 million and 26 million. It has also cut production in China as demand for cars has cooled in recent months.

“A key part of the Ford plan is to adjust production to the real demand,” Ford said in a statement. “We don’t adjust for unrelated factors like stock market.”

Tension and economics

On Friday, the China Association of Automobile Manufacturers cut its yearly vehicle sales forecast growth to 3 percent — down from the 7 percent projected in January, according to Bloomberg News. That projection includes trucks and buses and is the slowest growth pace in four years, Bloomberg said.

Lin Huaibin, manager of China light vehicles sales forecast at IHS Automotive, a research firm, said the current sales slowdown in China is due to economics; tensions between automakers and dealerships; and a “payback effect of panic-buying especially in cities that have imposed license plate limits.”

Despite the downturn, IHS predicts 7 percent growth in China sales this year to 19.3 million vehicles.

In January, GM predicted industry growth of 6 percent to 8 percent in China this year, and that it would gain “modest market share.”

Last week, Buckingham Research Group analyst Joseph C. Amaturo cut his stock price estimate on GM to $28 from $37 — as well as on GM’s 2015 and 2016 earnings — partly due to moderating China sales and the recent decline in its markets.

On Thursday, he wrote in a note to investors that he expects GM’s China profits will fall to $1.4 billion this year and to $1 billion in 2016, down from $2.1 billion last year.

Goldman Sachs last month downgraded GM stock to “neutral” from “buy,” and reduced earnings estimates from 2015-17 partly because GM’s guidance for China “looks vulnerable” and because of weaker pricing. It upgraded Ford to “buy” from “neutral” because of its growth outlook for the F-150 and its “easier growth trajectory” in China — where it has a smaller market share and is launching 15 vehicles.

“While the outlook for China has worsened for both companies, Ford is less dependent on China earnings than GM, Ford’s near-term product momentum appears stronger, and Ford has also pared back expectations somewhat, while we believe GM likely needs to cut China guidance,” analyst Patrick Archambault, wrote in a June 23 investors note.

Citi Research analyst Itay Michaeli is less worried about the impact on automakers. In a research note last week, he said GM looked like it “outperformed” the market in China in June, and that if GM’s China income falls 20 percent this year, it would mean just a 4 percent drop in its full-year earnings per share forecast.

“While we, too, are anxious over China, we think GM’s stock is overreacting and maintain our bullish stance,” wrote Michaeli, who rates GM a “buy.”

Barclays’ Johnson wrote that Ford’s double-digit growth expected in Western China “could be a risk,” and that pricing could hurt margins. Citi’s Michaeli also says the slowing sales growth could add risk to Ford profit estimates for the year.

GM touts opportunities

China is GM’s largest sales market. The automaker and joint ventures plan to invest $14 billion there through 2018, adding five assembly and two powertrain facilities.

It sold more than 3.5 million vehicles there last year and its sales are up 4.4 percent to a record 1.72 million through the first half of this year. The company said it will add more new and redesigned vehicles in the second part of the year to “keep up our growth momentum.”

GM North America President and Global Chevrolet leader Alan Batey told reporters late last month that GM is optimistic about sales the rest of the year in China and on Monday, GM CEO Mary Barra told reporters in Detroit she sees opportunity.

“China is an emerging market. It’s a very big market. We have very strong products. We have a strong brand with Buick. We’re continuing to grow Chevrolet and Cadillac,” Barra said.

Ford has sold 543,488 vehicles in China through June this year, flat from a year ago. Last year, Ford sold a record 1.1 million vehicles there.

It launched its Lincoln luxury brand in China in November and plans to introduce 15 vehicles there this year.

“We are enthusiastic about the second half of 2015, as we launch five new products in China, including the new Ford Taurus, the new Ford Everest, the new Ford Explorer, the new Ford Focus and the new Focus ST,” Ford said in a statement.

FCA has not publicly announced changes to its plans to localize vehicle production in China. It plans to ramp up sales through 2018 to 850,000 vehicles — primarily through its Jeep brand. It sold 182,000 vehicles there in 2014.

On Thursday, FCA and the Guangzhou Automobile Group, its Chinese joint-venture partner, announced plans to create a new sales company as it expands SUV production in China. GAC Fiat Chrysler Automobiles Co., the existing joint venture, said it expects to offer a full line of SUVs there by 2018, launching local production of the Jeep Cherokee this year and two new Jeep models by next year.

FCA and GAC also have agreed to localize a Chrysler vehicle, expanding the current passenger car lineup for the Fiat and Chrysler brands.

mburden@detroitnews.com

Staff Writers Michael Martinez and Michael Wayland contributed.