Detroit automakers face 'time of reckoning' in China

Ian Thibodeau
The Detroit News

Detroit's automakers are struggling to sell vehicles and make money in China, the world's largest auto market. But industry leaders say they're making moves to change that.

General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV all have reported overseas losses this year because of new headwinds overseas: Chinese manufacturers are making better vehicles catering to what Chinese consumers want, and the Chinese economy is slowing thanks to deepening trade tensions between the U.S. and Chinese governments.

Detroit's automakers are struggling to sell vehicles and make money in China, the world's largest auto market. But industry leaders say they're making moves to change that.

"It's a time of reckoning for many companies operating in China," said Michael Dunne, CEO ZoZo Go LLC, a Hong Kong-based automotive consultancy. "Until very recently, Detroit automakers and their suppliers had a sensational run in China. Now they've seen 12 months of declining sales. This puts us into a totally new uncharted territory. This is a jolt for everybody, and everyone's working hard to reset expectations."

The shifting economic situation, influenced almost daily by presidential tweets and proclamations from official Chinese outlets, adds uncertainty in a market that since 2007 drove most of the global auto sales growth. The upshot, experts say, is that some companies may soon be forced to decide whether to double-down on their bets in China — or leave entirely.

Problems navigating the changing Chinese market are not universally shared. Such automakers as Volkswagen AG, BMW AG, and Honda Motor Co. have found ways to grow share as the market shrunk this year. That's evidence there's still a way to succeed in China, even if the U.S. automakers haven't yet figured it out. 

After reporting losses in China in the second quarter, leadership at GM, Ford and FCA said they have the pieces in place to be successful in the rapidly changing market even as analysts like Morgan Stanley's Adam Jonas begin to question whether it's worth spending more to find a way to profitability in an increasingly challenging market.

"We believe many foreign auto firms, and in particular some U.S. firms, may be operating in China on borrowed time," Jonas wrote in a May note, even as Ford, FCA and GM plan to launch new models focused on the luxury they say caters to Chinese consumers — and would drive profits.

There's still time, according to Dunne and Alan Deardorff, professor of public policy and economics at the University of Michigan. Dunne said U.S. automakers will have to drive brand recognition and distance themselves from China's domestic automakers in order to succeed. The Detroit Three will have to push top-end luxury brands and products to drive sales as Chinese manufacturers enter the market with bargain cars.

"You have to move up or move out," Dunne said. "They need to position themselves as high as possible."

More:China will be the world’s used car salesman

More:Howes: In second decade, FCA prepares to shift into higher gear

That's the plan. Ford lost less money in the second quarter than it had a year ago, but officials said the automaker is taking hits as it readies its Chinese lineup for new SUVs and electric vehicles. The automaker also has leaned on Lincoln in China for years. Its sales in China fell 27% through the first six months of 2019 after Ford spent most of 2018 restructuring its leadership in China and adapting its plan for the future.

"The new headwinds, obviously they're not convenient, but that does not change our plan," Anning Chen, president and CEO of Ford China, told The Detroit News. "As long as we speak to the fundamentals of our business, we'll stick to our plan."

At its core, Ford's China 2.0 plan would speed up development times, roll out 30 new Ford and Lincoln vehicles over the next three years and lean into its joint-venture partnerships to tap directly into what Chinese consumers want in their vehicles. The economic slowdown that comes as a direct result of the Chinese government's trade war with President Donald Trump is an unanticipated challenge, but Ford feels ready to brave it.

"This is still a very large market," Chen said. "We're very clear about the challenges ahead of us."

GM’s partner company in China, meantime, has said it's anticipating its first-ever annual sales drop. GM leadership expected a volatile second quarter. The automaker’s General Motors International, GMI, segment lost $48 million in the quarter, caused by a $400 million decline in China from a record second quarter in 2018. GM said the decline was partially offset by better performance outside of China. GM said it cut its China inventory levels by 10% in the second quarter and will continue to watch the volatility and remain disciplined on inventory.

“When you look at it over the longer term, we have a very strong franchise in China,” CEO Mary Barra said in early August. “We have three strong global brands with Cadillac, Buick and Chevrolet. We think over the long term there are significant opportunities for growth.”

GM plans to continue to push into the Chinese market with its premium and luxury brands. The vehicle launches, Barra told investors, will put GM China in a good position because the company is seeing customer preferences shift to SUVs and crossovers. And because the market is competitive, she added, “having an all-new model will be significant in the marketplace.”

Meantime, FCA cut its sales guidance for the year given the slowing Chinese market. CEO Mike Manley predicted pricing pressures in China will continue into the third quarter as the industry works to comply with stricter vehicle emissions standards expected to go into effect next year, though he believes the changes the company has made in China will improve results from last year.

"In China, we streamlined the structure of our joint venture operations and put new leadership in charge to improve the competitiveness of our business there," Manley said on the second-quarter earnings call. "And our efforts to bring down cost and improve quality are making progress, and have seen signs of improvement and obviously, we still have some way to go. But I think you can see from the year-over-year performance that they are having an effect."

The sheer size of the Chinese market is enough to keep the automakers fighting for market share amid all the headwinds, Deardorff said. Sales in China are off about 15% year-to-date, according to Dunne. Automakers moved 28 million vehicles there in 2018. If the sales decline continues at that rate, Chinese auto factories could have a capacity overhang of possibly tens of millions of vehicles — a costly problem to have.

And while Chinese consumers will continue to spend less in the near-term amid the trade war, Dunne said there's no clear sign yet that say any of the Detroit Three still can't find success in the increasingly competitive country.

"Everyone has a shot to succeed in China," he said. "There's nothing holding them back. There's no reason why Ford, GM or FCA can't adjust or thrive in the Chinese market."

Twitter: @Ian_Thibodeau

Staff writers Kalea Hall and Breana Noble contributed.