Howes: Could change in China prod rethink by Detroit autos?
Before the global financial meltdown accelerated General Motors Corp.’s decades-long slide to bankruptcy, its leaders bet the future on a rich United States and a growing China. Their successors obliged, booking record profits on pickups and SUVs at home and making China the No. 1 market for the Detroit automaker.
But as trade and economic tensions between the United States and China escalate, and as domestic Chinese automakers improve their products and claim bigger shares of their own market, analysts say it soon could be time for GM and its American rivals to reassess their collective footprint in the world’s largest auto market — if they aren't already.
The result would be a seismic shift akin to GM's decision in 2017 to sell and bolt Europe after 90 years there. In a note to investors Thursday, Morgan Stanley & Co. said it sees “a window of opportunity” for U.S. automakers “to preserve what remains in China or to avoid doubling down where they are unlikely to win.”
The reasoning: cars and trucks are fast becoming “the world’s most sophisticated and sensitive” internet-of-things networks, with all that implies for safeguarding data privacy, trade secrets and security. Second, Chinese regulators and environmental policy-makers are expected to speed internal combustion engines to obsolescence more quickly than other major markets.
And China’s central planners will anoint a select group of domestic automakers “national champions” in the quest to electrify the country’s growing vehicle fleet, to claim a commanding position in the Auto 2.0 segments of mobility, autonomy and electrification, and to sharply reduce the nation's dependence on imported oil as a national security imperative.
“With this framework in mind," Morgan Stanley wrote, "we believe many foreign auto firms, and in particular some U.S. firms, may be operating on borrowed time.”
Now, there are all sorts of reasons the automakers won't agree, starting with the fact that a slower-growing Chinese economy still is notching faster economic and sales growth than the mature U.S. and European markets and the volatile South American market. And if there is one thing automakers need to drive their top and bottom lines, it's growth.
That's why recent sales trends for American automakers in China are so troubling, says ZoZo Go LLC, a Hong Kong-based auto consultancy: "The reality is that the Detroit Three are already in trouble — even before any direct fallout from trade tensions. Just look at the sales numbers in the first quarter of 2019."
Namely, GM sales dropped 18%; Ford Motor Co. is down 36%; and Fiat Chrysler Automobiles NV is down 41%. At this rate, ZoZo Go says, "GM, Ford and Chrysler's combined sales will fall below 4 million (vehicles) in 2019. That would be almost 2 million fewer sales than their peak in 2016."
It's not improving materially, either, likely a combination of Sino-American trade tensions and changing market dynamics. An April rebound did not come: the market slumped 18%, but GM-SAIC sales "tumbled a stunning 27%. Early May's market readings indicate even more gloom, with further double-digit declines" expected.
Driving the shift is a reordering of the Chinese industry that increasingly favors such foreign heavyweights as Volkswagen, Toyota and Honda, as well as such domestic producers as Geely. Foreign mass-market brands like Ford, Chevrolet, Peugeot and Hyundai are "getting squeezed from below by Chinese brands."
China's top private automaker, Geely, "is selling more than twice as many vehicles as FCA and Ford combined," says ZoZo Go. "This is a tidal shift considering as recently as 2016 — a mere three years ago — Geely sold only half that of FCA and Ford combined. And Great Wall, the 'Jeep of China,' now outsells Jeep 10-to-1 in China's SUV market."
How is that possible for the global auto industry's most iconic American brand, Jeep? Or Ford, that was global under founder Henry Ford, long before the likes of Volkswagen AG or Toyota Motor Corp. existed? One answer, familiar to folks who know the arc of Detroit's history in foreign markets, is that out of sight really can mean out of the product mind.
Instead, the inventor of the iconic Explorer SUV, or the smaller Escape, failed to detect surging demand in China for a three-row compact SUV. That's one contributing factor behind the Blue Oval's precipitous sales decline last year that "shocked" senior executives in Dearborn, retiring CFO Bob Shanks told a conference this week organized by Goldman Sachs.
Even Tesla Inc., the Silicon Valley electric-car maker, could be vulnerable in China, a cornerstone of its global plan to become consistently profitable through production and sales of the Model 3 compact there. But that strategy could be undermined by trade and geopolitical risks.
"Relative to many other players in the region, GM China is still in relatively good health," Morgan Stanley says, "printing record high profits in late 2018 even as the broader China market declined. A confluence of geopolitical and technological factors ... may make a separation or spin an option GM might consider."
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him at 3 p.m. and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.