Over a decade ago, one intriguing catalyst for Ford Motor Company (NYSE: F) investors was its potential growth in China. It was deemed a rapidly growing market that was intended to become a second pillar of financial results, standing next to North America.
My, how things change. Fast-forward to today, and Ford, as well as crosstown rival General Motors (NYSE: GM), have a big problem in China. Is it time for the automaker to take some extreme measures? Is it time to cut losses and flee? Let's dig in.
The 10,000-foot view
Entering China brought a long list of challenges for Detroit automakers, starting with the simple, such as understanding consumer preferences that were substantially different from those in the West. Sedans and other smaller vehicle segments were popular while massive, highly profitable trucks were not. Then you add the complexity that Detroit automakers were originally forced to create joint ventures with local Chinese automakers to enter the market, and the challenges mounted.
Ford's sales in China have been declining since 2016, but as the company has changed its reporting, let's use General Motors as a more specific example. 2023 was the first year since 2009 that GM sold more vehicles in the U.S. than in China. If you zero in on GM's largest joint venture in China, SAIC-GM, annual wholesale deliveries dropped to about 1 million in 2023 from a record 2 million in 2017. It's getting worse: Year-to-date volume has plunged 55% through July.
Detroit automakers have to deal with different consumer preferences, a lack of truck sales that bring home the bacon, and complex joint ventures. It can't get worse, right?
Wrong.
Enter electric vehicles
If investors asked if it could possibly get worse, electric vehicles (EVs) added another challenge. The Chinese government heavily subsidized China's automakers producing EVs, and it's causing waves across the global automotive industry.
It's forcing Europe to slap large tariffs on Chinese EVs, with the U.S. and others likely to follow. That's because Chinese EVs are incredibly well-built, the battery technology is advanced, they're very affordable, and the vast majority of the world isn't ready to compete.
It gets even worse. Not only does Ford, and to an extent GM, struggle to compete with Chinese EV products, China's EV market is years ahead of that of the United States. In fact, China's share of EVs among light vehicles increased 15 percentage points from the prior year to top 50% for the first time in July.
That's right -- Detroit automakers need tariffs to protect their home turf from Chinese EVs, so imagining them competing in an EV market years ahead of the West without beneficial tariffs, where half the light vehicle market sales are EVs, is daunting to say the least.
What now?
One could write an entire book on what Ford and GM, among others, should do in China, but Bank of America analyst John Murphy, managed to sum it up nicely: "I think you have to see the [Detroit Three] exit China as soon as they possibly can," Murphy said at his annual "Car Wars" presentation.
That would be a costly bullet to bite, certainly. There are other options; Ford, for instance, has begun to export vehicles produced in China to other markets. Factories with a focus on popular segments, or perhaps more profitable luxury segments, could continue to fight for a more lucrative piece of the pie.
For investors, however, it's important to note that Ford, along with other Detroit automakers, has a big problem in China. It's no longer poised to be the second pillar of profits that it was once hoped to be. That changes the company's investing thesis, and the company's plans in the near term in China should be something to dig into further and not taken lightly.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
1 of Ford's Biggest Problems Is About to Get Tougher. Is It Time to Worry? was originally published by The Motley Fool