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China’s gasoline-powered car sales in 2023 should amount to roughly 17 million units in 2023, down more than 20% from five years ago.
Bloomberg
No one said the transition to electric vehicles would be easy, and China’s traditional auto makers are finding that out. Their experience shows why
Ford Motor
and
General Motors
are effectively in a Catch-22.
Battery-electric vehicles’ penetration of new car sales in China is set to finish 2023 at roughly 25%, up from about 4% just five years ago. That has helped
Tesla
(ticker: TSLA) and
BYD
(1211.Hong Kong) become two of the world’s most valuable auto makers. The impact on Chinese companies that make mostly gasoline-powered vehicles, of course, hasn’t been as positive.
China’s traditional auto makers earned an operating profit margin of roughly 5% between 2019 and 2022. But profit margins have declined as their core market has given up ground to battery-powered cars. Operating profit margin in 2022 came in at less than 3%, and 2023 profit margins are expected to be about 4% even as total industry sales volume is expected to be at near-record levels.
Profit margins should be rising for car companies when industry volumes are strong. But the bulk of the gains are accruing to EVs. China’s gasoline-powered car sales in 2023 should amount to roughly 17 million units in 2023, down more than 20% from five years ago. Lower volume means unused plant capacity and inefficiencies. It’s showing up in profit margins.
That’s the crux of the problem for Ford (F) and GM (GM). If they don’t invest aggressively in EVs, they risk losing market share and seeing profitability erode. And if they invest in EVs—which both are—there is no guarantee they will win against upstarts such as
Tesla
and
Rivian Automotive
(RIVN). Failing to produce popular EVs also means losing market share and weaker profitability at Ford and GM.
Investors appear to realize this. GM stock trades for less than five times estimated 2024 earnings and Ford stock trades for less than seven times. Both multiples are below recent trading averages and seem to indicate that investors are taking a wait-and-see approach to how things develop in the market.
As easy as it would be to focus on gasoline-powered cars for these legacy auto makers, it would be difficult to ignore the trends. EVs are getting better and cheaper, and are backed by environmental policies around the globe.
The choice for Ford and GM is clear: Invest in EVs and do whatever it takes to make sure their traditional-car customers pick their EVs as more U.S. consumers consider going electric.
Ford shares were nearly flat in Friday trading, while GM shares rose 0.9%. The
S&P 500
and
Dow Jones Industrial Average
are down 1.2% and 0.8%, respectively. Both stocks have traded more with labor developments than EV developments lately. The UAW is now on strike at some facilities after a four-year labor agreement expired Thursday night.
Write to Al Root at [email protected]
Read the full article here