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Automakers Battle China Woes: F, GM and Others in Focus

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Automobile sales in China, the biggest global auto market, have been declining in recent times. Vehicle sales in Chinese mainland declined for the second straight month in August due to economic malaise and the ongoing trade spat with Washington. According to data provided by China Association of Automobile Manufacturers (CAAM), in August, auto sales in China fell 3.8% year over year to 2.1 million. In July, sales had declined 4% while in June, sales rose 4.8%.

According to CAAM, uncertainty with regard to the economic situation in China led people to tighten their purse strings in the last couple of months, hitting global auto leaders such as General Motors Company (GM - Free Report) and Volkswagen AG (VLKAY - Free Report) badly. Added to this, high gasoline prices and a weak stock market put a lid on demand for popular sports utility vehicles (SUVs), which has been the driving force behind auto market’s recent growth. This prompted people to look for comparatively cheaper and more fuel-efficient vehicles.

In August, SUV sales declined 4.7% to 737,000 units while sales of sedans fell 3.4% to 901,000. Also, the measures introduced by Chinese authorities to tighten bank lending to control rising debts dampened demand in the auto industry. Moreover on the international front, the trade war against the United States and consequent imposition of retaliatory tariffs by China have resulted in pricing uncertainties, keeping shoppers away from the showrooms.

Automakers’ China Impediments

China – with its huge market – holds immense appeal to automakers across the globe. Waning demand is thus a concern for automakers zeroing in on China to raise revenues and making huge investment in the country. China’s retaliatory action to impose 25% import tariff on vehicles made in the United States has badly hit automakers such as BMW AG (BAMXF - Free Report) , which imports its SUV models from its factory in South Carolina. However, the vehicles sold by American automakers in China are mostly manufactured in the country.

The second biggest U.S. automaker Ford Motor Company (F - Free Report) reported a 36% drop in China sales for August. Recently, the automaker cancelled its plans to import a new crossover model from a plant in China as the car maker felt that importing vehicles from China to the United States may not be profitable due to high tariffs. In the second quarter, sales of General Motors China sales growth declined to 0.7% due to softening of the market.

Conclusion

Despite the regulatory hurdles and the imminent clampdown on overcapacity in the auto industry, it’s tough for automakers across the globe to disassociate China from their scheme of things.

Beijing’s plan to roll out a multibillion-dollar electric vehicle market cannot be just overlooked. Again, in terms of profitability, gasoline-powered models are the frontrunner. Here again the gigantic Chinese market is tempting.

Among the stocks discussed above, BMW and Volkswagen carry a Zacks Rank #3 (Hold). General Motors and Ford carry a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BMW, Ford, Volkswagen and General Motors have an expected long-term growth rate of 4.5%, 5.3%, 5.9% and 8.2% respectively.

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