Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Jockeying For Global Pole Position
Last year, the automotive industry experienced one of the most telling geographical shifts in its history when China surpassed the United States as the world’s largest vehicle market. Largely thanks to tax breaks and green-driven incentives, the globe’s most populous nation sold around 13 million vehicles, compared with the 10 million or so sold in America.
China’s highways look to be getting more and more crowded this year. The July numbers show a 17% year-to-year advance, to about 1.05 million units. And through the first seven months of 2010, the 8.2 million vehicles sold are 29% more than last year.
At the same time, the rate of growth does appear to be slowing, considering the year-to-year advance in July, 2009 was 45% and earlier this year, car sales were still increasing as much as 60%. Recent indications suggest that the August tally will likely show further easing.
Despite the slowing pace of growth, Detroit and Japan both still look to China as a bastion of opportunity, especially as global demand elsewhere continues its modest climb from the historically lethargic levels of last year.
And while outsiders fight for space on China’s ever-crowding highways, what about the auto manufacturers within the country’s borders? The nation’s top manufacturers have not sat idly by while foreigners have moved in. No, they continue to build and bolster their lineups, and for many, the goal has broadened to the global stage.
Zhejiang Geely is the latest to make some noise, completing China’s largest acquisition of a foreign car maker. The company paid $1.3 billion in cash and issued a $200 million loan note to Ford Motor (F) for its Volvo division. Volvo has been mired in the red for some time now, but Geely intends to use the brand name to build a luxury vehicle platform in the Chinese market. Geely plans on constructing a production facility in China, which would just about double Volvo’s capacity, with the hope of selling 150,000 vehicles in the country by mid-decade. Meanwhile, it will maintain Volvo operations in Europe to supply worldwide demand.
Geely is not the only company here making moves, and China is not the only country on the auto makers’ radar. Chinese auto giant SAIC had earlier expanded its relationship with General Motors. The two had already partnered to make vans and trucks in China, but now the joint venture looks to produce economically priced vehicles to compete with Tata Motors’ (TTM) Nano in the Indian market, another country experiencing rampant demand.
The Chinese companies are also getting into the electric game. The popularity of hybrid and electric vehicles (EVs) continues to grow internationally. In fact, 2010 may be the year of hybrids and EVs, as environmentally friendly drivers can choose from the likes of GM’s Chevy Volt, the latest Prius from Toyota Motor (TM), Nissan Motor’s (NSANY) Leaf, and Honda Motor’s (HMC) Civic hybrid. Even those looking for something higher up on the price scale can go to their local Tesla Motors (TSLA) dealership and test drive the Roadster. In fact, Tesla’s recent IPO clearly demonstrates its high expectations for the EV market. The Chinese companies are not falling behind. Many, including top manufacturers SAIC and Chery International, have joined together in their research and development of EV components, and numerous EVs have already launched or are on the way this year.
And then there is BYD Auto’s claim at this year’s auto show that it hopes to be the world’s largest car maker by 2025, a title Toyota is unlikely to give up easily. Still, the company has found one very popular believer. Indeed, a division of Warren Buffet’s Berkshire Hathaway (BRKB) owns a 10% stake in BYD.
Meanwhile, back in the states, although the numbers continue to dwindle, there are still some that just want to “Buy American.” Their options are growing, with Tesla stock now on the market and GM likely to be available by yearend.
And then there’s Ford. The one Detroit company left standing after the American industry’s meltdown. The car maker continues to make moves to shore up its finances, and the Volvo sale was no different. Despite the lower-than-anticipated price tag, Ford sold an unprofitable business, garnered over $1 billion in cash, and it expects additional proceeds after finalized purchase price adjustments.
For investors seeking a play in the recovery of the U.S. auto names, Ford is the only option available. But that is not necessarily the only reason a prospective investor may want to consider these shares.
Ford is taking action and generating results. Earnings have improved drastically from the dismal first half of 2009, and the Volvo sale and earlier debt repayment to the United Auto Workers trust fund are just two examples of how the company has bolstered its capital structure.
Not to mention this issue is currently trading in the low teens, compared with the nearly $70-a-share price tag at the start of the decade. Although these shares are no longer the dog they were a year and a half ago, there is still a cloud surrounding the near-term future of the auto industry, as a whole, and, thus, this stock may scare off the more-timid investor.
With China now the world’s largest market and its auto manufacturers looking to be serious players globally, the vehicle industry looks set to get even more congested than it is today. More now than ever, drivers and investors alike need to do their homework before making a purchase.