3 Important Markets for These 3 Big Auto Companies

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Ford (NYSE: F), General Motors (NYSE: GM), and Toyota (NYSE: TM) are all battling to become the top auto manufacturer in the world. Toyota retook the title from GM this summer, but a recent turf war between China and Japan shut down the fastest growing market for Toyota and is shifting the balance back toward GM. Meanwhile, Ford is focused (no pun intended) on capitalizing on the economic recovery in the United States and cutting its losses in the dismal European business environment.

In order for any one of these companies to become the leading car manufacturer, it’s important for it to find success in all three of these markets – the United States, Europe, and China. Let’s take a closer look at these three markets, and determine who is leading the industry in each of them.

United States

The U.S. auto industry is showing signs of getting back on track with auto sales up 11% last month from a year ago. Low interest rates encourage consumers to buy new cars as the economy continues to recover.

Ford

Despite posting little growth (0.4%) in terms of unit sales, Ford posted record profits from North American operations last quarter. It did so by moving consumers from low-end models to high-end models with higher margins. Its $2.3 billion operating income from the past quarter is a 44% increase from the same period a year ago. Ford has posted operating income over $2 billion and an operating margin over 10% every quarter this year. Additionally, Ford saw great success with the launch of its C-Max hybrid car, as sales overtook that of Toyota’s low-end Prius V model in its first full month of sales.

GM

Where Ford posted record profits in North America, GM actually saw profits shrink to $1.8 billion last quarter, down 22% from the third quarter last year. GM is showing a reverse pattern from Ford, as sales of high-end Cadillac models are down, and low-end Chevrolets are up. Thus, despite increasing unit sales nearly 5% from a year ago, profits are shrinking. It could boost fourth quarter profits by commanding higher pricing on its non-luxury car models.

Toyota

Toyota recovered nicely from the natural disasters that shut down several of its factories last year. The company reported unit sales increased nearly 16% in October compared to last year versus analysts’ expectations of 26% growth. Its Prius line leads the company in sales growth with an increase of 60% in sales for the product line as a whole. Hybrid vehicles are the fastest growing segment of the auto industry, with year-over-year growth of 72%. Strong competition from both Ford and GM may continue to cut into Toyota’s share in the hybrid-car market.

Winner: Ford

 

Europe

The European debt crisis has wreaked havoc on auto manufacturers over the last two years. Auto sales are down 7.3% year-to-date and are at their lowest levels since 1993.

Ford

Ford plans to cut 6,200 employees in Europe in the next two years. This includes the imminent shut down of a plant in Belgium that will cost the company $1.1 billion. Ford estimates it will improve profit by $750 million annually, which means Ford believes it will be at least a year and a half before European operations are profitable again. In the most recent quarter, Ford reported losses of $467 million in the region and expects annual losses to top $1.5 billion this year and next.

GM

GM seems much more hesitant than Ford to shut down operations in Europe. On one hand, the company is hinting that it would like to shut down some unprofitable facilities. On the other, it seems to want to maintain a presence in Europe with a new line of credit and talks of a joint venture with Peugeot. Both companies are currently losing money in Europe, so I believe this is one case where it makes more sense to cut and run.

Toyota

Despite the problems the auto industry faces in Europe, Toyota actually saw an increase in sales across the board. Sales rose 13% last quarter from the same period a year ago. Its Yaris Hybrid model led the way, as a more economic and fuel efficient choice for auto buyers. The success allowed Toyota to report a modest $44 million profit in Europe in its first quarter, compared to the hundreds of millions Ford and GM are losing every quarter in the region.

Winner: Toyota

 

China

A territorial dispute between China and Japan has led to China’s own “Buy American” campaign. The boycott against Japanese goods opens the market up to GM and Ford to capture market share, and they haven’t disappointed.

Ford

Ford leads the way in its efforts to capture the ground lost by Toyota. Sales grew 48% in October compared to last year. The compact Focus has been very popular in China, accounting for over 50% of all auto sales from the manufacturer. The company also plans to release two new SUV models catered toward Chinese drivers in the next few months. The ability of Ford to capitalize on the opportunity presented by the Japanese boycott is, in my opinion, quite astounding. However, the company still has a long way to go in order to compete with GM.

GM

Where Ford grew its market share by the highest percentage, GM actually sold about 31,000 more units last month versus October of last year. (Ford only sold about 20,000 more.) The increase represents 14% growth year-over-year, as GM continues to improve its stronghold in the Chinese auto market. GM actually sells more cars in China now than in the United States. If the company can maintain its dominance in a market that’s expected to grow 30% next year, it could make up for weakness in other areas vis a vis Europe.

Toyota

Naturally, Toyota is falling fast with consumers’ hesitancy to buy anything made in Japan. The company, along with other Japanese manufacturers, shut down its facilities in China this summer after two factories were shut down by worker strikes. Sales have been cut in half compared to last year. While the boycott is likely temporary, it’s unclear just how temporary. Even when production starts back up, it’s unlikely production will return to full capacity with lingering anti-Japanese sentiment from consumers.

Winner: GM

 

So there you have it – three markets, three companies, three winners. If an investor can only pick one company, I would choose Ford. The U.S. market appears to be vitally important for a successful car company, and while all three companies are performing well in the market’s recovery, Ford has been just that much better in the States. Additionally, the prolonged economic woes in Europe make me believe Ford is being smart and aggressive in its decision to decrease production facilities in the region. Finally, while China is growing quickly, and is an important market to capture, it stands on shaky economic footing. Therefore, if you invest in only one car company, make it Ford.

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adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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