Shares of General Motors and Ford Motor traded lower on Wednesday after Morgan Stanley downgraded the overall U.S. auto sector, citing worries that Western automakers might struggle in the intensifying competition with Chinese rivals.
General Motors was downgraded to “underweight” from “equal weight,” and its shares fell 5.4 percentage points, to $45.50. Ford went to “equal weight” from “overweight,” with its shares dropping more than 4 percentage points, to $10.43.
Electric vehicle (EV) maker Rivian Automotive and Canadian parts manufacturer Magna International were both downgraded to “equal weight” from “overweight.” Shares of Rivian were down 5.7 percentage points while Magna’s were off 4.7 percentage points.
Investors sold after Morgan Stanley analysts warned about what they called the “China butterfly effect,” a metaphor suggesting that even small surges in China’s industrial production capacity could have significant ripple effects across the global market.
“China capacity ‘butterfly’ has emerged and is flapping its wings,” the analysts wrote in a note viewed by The Epoch Times, noting that China now produces 9 million more cars than its domestic market can absorb.
This oversupply of Chinese cars will be “upsetting the competitive balance in the West,” according to the analysis. Even if those units don’t enter the U.S. market, it warned, the “‘fungibility’ of lost share and profit by key U.S. players adds pressure here at home.”
Shifting its outlook, Morgan Stanley downgraded the U.S. auto industry to “in-line” from “attractive,” based on “a combination of international, domestic, and strategic factors that we believe may not be fully appreciated by investors.”
The investment bank further highlighted the “capital intensity” Western automakers might face as they compete with Chinese manufacturers, especially when it comes to developing artificial intelligence (AI) technology for the next generation of cars.
“The AI/data theme for autos still gets us excited, but to play in the game, players need to spend tens of billions,” the analysts said. “We question the financial ability of most auto companies to create proprietary AI models to augment their operations.”
At the same time, Morgan Stanley upgraded car retailers and dealerships, which are largely insulated from Chinese competition, and generate recurring profits from servicing vehicles and selling parts. Shares of Penske Automotive, for example, were up 0.5 percentage points, Asbury Automotive gained 2 percentage points, and Sonic Automotive added 0.3 percentage points.
The revision reflects growing concerns over the influx of Chinese-made cars, particularly EVs, into international markets.
Bolstered in part by massive government subsidies, Chinese manufacturers have rapidly emerged as major players in the EV industry, accounting for 60 percent of worldwide EV sales and almost one in five EVs sold in Europe last year.
Both Washington and Brussels have hiked tariffs in response to China’s excess production of low-price EVs.
The European Union announced plans in July to levy import duties of up to 36 percent for Chinese EV imports—on top of its standard 10 percent car tariff, while the Biden administration last month quadrupled the existing tariff, from 25 percent to 100 percent.
Republican presidential candidate Donald Trump has also pledged to implement a tariff as high as 200 percent on Chinese EVs assembled in plants located in Mexico, which he said would make them “unsellable” in the United States.
