Analyst revises Ford, GM, Rivian stock price targets on China 'butterfly effect'

Edward Norton Lorenz saw the connection.

Lorenz, founding father of the branch of mathematics which is commonly is termed brand new chaos theory, believed that when a butterfly flutters its wings in a single element of the sphere, it is able to possibly eventually lead to a hurricane in every other.

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The theory may sound a touch funky for day to day people, but analysts see it playing out within the auto sector. A butterfly flapping its wings in China is blowing a mighty wind through carmakers on the alternative side of the globe.

As of this year, China is the sphere's largest market both when it involves automobile sales and ownership, and that growth is closely tied to the us's economic development and the upward thrust of the middle class.

Chinese auto exports have increased from roughly 1,000,000 to two million between 2020 and 2021 to reach almost 5 million last year, in accordance with Statista, which cited data from the China Association of Automobile Manufacturers.

In 2023, China overtook Japan as the sphere's largest car exporter, and the increased export numbers contributed to the growing demand for electric cars, the BBC reported.

Elon Musk's Tesla (TSLA) has been jockeying with China's BYD (BYDDY) for the crown as the pinnacle electric-vehicle maker.

BYD, incidentally, saw its 9 millionth new energy vehicle model roll off the production line on Sept. 25. The company produced its most contemporary 1,000,000 vehicles in less than three months, and has launched three models in Kenya.

Analysts take tough have a look into Ford, GM, Rivian

Meanwhile, the U.S. Commerce Department proposed to ban key Chinese software and hardware in connected vehicles on American roads as a consequence of national security concerns. This sort of move would effectively bar Chinese cars and trucks from the U.S. market, Reuters reported on Sept. 23.

The regulations would also force American and other major automakers in years in advance to place off key Chinese software and hardware from vehicles within the U.S.

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A Commerce Department official told Reuters that General Motors (GM) and Ford (F) would should stop importing vehicles to the U.S. from China lower than the proposed rule.

GM sells the Buick Envision and Ford sells the Lincoln Nautilus — both assembled in China — within the U.S. market. Inside the first six months of 2024, GM sold about 22,000 Envisions and Ford sold 17,five hundred Nautilus SUVs within the U.S.

In response, China urged the U.S. to forestall “unreasonable suppression” of its companies, with a Commerce Ministry official saying “the U.S. move has no factual basis, violates the principles of market economy and fair competition, and is a customary protectionist approach.”

Analysts at Morgan Stanley have been tracking the Chinese butterfly's movements and issued a research report adjusting the value targets of some U.S. car marketers.

"The China capacity ‘butterfly’ has emerged and is flapping its wings." the investment firm said in a note to investors. "China produces 9 million more cars than it buys, upsetting the competitive balance within the West."

Among other actions, Morgan Stanley downgraded Ford to equal weight from overweight, while cutting its price target on the stock to $12 from $16.

Firm: 'Tariffs will work for a bit bit but now not for long'

The firm dropped General Motors to underweight from equal weight and slashed the automaker’s price target to $Forty two from $Forty seven. And it downgraded electric-vehicle maker Rivian (RIVN) to equal weight from overweight and cut the value target to $13 from $16.

“[We] downgrade legacy OEMs and make a ramification suppliers who're more at risk of increased China competition (export markets and domestically) and [the] resulting share loss, passing through peak earnings, regulatory compliance risk, and increased calls on cash to remain relevant" within the stepped forward-driver-assistance market, Morgan Stanley said.

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Conversely, the firm said it change into upgrading the franchise-dealer complex, which within the auto industry value chain is most levered to stronger U.S. states and the high end consumer with limited exposure to the Detroit Big Three.

China accounted for 29% of global auto sales in 2023 and 32% of production, the firm said, and "we estimate well over Forty% of global auto capacity (China at approx. 50% capacity utilization)."

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"Tariffs will work for a bit bit but now not for long, and there's commonly retaliation and indirect pressure," Morgan Stanley said. "China-made EVs continue to expand into export markets, rivaling global peers with superior affordability, variety and (more and more) quality while competition in domestic markets has also eaten into Western legacy [original-equipment-manufacturer] share."

At a high level, the firm said its downgrade change into driven by a combination of international, domestic and strategic factors that "we believe is most definitely now not fully appreciated by investors."

"Even if these units do not finally find yourself without delay on US shores, the 'fungibility' of lost share and profit by key US players adds pressure here at home," Morgan Stanley said.

Capital spending is falling at the margin, but OEMs struggle with recently added EV capacity, potentially noncompetitive costs and unsure demand.

Stock buybacks "have worked this year (GM best-performing OEM year-to this point), but we believe these will eventually end," the firm said.

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