These Top Stocks Have a Big China Problem to Solve

Some foreign automakers, like General Motors (NYSE: GM), were early to the auto retail game in China, and some were slower to enter, such as Ford Motor Company (NYSE: F). But both find themselves with big problems now.

China was once viewed as the holy grail for auto sales growth, with its booming middle class and luxury vehicle market. That has almost entirely reversed over the past decade.

Now, foreign automakers are struggling to compete with China's electric vehicle demand and expectations, and profits are plummeting -- in some cases, losses are mounting. Through all the rapid changes in the Chinese market, Ford was an early leader in an intriguing solution.

Image source: Getty Images.

Enter China to ... export?

China's automotive market has evolved so rapidly and so thoroughly that it's requiring massive strategic shifts from Ford. Initially, China was a huge juicy sales target for the folks at the Blue Oval. Now that strategy has turned into treating the market as a low-cost export hub, as well as a region in which to improve its electric vehicle (EV) development and costs by studying Chinese competitors.

For investors asking why, the following numbers will speak loudly. As recently as 2021, the industry average gross profit per vehicle, for passenger-vehicle makers in China, checked in at about $3,025, according to the China Passenger Car Association. By last year, that figure had plummeted to $1,873. Because of that plunging profitability, investors need to understand where companies stand, because it affects GM's nearly 2 million China sales more than Ford's, which are a fraction of that.

While Ford's strategy in China is still evolving, investors now have a firm grasp on what happens next. The biggest factor might be Ford's goal of matching China's cost structure for EVs by 2027, through analyzing domestic supply chains and manufacturing processes. Indirectly, this will likely lead to smaller EVs and reduce the need for a larger, heavier, and more expensive battery.

If investors blinked, they may have missed how quickly the situation in China has changed. As recently as last year, Volkswagen Group highlighted its "In China, For China"-themed strategy, which has already reversed to Volkswagen admitting it will be making cars in China to serve the world. Ford was an early leader in exporting vehicles from China, but others -- including GM, Tesla, Volvo, BMW, Nissan, and Mazda -- are all using the strategy to some degree.

What it all means for auto stocks

For investors, especially in Detroit automakers, there are a couple of takeaways here. First, China is highly unlikely to become a second pillar of profits standing next to the lucrative North America market, as was envisioned.

Second, and perhaps more importantly to long-term investors, is that this emphasizes a culture change in Detroit automakers from decades ago, when similar disruptions would cause years of pain. Ford and GM have come a long way from the arrogant days of the distant past and are now more forward-looking and quicker to adapt. For long-term investors, this culture change and evolving mindset is worth noting in your investment thesis.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft and General Motors. The Motley Fool has a disclosure policy.