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Asian Automakers Are in the Driver’s Seat

Companies / Sector Analysis Jan 28, 2010 - 03:30 AM GMT

By: Tony_Sagami

Companies

Best Financial Markets Analysis ArticleThe funeral list of industries that have dared to compete against low-cost Asian competitors is long and getting longer. Just ask anybody in the textile, furniture, footwear, electronics, steel, clothing, or TV industry.

You’ll be able to add the automobile business to that list in the near future.


According to automaker watchdog Autodata Corp., Asian automakers now own 47.4% of the global auto market while the General Motors, Ford, and Chrysler have seen their market share shrink to 44.9%.

To put that in historical perspective, the Asian automakers only had 18% of the car market and the Big Three American carmakers hogged more than 75% of the market in 1980.

The Big Three Detroit automakers made mistake after mistake. The first stumble was their reliance on big gas-guzzling sedans whose sales were crushed from the oil crisis of the 1970’s and then again when $4 a gallon gas ruined the American love affair with 2-ton SUVs and full-size trucks.

The Big Three got a temporary reprieve from the Obama administration in the form of multi-billion taxpayer bailouts and Cash for Clunkers tax incentives … but those short-term Band-Aid fixes won’t change the underlying problem that the cost of building cars in Asia is simply much, much lower.

The Big Three sees the handwriting on the wall and that is one of the reasons they are so eagerly trying to convert themselves into Asia-centric sales companies. General Motors, for example, bragged last week that it expects to sell 2 million vehicles in China in 2010. GM did sell 1.83 million cars in China last year, making it the largest foreign car company in China.

That’s a nice goal, but they won’t make it. First of all, the Chinese government cut the sales tax on cars last year from 10% to 5% along with $732 million of their own version of Cash for Clunkers tax incentives will soon expire.

U.S. automakers can't keep up with the Asians in developing fuel-efficient hybrid and electric cars.
U.S. automakers can’t keep up with the Asians in developing fuel-efficient hybrid and electric cars.

More importantly, the U.S. automakers are woefully behind the Asians on developing the next generation of green, fuel-efficient hybrid and electric cars. The reason is that American automakers are more driven by government policy than consumer needs.

The Obama administration and the Department of Energy have set aside $30 billion of stimulus money for green energy programs, tax credits, and grants. Plus, the looming federal mandate to increase fleet fuel efficiency to an average of 35 miles per gallon by 2016.

The Asian carmakers, by contrast are way ahead technologically and in sales.

arrow Asian Automakers Are in the Driver’s Seat  The Toyota Prius is the best selling hybrid in the world by a wide margin and is kicking the stuffing out of our Big Three. Toyota expects to sell 180,000 of the 50-mph Prius.

Toyota (NYSE:TM)

Honda (NYSE:HMC)

BYD Corporation (Hong Kong: 1211.HK)

Nissan Motors (OTC:NSANY.PK)

Tata Motors (NYSE:TTM)

Hyundai (Korea:5380.KS)

arrow Asian Automakers Are in the Driver’s Seat  Business is so good at Chinese carmaker BYD Corporation that it just raised its 2010 sales forecasts from 700,000 to 800,000 as it prepares to roll out its first ALL electric car, the E6. BYD’s F3 hybrid sedan was the best-selling car in China in the first 11 months of this year.

arrow Asian Automakers Are in the Driver’s Seat  BYD is building two new factories, one in the central Chinese city of Changsha and in Xian, the home of the terra cotta warriors. For subscribers to my Asia Stock Alert, you may remember the Chinese government’s Go West priority and the prosperous impact on Xian. This new plant is just another reason why I am so optimistic about the three Xian-based companies that we own. Warren Buffet, by the way, owns 10% of BYD.

arrow Asian Automakers Are in the Driver’s Seat  Honda has a lineup of fantastic hybrids: Honda Insight, Accord Hybrid, Civic Hybrid, CR-Z Hybrid.

arrow Asian Automakers Are in the Driver’s Seat  Should you invest in an Asian car maker? The quick answer is that I think you could do well with any one of them over the long-term, particularly Toyota, which is the one company that is doing well all over Asia. Wherever I go in Asia — Jakarta, Bangkok, Tokyo, Beijing, Singapore, Guangzhou, Bangalore, Taipei — I see Toyotas. I can’t say that about any other car company.

However, I have never been a big fan of any industry that requires a regular stream of multi-billion capital improvements. Industries that require huge capital outlays — such as airlines, steel mills, and automakers — typically have low return-on-equity rates and are usually burdened with large amounts of debt to finance those billion dollar spending sprees that make them especially vulnerable to economic downturns.

That is why I would suggest that there are better ways to profit from the booming Asian auto markets. Instead of investing in the car makers directly, who are going to be killing each other to come out with the best “green” cars, you could instead invest in the companies that make the batteries that go into the cars.

A better way to play the booming Asian auto markets is investing in car batteries.
A better way to play the booming Asian auto markets is investing in car batteries.

Levi Strauss made a fortune by selling dungarees to the hoards of prospectors during the California Gold Rush and some battery makers are going to make fortunes by selling to the new wave of green transportation prospectors.

Like the auto business, the battery business is dominated by Asian companies such as China BAK Battery (Nasdaq:CBAK), Advanced Battery Technologies (Nasdaq:ABAT), China Ritar Power (Nasdaq:CRTP), and Hong Kong Highpower Technologies (Nasdaq:HPJ).

To be fair, I should disclose that my Asia Stock Alert subscribers already own China BAK Battery. It has opened a new factory in Tianjin, China with the Chinese government’s backing and has plans to open a third factory in India. It is building all that production capacity for one reason and that it expects gangbuster business from the auto industry.

Lastly, if you happen to own any Ford or DamilerChrysler shares … dump it as fast as you can. That also goes for any mutual funds. Hartford Capital Appreciation, Janus Overseas, CGM Focus, New Perspective Fund, and Vanguard Wellington are loaded with Ford shares.

Best wishes,

Tony

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