Boeing, Ford, GM: What's next in China?
The companies head east for growth, but the route is not necessarily smooth.
By Ted Reed, TheStreet
Boeing's recently released current market outlook, the leading annual forecast of air transportation growth, underscores China's importance. Boeing said 2010-30 air traffic within China will grow at 7.5%, compared with 7% in the Asia Pacific region, 4% in Europe and 2.3% in North America. In 2010, the Asia Pacific region was the world's biggest air travel market for the first time, Boeing said.
Meanwhile, a new report by Standard & Poor's notes that China auto sales reached 18 million in 2010, compared with 11.5 million in the U.S. China was easily the world's largest light-vehicle market.
Among U.S. companies, GM is a leader in promoting its interest in China, where it is the automotive market leader. In February, CEO Dan Akerson called China "the crown jewel in the GM universe."
Yet it is clear that China is far from a sure bet for anyone.
"China is both an opportunity and a risk for investors in particular companies," said Michael Yoshikami, a frequent visitor to China and the chief investment strategist at Bay Area firm YCMNET Advisors, which manages about $1 billion in assets.
"It's been a huge opportunity for automakers as they continue to push into China markets, but it's also a challenge, because China's ultimate goal is to become a manufacturer and they recognize that to continue to grow they need to be not just a manufacturer of cheap goods but a manufacturer of technology," Yoshikami said.
In aircraft manufacturing, China's stated goal is to compete with Boeing and Airbus. Commercial Aircraft Corp. of China, or Comac, says its single-aisle jet, the C919, will enter service in 2016 and already has 100 orders, primarily from Chinese airlines.
Boeing keeps a close eye on jet manufacturing in China, Randy Tinseth, Boeing's vice president of marketing, said on a recent conference call with reporters. "China, Brazil, Russia, Japan -- we watch this very carefully," he said. "That is where our next competition will come from." He spoke specifically of regional jet manufacturing, expected to lead inevitably to bigger jet manufacturing.
Aviation consultant Robert Mann said that while Chinese manufacturers are gearing up to build big jets, "you wonder how much demand they will satisfy," even within Asia, given the long leads that Airbus and Boeing have acquired and their established ability to support aircraft. "The toughest barrier to breaking outside China would be the support requirements," he said.
But Yoshikami reminded that China's target market will be Asia, "where there will be much more comfort with Chinese planes," than in the U.S. and Europe. Who needs the U.S. and Europe anyway, given their slow growth? "The aircraft market is a 25-year to 30-year forward industry, because of the lead time needed to develop planes, and that is how the Chinese look at it," Yoshikami said.
Auto sales' trickling growth
On the auto side, sales in China are projected to climb steadily throughout the decade. "Even as the economy and vehicle demand recover in the U.S. and sales creep back toward 17 million cars by 2018, sales in China of passenger and commercial vehicles together could be headed toward 33 million by then," J.D. Power analyst Jeff Schuster wrote in a recent report.
"Longer term, car sales in China seem likely to go nowhere but up," Schuster said, noting that today only 50 in every 1,000 Chinese citizens own a car, half the ratio in Brazil, one sixth of the ratio in Russia, and about 5% of the rate in the U.S. Beyond 2013, Schuster projects Chinese passenger vehicle sales growth between 7% and 9%, about the rate at which Boeing projects air traffic growth.
In the short term, however, China sales are slowing. Schuster said he recently cut his 2011 forecast for Chinese light-vehicle sales to 18.4 million units, representing a 6% increase over 2010. Vehicle sales rose 32% in 2010.
The reasons, Standard & Poor's said, include reinstatement of a 10% sales tax rate on small cars, a phase-out of subsidies for vehicle trade-ins in rural areas and restrictions on the issuance of new license plates in Beijing, with a lottery for new plates. Since 2005, the number of autos in Beijing has risen 85% to about 4.8 million. But while Beijing has many more cars, it does not have a lot more roads to put them on, Yoshikami said.
Additionally, "rising oil prices, elevated raw material costs, high inflation and hikes in interest rates are eroding purchasing power and dampening consumer sentiment in Asian economies," S&P said. "That, together with all-inclusive macroeconomic policy regulations, has resulted in an economic slowdown in the fastest growing region of the globe, (leading to) a drop in auto sales in most of the economies, which are already feeling the pinch of the Japanese earthquake."
In terms of the shares of U.S. automakers, investors could make a choice based on their China view. In China, GM has a market share of about 14%, a good position for the long term, while Ford's (F) share is about 2.5%, probably better in the short term.
Of course, Ford is working hard to grow its share in China --- but who isn't?
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Consumers are very status conscious in Asia, Africa and other emerging-market areas. This is especially true in China.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.