The Case For Detroit’s Automakers To Get Out Of China Fast

Most automakers–specifically American and German ones–used China like a piggy bank for decades. The period of strong economic growth in China from the ’90s into the ’00s may have been due to a rebalancing of manufacturing that ultimately was a bad thing (see: China Shock), but it created huge profit centers for these automakers.

Will that be the case going forward? China is a populous country with a lot of consumers and most of those automakers are still doing well there. At the same time, massive overproduction, price wars, and increased protectionism make it a tough place right now. Should automakers just bolt?

That’s the argument I’m going to look at this morning: Should the Detroit Three leave China?

While we’re here I’m going to speed run some other news: Ferrari EV is going to be expensive, used cars are still getting cheaper, and one dealership came up with a great way to encourage new technicians.

The Time To Get Out Of China Is Now

Last year, General Motors sold more cars in America than in China. That’s bad. Real bad. Once a profit driver for GM and its biggest market, Chinese consumers have continued to look elsewhere as Chinese cars have gotten way better. Chinese automakers also produce the most popular mass-market and most affordable EVs in the world, with maybe the exception of Tesla.

At the same time, the North American market is almost completely closed off to Chinese brands and only imports a handful of Chinese-built models, mostly for GM and Volvo. Even if China could sell cars here, Chinese automakers don’t build the kind of pickup trucks that American consumers want.

What’s the solution to this problem? According to Bank of America analyst John Murphy, it’s for the Detroit Three to ditch China and double down on profitable vehicles like pickup trucks.

From The Detroit News:

Although the Detroit Three all have said they remain committed to selling in the country, excessive capacity and competition and advanced technologies offered by domestic manufacturers there have made the market tougher and boosted pressure on pricing. GM lost money there in the first quarter. Meanwhile, there’s a high risk of tariff retaliation. Murphy likened the situation to Europe when GM sold off its brands there in 2017.

“Focus on your core,” he said before the Automotive Press Association at Bank of America in Farmington Hills. “And China is no longer a core strategy to GM, Ford or Stellantis.”

That’s a tough pill to swallow, Murphy acknowledged, but he emphasized the companies should focus on generating the close-to-record profits they can obtain from their legacy business to finance the powertrains in which they ultimately need to invest to survive.

I like this argument and, specifically, I like it because of what Murphy is arguing they do with that money: invest in new powertrains.

We may have a long road to full electrification and hybrids will likely play an increasing role on that road, but to meet stringent emissions requirements and continue to be competitive as charging infrastructure improves it’s clear that automakers will have to keep building more electric cars.

And that sucks for most Detroit automakers because BofA estimates they still spend about $17,000 more on components for each vehicle than Tesla does. Will it be possible to bridge that gap quickly? Nah. Again, from the article:

“It’s going to be mission critical to ultimately becoming competitive on a price and cost basis with Tesla,” Murphy said. “Pushing volume at the moment and losing money doesn’t make a tremendous amount of sense. You really want to focus on some of the next-generation platforms to have a profitable business.”

He suggested even the forthcoming EVs from companies like Ford that executives have emphasized will make strides in cost reductions won’t be enough to bridge that gap. It will require a subsequent third generation, potentially four to five years out from now, to become cost competitive, Murphy said.

That is brutal. There’s no guarantee that Murphy is right as he’s just making a guess based on the current data and a prevailing sense of what Beijing is going to do as retaliation for more tariffs. It kinda sounds right though, doesn’t it?

Ferrari’s EV Will Cost More Than $500,000

Ferrari doesn’t build many cars, so when it builds a car it generally sells (see: the Purosangue). And if it doesn’t sell, Ferrari just makes its customers buy a Roma if they want to, later, buy a 12 Cilindri or whatever.

Will Ferrari’s new EV be a car that everyone wants or a car that the Tifosi have to buy? It’s not clear, but the new Ferrari will enter into the extra-lux electric category with a car that’ll cost at least $535,000 according to Reuters:

The price tag, which doesn’t include features and personal touches that typically add 15-20%, is well above the average sale price of around 350,000 euros, including extras, for a Ferrari in the first quarter of this year, and many rival luxury EVs.

Here’s my favorite part:

Waiting lists for some models can top two years.

“That is not getting any shorter. Being in the waiting list is in itself a status symbol,” Caldato said, noting an increase in potential wealthy customers in emerging markets, such as India and the Middle East.

It’s cool just to be on the waiting list. That’s a business.

Wholesale Used Car Prices Continue To Drop

The Manheim Used Vehicle Value Index has extended its price slide according to Cox Automotive:

Wholesale used-vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) decreased 0.3% from May in the first 15 days of June. The mid-month Manheim Used Vehicle Value Index fell to 196.8, which was down 8.5% from the full month of June 2023. The seasonal adjustment lessened the impact for the month. The non-adjusted price change in the first half of June declined 1.6% compared to May, while the unadjusted price was down 9.5% year over year.

“May ended with stronger than normal price declines in the last few weeks, and that’s continued into early June,” said Jeremy Robb, senior director of Economic and Insights at Cox Automotive. “We are still seeing higher sales conversion levels with days’ supply down as sales have continued to run above last year’s levels.”

I sense this will continue through the summer, at least until interest rates drop and new car monthly payments come down more.

Dealership Hosts Signing Ceremony For Apprentice Techs

There’s a huge shortage of vehicle techs and it’s making it harder to get good service (or any service) for our increasingly complex automobiles.

How to encourage more people to take up the job of being an auto repair technician? Carter Myers Automotive out of Charlottesville, Virginia had the idea to host a signing ceremony for their future techs. This is a fun idea as I remember the signing ceremonies for high school athletes going to college when I was growing up in Texas.

Here’s the thought process behind this, via Automotive News:

We want to celebrate these students as they enter a career path and earn a living wage — with no college debt and great earning potential,” said Beth Lucchesi, talent acquisition specialist at Carter Myers, of Charlottesville, Va. The dealership group owns 24 stores in North Carolina, Virginia and West Virginia.

[…]

“In the last few years, we’ve seen an uptick in celebrations and recognition of and focus on the trades,” Lucchesi said. “We’re not taking anything away from anyone who wants to be a lawyer or a doctor — that’s fantastic. But for the many students who don’t know what they want to do or who want to work with their hands … there are plentiful jobs within the auto industry that can provide a great living without a college education.

No offense to lawyers and doctors!

What I’m Listening To This Morning While Writing TMD

This is not a unique observation, but Sam Cooke was often playing for at least two very different audiences throughout his tragically shortened career. If you want proof of this, he recorded two live albums in roughly a space of one year: One Night Stand! Live At The Harlem Square Club and Sam Cooke at the Copa. Those are both great live albums from the same artist that are roughly contemporary with one another.

The Copa album is very much the “safe” Sam Cooke of his wonderful love songs and fun poppier songs. It has Cooke’s beautiful voice and some of his energy, but it’s clean-cut and almost chaste. One Night Stand, on the other hand, is a raucous and lustful event for obviously a very different crowd (so much so that the record label didn’t release it for 25 years out of fear of hurting his image).

If there’s a song that bridges the gap, and one appropriate for today, it’s “A Change Is Gonna Come.” With its slow, dreamy march forward carried by sweet strings and punctuated by gentle bursts of French horn, it sounds like a ballad. It’s non-threatening. The words, however, carry the weight of hundreds of years of abuse and mistreatment and yet still retain an edge of hopefulness. If you can listen to it more than once without tearing up you’re stronger than I am.

The Big Question

Should all three automakers leave China? Should one of them stay?