Ford, GM and Rivian may get caught by a 'China butterfly effect,' this investment bank says

By Claudia Assis

Morgan Stanley sees market-share loss ahead for Ford and GM, intense capital needs for Rivian

Shares of Ford Motor Co., General Motors Co. and Rivian Automotive Inc. got downgrades on Wednesday from analysts at Morgan Stanley, who cited a "China butterfly effect" for their dimmer views on the sector.

"The China capacity 'butterfly' has emerged and is flapping itswings. China produces 9 [million] more cars than it buys, upsettingthe competitive balance in the West," the Morgan Stanley analysts, led by Adam Jonas, said in the note.

They raised their ratings on auto dealers following the Federal Reserve interest-rate cuts, however. "Within the autos value chain, [auto dealers are] most levered to stronger U.S. states and the high-end consumer with limited exposure" to U.S. legacy automakers, the analysts said.

"Conversely, we downgrade legacy OEMs and select suppliers who are more vulnerable to increased China competition (export markets and domestically) and resulting share loss, passing through peak earnings, regulatory compliance risk, and increased calls on cash to remain relevant in the AV/ADAS market," they said.

U.S. vehicle inventories are rising, and prices of new vehicles are getting out of reach for many, the analysts said. Credit losses and delinquencies continue to trend upward for less-than-prime consumers, and China's decades-long growth engine has not stalled, they said.

Morgan Stanley downgraded GM's stock (GM) to the equivalent of sell, from hold, and cut its price target on the shares to $42, from $47, implying a downside of about 9% over Wednesday's share price.

"Our downgrade is underpinned by our expectation for greater share loss through end of decade, price/mix headwinds, and China, regulatory compliance," plus risks to profitability around EVs, autonomous vehicles, and other concerns, the analysts said.

Ford's shares (F) were downgraded to the equivalent of hold, from buy, and their price target to $12, from $16. That implies an upside of about 9% over Wednesday's share price.

The Ford downgrade is thanks to expectations "for greater share loss through end of decade," price and mix headwinds, and risks around regulatory compliance, EVs and AVs, and others.

Rivian's stock (RIVN) got a downgrade to the equivalent of hold, from buy, and a price-target cut to $13, from a previous $16, implying upside of around 18% over Wednesday's prices.

The downgrade reflects "our incorporation of the capital intensity of AV/ADAS which may be required to fulfill the technological underpinnings" that attracted Volkswagen AG to be Rivian's partner, the Morgan Stanley analysts said.

On the auto dealers' side, the Morgan Stanley analysts upgraded Group 1 Automotive Inc. (GPI) to the equivalent of buy, from neutral, Penske Automotive Group Inc. (PAG) to buy, from sell, and AutoNation Inc. (AN) to buy, from neutral, among other actions.

-Claudia Assis

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09-25-24 1154ET

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