One of Ford’s biggest problems is about to get worse. Is it time to worry?

Over a decade ago, an intriguing catalyst for Ford Motor Company (F 0.72%) investors was its growth potential in China. It was considered a fast-growing market that was to become a second pillar of financial results, alongside North America.

God, how things change. Fast forward to today and the Ford as well as the rival Crosstown General Motors (GM 0.63%)they have a big problem in China. Is it time for the automaker to take some extreme measures? Is it time to cut our losses and run? Let’s dig.

The 10,000-foot view

Entering China brought a long list of challenges for Detroit automakers, starting with simple ones like understanding consumer preferences that were substantially different from those in the West. Sedans and other smaller vehicle segments were popular, while massive and highly profitable trucks were not. Then add the complexity that Detroit automakers were initially forced to form joint ventures with local Chinese automakers to enter the market, and the challenges mount.

Ford’s sales in China have been declining since 2016, but since the company has changed its reporting, let’s use General Motors as a more specific example. 2023 was the first year since 2009 that GM sold more vehicles in the US than in China. If you focus on GM’s largest joint venture in China, SAIC-GM, annual wholesale deliveries have fallen to about 1 million in 2023 from a record 2 million in 2017. It gets worse: year-to-date volume is down 55 % until July. .

Detroit automakers must contend with different consumer preferences, a lack of truck sales to bring home the bacon, and complex complex associations. It can’t get any worse, right?

Wrong.

Enter electric vehicles

If investors asked if it could get any worse, electric vehicles (EVs) added another challenge. The Chinese government has heavily subsidized Chinese automakers that are producing electric vehicles and making waves in the global auto industry.

It forces Europe to impose high tariffs on Chinese electric vehicles, with the US and others likely to follow. That’s because Chinese electric vehicles are incredibly well built, battery technology is advanced, they’re very affordable, and the vast majority of the world isn’t ready to compete.

It gets even worse. Not only is Ford, and to some extent GM, struggling to compete with Chinese EV products, but China’s EV market is years ahead of the United States. In fact, China’s share of electric vehicles among light vehicles rose 15 percentage points from a year earlier to 50% for the first time in July.

That’s right — Detroit automakers need tariffs to protect their territory from Chinese EVs, so imagine competing in an EV market years ahead of the West without beneficial tariffs, where half of sales of the light vehicle market are electric vehicles, is discouraging to say the least. .

what now

An entire book could be written about what Ford and GM, among others, should be doing in China, but Bank of America analyst John Murphy, managed to sum it up nicely: “I think you need to see (the Detroit Three) get out of China as soon as possible,” Murphy said at his annual “War of the Cars” presentation.

That would be an expensive bullet to bite, for sure. There are other options; Ford, for example, has begun exporting vehicles produced in China to other markets. Factories with a focus on popular segments, or perhaps more profitable luxury segments, may continue to fight for a more profitable piece of the pie.

For investors, however, it’s important to note that Ford, along with other Detroit automakers, has a big problem in China. It is no longer ready to be the second pillar of profits it was once hoped to be. That changes the company’s investment thesis, and the company’s near-term plans in China should be something to dig into further and not take lightly.