Once the major growth driver, China is now a big headache for Western carmakers

For a significant amount of time, China was a critical growth engine for Western automakers, providing substantial demand and profit.

However, this trend is now reversing, creating major challenges for companies that once thrived in the market, according to a note from Morgan Stanley on Thursday.

"China's two-decade run as a source of incremental demand and profit is moving the other way," the bank stated in a brief section of its note focused on affordability and profitability in the auto sector.

"The timing of a continued sharp downgrade in China JV-derived auto profits provides no offset to increasing risks of home market pressures," added Morgan Stanley.

The deteriorating situation in China is compounded by rising risks in the U.S. and European markets.

Analysts noted that the region's automakers, including giants like Porsche, Volkswagen, and BMW, have recently issued profit warnings.

This marks the start of a prolonged "negative margin cycle," driven by reduced pricing power, which may take several years to normalize.

In China, Western automakers are facing intensified competition from domestic brands, making profitability elusive. The note says China, which used to contribute significantly to revenue growth, is now "flipping into losses" for these companies.

As demand in China falters, the losses provide no cushion against growing pressures in Western markets.

The U.S is also seeing signs of trouble, according to Morgan Stanley. They state that inventory levels have rebounded sharply, with U.S. domestic supply in August nearing pre-pandemic levels, while the rise in delinquencies on auto loans points to affordability concerns.

The bank warned, "The ultimate problem is affordability; prices need to fall for volume to recover."

Source: Investing.com