The outlook for the U.S. auto industry is getting worse because of China competition and worsening conditions at home, which could put pressure on shares of Ford Motor and General Motors , according to Morgan Stanley's Adam Jonas. The widely followed analyst downgraded Ford to equal weight from overweight. He also trimmed his price target to $12 from $16, implying upside of 10.4%. GM was lowered to underweight from equal weight, with the price target cut to $42 from $47. The new forecast signals 12.6% downside from Tuesday's close. Additionally, Jonas lowered his rating on EV maker Rivian to equal weight from overweight, cutting his price target to $13 from $16. The new forecast implies upside of just under 10%. The analyst believes China taking market share globally will weigh on the U.S. auto sector, along with rising car inventories, low affordability and deteriorating credit at home. "The China capacity 'butterfly' has emerged and is flapping its wings. China produces 9mm more cars than it buys, upsetting the competitive balance in the West," said Jonas. "Even if these units don't end up directly on US shores, the 'fungibility' of lost share and profit by key US players adds pressure here at home." Shares of Ford were down 2% in the premarket, while GM shed 3.6%. Rivian was off by 4%. F GM 5D mountain F and GM fall Ford Motor shares have struggled in 2024, losing more than 10%. Jonas thinks the company will see "increased pressure on margins across all segments, from China excess capacity and US rising inventories." These headwinds, coupled with "peak earnings" and electric vehicle and regulatory risks, will also send GM shares lower. GM has rallied more than 33% year to date. In July, the company hiked its full-year earnings guidance thanks to strong internal combustion engine vehicle sales and the restructuring of its autonomous vehicle unit. Jonas however, warned back then that the "good times won't last" for the automaker. Now, he's cautious on the entire U.S. auto industry. "[We are] downgrading our US auto industry view to In-Line from Attractive. At a high level, our downgrade is driven by a combination of international, domestic and strategic factors that we believe may not be fully appreciated by investors. US inventories are on an upward slope with vehicle affordability … still out of reach for many households," Jonas wrote. On Rivian, Jonas said, "The downgrade reflects our incorporation of the capital intensity of [autonomous vehicles] which may be required to fulfill the technological underpinnings that attracted Volkswagen as a JV partner." Along with these auto-manufacturers, Jonas downgraded his view on parts makers Magna International and Phinia as well. Some investors see cyclical stocks like autos benefiting from the Federal Reserve lowering rates for the first time in four years. But Jonas disagrees. "Thera are better ways to play rate cuts," he said in the note.
