This article is part of the Fool's Halfway Through 2012 series, in which we review how sectors have done since January and see what's coming for the rest of the year. Click here to read all of the articles.
It has been a wild ride for the automakers already in 2012. Despite continued strong results in the U.S., General Motors (NYSE: GM) and Ford (NYSE: F) have seen their stocks fall to multiyear lows on concerns over steep and growing losses in Europe.
Meanwhile, Toyota (NYSE: TM) and Honda (NYSE: HMC) have largely recovered from the natural disasters that clobbered them in 2011 -- and are fighting hard to regain their shares of the global auto-sales pie. But they're facing challenges from other upstarts -- and GM and Ford aren't giving way easily.
So what's in store for the rest of 2012? That will depend a lot on the elephant in the automotive living room: Europe.
A specter is haunting automakers: The specter of Europe
Europe is a mess, plain and simple, and that's the big story affecting nearly all of the big automakers right now. Put simply, economic woes in the region have crushed the new-car market: Sales were down about 10% in the first half of 2012, reaching lows not seen in a decade.
The story gets even worse when we look at the details. Fierce competition for the consumers that are willing to buy has led to a price war. Automakers have had to offer deep discounts just to keep sales going, and that has crushed already-slender margins.
The upshot: GM lost $256 million in Europe in the first quarter. Ford lost a shocking $404 million on Europe in the second quarter and warned that its losses in the region would likely exceed a billion dollars by year-end. The story was worse for some of the regional players: French carmaker PSA Peugeot Citroen, Europe's second-largest automaker after Volkswagen, posted an overall loss of 819 million euros in the first half and said that it was unlikely to break even until at least 2014.
The problem is complicated, but the gist of it is simple: Too many car factories, not enough car sales. As a general rule of thumb, auto factories break even when they're running at about 80% of maximum capacity. Any lower, and they're losing money. A recent Morgan Stanley report estimated that Ford's European plants were running at just 63% capacity, and GM isn't faring much better. Some automakers, like Fiat, may be doing even worse.
The answer will involve painful factory closings, but labor-friendly laws and public pressure to preserve jobs make those a tricky proposition in Western Europe. Which automaker will be the first to make a bold move? My bet is on Ford, but that will be one of the big dramas to watch through the rest of 2012.
Meanwhile, in the rest of the world
Other key issues to watch as we move into the second half of 2012:
- Will the U.S. market stay strong? U.S. auto sales have been the bright spot for many of the global automakers, powering GM and Ford to solid profits and helping Toyota, Honda, and Nissan put up big numbers as well. But will that momentum continue? There are reasons to be optimistic, but also some serious concerns on the horizon.
- Where's China going? GM and Volkswagen have long battled for leadership of China's auto market -- now the world's largest -- with the edge going to GM in recent years. But the market's growth has slowed sharply, just as Toyota is regaining momentum and Ford is making massive investments to expand. Will a Chinese slowdown hammer the automakers?
- Will new technologies shine? Tesla Motors (Nasdaq: TSLA) just started delivering its electric Model S luxury sedan to customers. Will Tesla find success once its early adopters have their cars? And if it does, will Tesla's success lead to more mainstream electric cars, or will the global green leaders -- Toyota and Ford -- stay committed to a hybrid-centric path?
Clearly, it's a tumultuous time for the global auto business. While I continue to think that companies like GM and Ford represent good buys for patient investors at current prices, mostly on the strength of managements' execution in tough environments, those investors will want to keep the Alka-Seltzer handy -- heartburn may be hard to avoid for awhile.
Thanks in part to concerns about Europe, Ford's stock has been under pressure lately, dropping to levels not seen in years. But the company is still performing very well at home and is investing heavily for growth abroad. Have these short-term pressures created an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Click here to get instant access to this premium report.
This article is part of the Fool's Halfway Through 2012 series, in which we review how sectors have done since January and see what's coming for the rest of the year. Click here to read all of the articles.
