The price of oil just keeps going down, and nowhere is this more apparent than in the jacked-up automobile sales numbers from 2015, especially for gas-guzzling SUVs and trucks. Many auto companies have announced strong guidance for 2016 and even beyond, with Ford (F 2.21%) expecting huge sales from China.
In this clip, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about the country's huge potential for automakers, how Chinese demand for oil fits into the market craziness we've seen lately, and how the country fits into big auto's bigger picture.
A full transcript follows the video.
This podcast was recorded on Jan. 14, 2016.
Sean O'Reilly: As a follow-up to last week's story where, I think, Tyler, you were talking about how SUV sales and truck sales are surging because gas is $1.90 or something...
Tyler Crowe: $1.77 when I came in. Alexandria, Virginia, today.
O'Reilly: You fill up whenever you come to Virginia, too.
Crowe: No, it's just like, the one turn I make to the office, I have to go right by a gas station, and right there, it's plastered right in front of my face. I drove in this morning, it said $1.77.
Taylor Muckerman: Did you get a Big Gulp?
Crowe: No. It's not a 7-Eleven.
Muckerman: No, it's not.
O'Reilly: What's a Big Gulp go for these days? Is gas cheaper than a Big Gulp? That's what I want to know.
Muckerman: It might actually be. A Big Gulp is smaller than a gallon of gas.
O'Reilly: Don't they pitch the Big Gulps as $1.09?
Muckerman: But you can't refill your gas tank for free if you're still in store.
O'Reilly: Oh, sorry. That's a good point, though, thank you. You must have taken some econ classes at some point. Anyway, as a follow-up to last week, basically, General Motors (GM 2.65%) just announced strong guidance for 2016. They're doing a $4 billion buyback, they're saying they're going to sell even more cars this year. I guess cheap oil prices are having an effect, huh?
Crowe: I guess you could say that.
O'Reilly: A little bit.
Crowe: Basically, they're guiding for $5.25, $5.75. Pretty large uptick from last year. One of the big things that I think a lot of people got excited from is, they're boosting their stock repurchase plan up to $9 billion, up from $5 billion, which is obviously saying, "We're doing pretty well, and we don't have to reinvest a whole lot in the business right now, so let's give it back to shareholders." And I think that's been something that shareholders of GM and Ford have been waiting for. "When is it our turn?" It's been quite a while since the downturn, and all the issues that GM has had over the years, I'm sure there's a lot of shareholders who've been itching: "When is it our turn to make those returns?"
Muckerman: Well, they've returned a nice amount in the market since the big government intervention, I think, right?
Crowe: Yeah. Maybe people just aren't noticing.
Muckerman: Yeah, that's fair.
Crowe: This would be the best part about it.
O'Reilly: So, Taylor, as Tyler mentioned, Ford announced decent guidance and results and everything. But they just announced crazy sales from China. Now, last I checked, the Chinese stock market is crashing, they're always tripping their circuit breaker, talking about a pullback and slowdown there, hardlining, stop landing. But we're not seeing that in auto sales there. What was it, they sold 18% more cars in China than last year? Where's the dichotomy here?
Muckerman: I think what you're looking at is, the Chinese are used to purchasing consumer goods. I don't know if they're necessarily used to purchasing stock. It's a very retail-heavy stock market, and it's fairly new compared to the U.S. market. So I think they're still learning how to adjust to the crazy growth their market's had, and the skittishness that investors over there might have. I saw a survey that indicated they feel much more like gamblers over there, in terms of investing.
O'Reilly: Well, the size of their stock market compared to ours, relative to the size of each economy, it's infinitesimally small. It's way smaller. Not only that, but their government buys stock on the open market regularly.
Muckerman: Yeah, there's an lot more finagling going on over there. So I wouldn't necessarily translate stock market performance to consumer buying habits in China.
O'Reilly: So this seems to imply that the Chinese consumer's doing a little bit better than the headlines would lead you to believe.
Muckerman: Yeah, and you see that in retail sales over there as well. This has been, historically, not a super-strong market for American car makers.
Muckerman: So if they can make headway like this, then that's a totally new opportunity that investors can get excited about.
O'Reilly: Yeah, was it Ford that said -- you may have missed it, and I can't recall, so it's fine. But I think Ford said, "We expect China to be huge for us someday."
Muckerman: You would imagine so. There's a very small portion of the population that does drive. You just have to wonder if they more or less skip traditional automotives and just wait for EVs to come out. But you haven't really seen too much growth there, either, in terms of overall market-share capture from EVs. So, I think it's got a few years to run here for traditional vehicles growth in China. And you're not seeing the only two companies that are producing high expectations, Magna International, which is an OEM parts supplier, they also build cars for smaller car companies, a Canadian company, but they do trade in the U.S. as well. They even boosted their 2018 guidance.
Muckerman: That's a few years down the line --
Muckerman: They see some positive things happening --
O'Reilly: Do they have a backlog? How can they do that with any confidence?
Muckerman: They do. So they basically provide pretty much any parts you can think of.
O'Reilly: Spark plugs.
Muckerman: And you see their name mentioned in the discussions when you talk about an Apple car or a Google car.
Muckerman: They could potentially be the builder. There's been rumors that an Apple executive visited a plant of theirs in Europe last summer.
Muckerman: So it's just a way for this company to maybe see some optionality, and maybe get into the autonomous-driving market without just being a parts supplier.
Crowe: And tying it a little bit back to energy here, there's tons and tons of factors that go into the price of oil, and a lot of the sentiment going around it, and one of the things that has been talked about a lot, at least as of late, was that we should start to see a waning Chinese demand for oil. And when you see sales figures that we've seen for automotive as of late, it makes you wonder what the metrics they're looking for oil demand in China are.
Yeah, if we look at manufacturer purchasing indexes, they're very far down, and a lot of times, we gauge the Chinese economy on that manufacturing export sort of model. But if we're seeing such strong consumer demand, which is going to be one of the major drivers for oil, probably more so since it is primarily a transportation fuel, it does make you wonder, are the concerns that Chinese oil demand --
O'Reilly: Is that fair, yeah.
Crowe: -- is not waning as much as people are expecting it to.
O'Reilly: Well, whenever I see any of this stuff, I'm not surprised, like the stuff that's going on in China right now, with the stock market crashing and everything, because their current goal is to shift from an export-driven manufacturing economy to a consumer-driven economy, a little bit more like ours. And that's exactly what's happening. Their stock market is comprised mostly of export-driven manufacturers. It is what it is.
Crowe: Yeah, agreed.
O'Reilly: Before we move on, I want to put things in perspective. Tyler and I broke this out before we went in, the North American car market is still a lot bigger than Asia. Was it $200 million? Something like that? Yeah. For Q3. Pre-tax results by segment, and it's what it is.
Crowe: To give a comparison, Q3 pre-tax results by Ford's segments, regionally, North America was $2.6 billion. Asia Pacific, $20 million.
O'Reilly: For profit margins.
Crowe: Profit margins, yeah. So let's keep it a little bit in perspective here.