BRIC Is Broken Even If Ford, GM and Buick Are Doing Fine in China

Beijing (TheStreet) -- Not long ago, the auto industry looked eagerly to emerging markets as an area where sales would grow rapidly, but that perception has changed dramatically.

Now, BRIC is broken.

"Volatility in emerging markets is creating huge challenges for auto companies," said Mike Hanley, global automotive leader for professional services firm EY -- formerly Ernst and Young -- in an interview. "There cannot be such a rush to put capacity in these markets (because) the economies are not taking off. They have to more carefully manage growth."

In Brazil, light-vehicle sales in 2013 fell 0.9%, the first decline in a decade; growth had averaged more than 10% in each of the previous 10 years. In Russia, light-vehicle sales fell 5.5% in 2013, following three years of strong growth. In India, 2013 auto sales fell 10%, the first annual decline in 11 years.

Among the BRIC countries, only China defies the trend. In 2013, sales rose 14% to 22 million, as China became the first country where more than 20 million cars were sold.

In general, the negative results are continuing this year, as are the positive trends in China.

"Are Emerging Markets the new Achilles heel of the Automotive Industry?" consulting firm LMC Automotive asked recently in a recent press release, where the firm did something that is rare in the forecasting business: It admitted that it had been wrong.

In September, the firm said, it projected that 2014 would bring single-digit automotive sales growth in five emerging markets: Argentina, Brazil, India, Russia and Turkey. But in April, LMC revised that forecast. Now it sees full-year declines of 27% in Argentina, 20% in Turkey, 9% in Russia and 4% in Brazil.

Also, LMC now forecasts 3% growth in India, down from its September forecast of 9%. It now forecasts a 20% decline in Thailand; it had predicted a decline of 9%.

"While the U.S., China and Western Europe continue to be likely sources of expansion in 2014, driving our outlook for the year, a number of large and previously dynamic emerging markets have moved from growth to stagnation, or even outright contraction," said Pete Kelly, managing director of LMC Automotive, in a prepared statement.

As for China, it remains a mixed picture, despite the positives.

Chinese domestic automakers are generally losing share, but the international companies are flourishing. Ford's (F) 2013 sales rose 49% to 935,818 units and sales by market leader GM (GM) rose 11.4% to 3.16 million.

In the first quarter of 2014, GM China sales gained 13%, the biggest gain among GM's top five global markets.

GM's Buick is in many ways a Chinese company. In 2013, it accounted for 809,918 sales in China, about a quarter of GM's total. In the first quarter of 2014, Buick sold 238,094 vehicles in China; 53,083 in the U.S., 2,752 in Canada and 1,028 in Mexico.

This year, GM sold its 1 millionth vehicle in China on April 14, the earliest it has reached the 1 million mark.  "General Motors has made China a global priority, expanding both our brand and product lineup to keep up with the changing demands of the market," said Matt Tsien, GM China president, in a prepared statement.

Meanwhile, Ford China sales rose 28% in March, as Ford sold 103,815 vehicles. Ford's first-quarter sales rose 45% to 271,321, putting Ford on track to pass a million vehicles in sales in China and also to become the third-largest automaker in China after GM and Volkswagen.

"Generally, the most growth will come in China," EY's Hanley said, noting that "China was able to continue building roads," while infrastructure growth in Brazil, Russia and India largely came to a halt.

However, "China is not going to grow as much as it has," he said. In fact, China remains the greatest threat to global economic growth, Nariman Behravesh, chief economist for research firm IHS, said recently at the NADA/J.D. Power Automotive Forum in New York.

"China has a credit bubble," Behravesh said. "That's the single biggest risk out there." The problem is that much of China's debt is held by shadow banks with unknowable credit risk.

Additionally, the Chinese auto market is home to an extraordinarily high number of domestic producers, resulting partially from the desire of various local governments to support their own automakers. "Everybody wants an auto company," Behravesh said.

John Humphrey, senior vice president of Global Automotive Operations for JD Power, isn't worried about auto sales in China because "the auto sector is a pillar sector for the economy," he said at the automotive forum.

But Humphrey noted that the supply side is concerning, given an excess of dealers, brands and models. "Underperforming entities are being propped up by governments in China," Humphrey said.

"I don't see it going from good to bad, but there might have a shakeout," he said. "They'll shed some of the players that should have been shed all along."

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

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