The Bleeding Edge of the Car Biz

The Bleeding Edge of the Car Biz

Goldman Sachs thinks you can make 40% on Ford. I think that figure should be a lot closer to 400%.

China has finally, truly and wholeheartedly embraced “21st century American-style capitalism.”

God help them.

Here’s the headline that popped up on one of my news feeds a day or so ago: “Chinese Carmakers Record Sales.”

That’s right, in the middle of a yearlong global recession, China is selling more cars than ever before. Skimming down through the article, one notes that sales of minivans are up some 40% Q1 2008 to Q1 2009.

China’s “Recession”

How can this be true? Isn’t China suffering too as depressed American and European consumers decline to buy their cheap T-shirts and lead-painted gewgaws?

Actually, China’s version of recession is a tad different than ours. It did indeed miss its target of a blistering 8% annualized growth rate for the first quarter of 2009, settling instead for a “mere” 6.1%, a figure for which most any Western finance minister would sell his children.

But even the threat of China’s growth approaching the ever-so-sluggish global norm threw Beijing into a printing tizzy as early as last November. Now 4 trillion yuan (US$586 billion) might sound like a drop in the bucket compared to the hundreds of billions of dollars Washington is inventing on a weekly basis. But then again, Beijing is only trying to keep its ball rolling along, while Washington is trying restart a mired economy.

But it isn’t just the fact that China is stimulating from the top down that is so fascinating. It is, after all, quite experienced at this whole centralized command economy idea that we are just cozying up to. It’s how it is going about it that has me laughing into my morning coffee.

A Gift From Uncle

Last month, Beijing began disbursing some 5 billion yuan ($731 million) into the hinterland to encourage folks to purchase new minivans. Now to my wife, the phrase “minivan” brings to mind a 4,500 lb. monster with a large six-cylinder engine replete with a quality sound system, electric doors, seats, windows and mirrors. Oh, and maybe a DVD player (we didn’t get one last time around, and they have been hassling me about it ever since).

However, when a Chinese family goes into their local dealership with their check from Uncles Wen and Hu, they find a remarkably different vehicle available to them. It generally has an engine half the size of an American van, which is okay since it hauls about half the curb weight.

If you are really lucky, the windows roll down by hand. Leather seats or airbags? As cousin Frank from Newark says, “Fergeddaboudem!” You want tunes? Learn to whistle. The good news is, these cheap little grocery haulers really are cheap. They only run about 33,000 yuan ($4,400) which comes to roughly 80% of the average Chinese citizen’s annual wage.

But is this spike in the sales of cheap vans truly good news? Or are China’s car companies traveling down the same road that brought GM and Chrysler to their corporate knees?

Death of a Thousand Cuts

In an attempt to increase fleet gas mileage and stretch its yuans a little further, Beijing is strongly suggesting that the checks be spent on smaller vehicles. It also has cut taxes in half on vehicles with engines smaller than 1.7 liters.

Unfortunately, as Mr. Xu Liuping, CEO of China’s number four manufacturer, Changan Automobile Group, recently warned at the Shanghai Autoshow, “Small cars mean small margins. There may be vehicle sales growth for the industry this year, but revenue and profit may fall.”

DongFeng Motor Corp.’s Liu Weidong further whined that “the auto industry no longer has extraordinary profit margins. Companies have been adjusting prices because of the government’s industry stimulus policies and to boost sales.”

“We Want a Piece of That Action Too!”

Yeah, that’s right: The Chinese aren’t making money selling small cars anymore than the Americans were. You want one more weird fold in the story? GM, who was so totally unprepared when gas skyrocketed here in the States, wants into the Chinese market in the worst way.

In fact, on the same Shanghai podium where Mr. Xu complained of profit difficulties, GM’s Kevin Wale bragged that China was a “very important market” and announced that GM (already a stakeholder in China’s biggest minivan maker) intends to double sales over the next five years.

Keep in mind that even that mighty global micro-car expert Toyota (TM:NYSE) cannot make a buck in China these days, as most of its line is considered “too large” to qualify for the subsidies that are driving this market. In fact, Toyota’s in-country partner, Guangzhou Automobile Group, actually registered a drop in sales and profits on Toyota’s offerings.

The Poisonous Teat

Kind of puts the lie to the idea most any manufacturer can do well while suckling at the government teat, eh? Which brings us back here to the States, where Ford (F:NYSE) – the only American builder to turn down Washington’s largesse – has posted yet another stellar week on its “Way Forward.”

Since hitting $1.01 last November, Detroit’s “Last Man Standing” has risen to $4.41. As you might imagine, a rise like that actually garners a little notice on Wall Street.

And so, after F shares have already gained some 194%, those bold folks at Goldman Sachs have actually shifted their stance from “neutral” to “buy.” Goldman’s Patrick Archembault even went so far as to predict that F could hit $6 in the next six months. Of course, he also larded his statement heavily with warnings that “an investment in Ford is not for risk-averse investors.”

Where Angels Fear to Tread?

Wow, that’s really putting it out there, Pat!

Come on, folks: It’s become god-awful obvious that most any investment in American Blue Chips stands a good chance of getting cut off at the knees these days. We don’t need GS’s caviling when plain old experience can tell us that!

But it is ridiculous to wince about like this when there is so much money to be made by being even just a little bold. Let me show you what I mean…

How to Trade the Car Biz

Back in March, when Goldman was still sitting on its thumbs, I asked WaveStrength Options Weekly readers to take a chance on some Ford call options. They cost a measly 80 bucks per contract. So far as downside risk is concerned, well, if you can’t afford to lose $40, you’re pretty much done.

As I sit to write, those calls are now worth $242 per contract. That’s a gain of 203% in about four weeks. And when Ford hits GS’s $6 target (which I will tell you right now will happen a lot sooner than six months), those calls will in all probability hit $400, rounding gains up to a neat 400%.

I am not bragging here (okay, maybe a little). Heck, I’m just a poor scribe operating out of a loft in downtown Baltimore. But don’t you think that that’s the kind of advice we ought to be expecting from Archembault and his friends in New York?