Stellantis Just Served a Major Warning to Ford and GM Investors

Say what you want about Stellantis (NYSE: STLA) and whether or not it should be included as a "Detroit automaker," but it still has a core Detroit SUV and truck business. And when one Detroit automaker issues a warning, others are certainly listening. Stellantis just served a major pessimistic warning that Ford Motor Company (NYSE: F) and General Motors (NYSE: GM) investors should heed loud and clear as third-quarter earnings approach.

Horrible guidance

Stellantis stock slid early this week after the maker of Jeep and Ram brands cut its 2024 financial guidance. The driving force behind its guidance cut was deteriorating industry dynamics, increasing inventory, and increasingly difficult challenges in China.

These aren't slight financial guidance cuts either, these were more of a slap-in-the-face wake-up call for auto investors. Stellantis toned down its forecast for full-year adjusted operating income to a range of 5.5% to 7%, which is down drastically from the previous guidance of "double digits." It gets worse. Stellantis now projects its free cash flow to be in a range of negative $5.6 billion to negative $11.2 billion, a far cry from the original guidance of "positive" free cash flow.

To help offset these financial burdens, Stellantis is attempting to bring vehicle inventory back in line by targeting no more than 330,000 units of dealer inventory by year-end, accelerated from the original first-quarter 2025 estimate. It's doing that by doubling its previous planned reduction of production, now building 200,000 fewer vehicles during the second half of 2024.

Big China problems

Right now, China is basically the worst of both worlds when it comes to foreign automakers as it has a fiercely competitive EV market and a sluggish economy. Foreign automakers have to try to stand out in a booming electric vehicle (EV) market against competitors that have been boosted by government subsidies and have secured supply chains and well-received vehicles.

To better explain just how advanced China's EV market is, consider that in July over 51% of new passenger car sales were EVs in China, over 5 times the market share that EVs account for in U.S. new vehicle sales. Further, BYD's cheapest vehicle, the Seagull, could absorb 100% U.S. tariffs and still undercut the industry with a $25,000 vehicle.

Imagine trying to fight for market share in a booming EV market without tariffs to help offset Chinese price advantages. That's why many foreign automakers are absolutely struggling with a sales decline and excess production capacity.

Bank of America Securities research analyst John Murphy went as far to say Detroit automakers should bite the bullet and exit China. "Focus on your core," he said before the Automotive Press Association at Bank of America in Farmington Hills, according to The Detroit News. "And China is no longer a core strategy to GM, Ford or Stellantis."

Automakers are going to have to think outside of the box for solutions in China, because becoming competitive on EV price and technology overnight is almost certainly out of the question. One example is Ford's recent move to export vehicles out of China. Ford exports a number of vehicles from China to Latin America, the Middle East, and Southeast Asia and shipped more than 100,000 vehicles out of China in 2023 alone. Already through the first half of 2024 those exports have surged 45% higher.

Bottom line

Ultimately, Stellantis' drastic adjustment of its 2024 financial guidance should serve as a large warning to companies that have substantial business in China, or are dealing with Chinese automaker entries into the Europe market. Both remain significant and costly challenges. When one Detroit automaker is feeling the pain, it should certainly serve a warning to investors of similar automakers to temper expectations for upcoming third-quarter results. It's also worth noting that these China troubles are more short-term in nature and long-term investors can take the speed bump with a grain of salt. Already China's government has put together a stimulus package to try to reinvigorate the economy, although that won't solve all foreign automaker problems in the country.

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Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and Stellantis and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.