How to Play Detroit’s Chinese Connection
Western investors reacted with outright derision and plenty of skepticism when news broke this week that one or more Chinese automakers are considering bids for Detroit’s Fiat Chrysler Automobiles N.V. (NYSE:FCAU).
What they don’t realize is that not only is a deal like this absolutely possible, it’s highly probable.
Which means the time to make your move is now.
Many investors are simply incredulous. I’ve spoken with tens of thousands of them over the years who cannot grasp the enormous financial implications associated with China’s emergence as a global power.
In some cases, they don’t want to acknowledge that China truly has global aspirations.
Most of the time, though, I find they simply cannot process the notion that somebody may have a bigger, more profitable vision of the future than they do – especially when it comes to an industry we pioneered.
However, they better get used to the idea… Chinese automakers are a logical partner.
In fact, they may be the only partner.
You see, China’s automakers are the only ones with the cash to pull off a deal like this one in a world where the automotive industry has been rocked by emissions scandals, slowing sales, decreasing prices, and the development of autonomous driving technology.
What’s more, they’ve got a far broader vision than their counterparts in the Motor City.
So how do you play that?
The smart money is already on the move, and investing in Chinese car companies is not the answer most people expect. I’ll get to that in a moment with how you want to play it and what you want to buy instead.
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First through, here’s why the deal – or one just like it – is a virtual certainty.
Fiat Chrysler Chairman Sergio Marchionne has engineered a successful turnaround that began in 2009 when the company lined up a controlling interest in Chrysler. Now he wants an exit, but only after he’s created a unified global automaker.
Fiat Chrysler is a far more streamlined version of itself thanks to the very same turnaround, but still lacks the technological savvy to be truly competitive. China’s buyers are loaded with desperately needed cash that could jumpstart that process and, in doing so, help it leapfrog competitors like Toyota, BMW, and others – especially where hybrids are concerned.
There’s precedent in Volvo which was struggling to remain relevant prior to being acquired by Geely Automobile Holdings Ltd (HKG: 0175). Now, the brand is again vibrant and, in fact, in the running for several cars of the year with models like the XC90 and S90 leading the way.
Contrary to what a lot of people think, a Chinese acquisition would save jobs while at the same time injecting much needed money and energy into Detroit for a Chinese resurgence… as hard as that is to imagine.
Here’s where this gets very interesting, exciting, and potentially very profitable.
Bits and Bytes over Horsepower and MPG
Most investors make the mistake of thinking about a deal like this in terms of what the products represent.
Clearly, we’re talking about cars – only what we drive no longer fits the definition in the traditional sense of the word.
Tomorrow’s vehicles are really computers with wheels, which means you’ll want to think about them in terms of bits and bytes rather than horsepower and MPG.
There’s a good argument for that.
For instance, it’s not uncommon for many of today’s cars to run as many as 50 separate microprocessors controlling everything from diagnostics and safety equipment to fuel use and – yes – emissions.
Tomorrow’s processors will run the cars themselves, making human interaction just another input.
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To that end, I think it’s very telling that former Ford Motor Company (NYSE:F) CEO Mark Fields began characterizing the business as both a “car and data company.”
Nor is it a surprise that Tesla Inc. (NasdaqGS:TSLA) CEO Elon Musk feels the same way. He didn’t drop the “Motors” from Tesla’s name earlier this year for kicks and giggles.
Car data monetization will be a $750 billion market by 2030, according to McKinsey & Co.
Ironically, tech manufacturers will make the jump faster than traditional carmakers and their suppliers who are accustomed to seven-year product cycles, full control over a stable value chain, consolidated monetization models, and few interactions with end customers.
Which is why you’ll want to very seriously consider unloading every share you own when it comes to the likes of Detroit’s traditional automakers. It’s dead money, or at least money with the potential to leave your wealth stranded.
Instead, go with the likes of Toyota Motor Corp. (NYSE:TM) which has invested more than $1 billion in artificial intelligence and which is doing a lot of thinking about the nature of transportation. You’ll catch a glimpse of that in 2020 when the company rolls out some of its Buck-Rogers style technology during the 2020 Olympic Games in Tokyo.
Or Tesla Inc. (NasdaqGS:TSLA), which is redefining the car as a larger part of the electrical grid.
Then, consider picking up shares in Apple Inc. (NasdaqGS:AAPL), and Alphabet Inc. (NasdaqGS:GOOGL). Both have yet to unlock the big data that will form the backbone of future transportation. We’ve talked about each many times as they relate to self-driving cars.
Your Best Move: The “Chinese Amazon”
If you really want to get ahead, though, the one stock you need to buy if you want to maximize profits is Alibaba Group Holding Ltd. (NYSE:BABA)
The “Chinese Amazon” introduced a sport utility called the RX5 with plenty of wow-factor last year for around $22,000.
The fit and finish is reportedly stunning and that tells me it won’t be long before China’s automakers are producing quality vehicles on par with American and European models…
Or, the more likely outcome based on my experience in China? They’ll be better.
The RX5 is being billed as an “Internet car” capable of finding parking spaces, locating gasoline or charging stations, making restaurant reservations, and a whole lot more – all of which rely on Alipay, which is Alibaba’s version of Apple Pay.
Further, the car is already being prepped to interact with surrounding traffic, vehicles, and even nearby businesses, which is no small undertaking considering that China’s auto market is the world’s largest and potentially most profitable.
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Why The Dragon’s Eye is on Detroit
That brings me back to why China’s car companies, or even a Chinese tech company, will buy one or more U.S. automakers, starting with Fiat Chrysler.
Doing so gives them access to technology that will help them leapfrog technological and quality gaps presently holding them back. At the same time, foreign sales channels give them much needed hard currency, powerful brand recognition, and distribution reach.
Then, they’ll go after smaller specialty companies making key components like the three I’ve identified in a new Special Investor’s Report broadcasting this fall. All three are relatively undiscovered, inexpensive, and potentially very profitable acquisition candidates.
In closing, there’s clearly a lot to absorb in today’s column.
But it all boils down to this one thought when it comes to your money:
…the Dragon is coming to dinner. The only decision you need to make is whether you want to be at the table or on the menu.
Until next time,