Auto Sector Parts Suppliers Looking Good in China

You should continue to stay away from automakers at this time. I have not been optimistic on automakers for several years now, as the growth in North America is absent and declining. The big three U.S. automakers are struggling in light of rapidly declining demand for SUVs and larger vehicles. With the price of gasoline close to $4.00 a gallon in the United States and about $1.30 per liter in Canada, you’ll understand why demand for gas-guzzlers is declining fast.

In my last commentary, I discussed the situation with General Motors Corporation (NYSE/GM), which announced that it would be closing three plants in the U.S . and one in Canada. Why anyone would put dead money into an auto stock is not clear. GM just said that its sales in the U.S. fell by an adjusted 30.2% in May, while Ford Motor Company (NYSE/F) announced a 15% decline in its May sales. Car sales did jump three percent for Ford, but this was offset by declining SUVs and pickups.

The demand for smaller and more fuel-efficient cars continues to drive the auto industry given the high cost of gasoline. Even Toyota Motors Corporation (NYSE/TM) saw its U.S. sales fall by 4.3% in May, highlighted by a 12.2% decline in truck sales.

With the higher gasoline prices, the key is to look for growth in foreign auto markets such as China. U.S. automakers are already there and are doing well. China’s massive auto market surpassed Japan in 2006 to become the world’s second largest market for vehicle sales after the United States. And with estimates from industry pundits saying that the country will become the second largest producer of vehicles by 2010, you can understand our optimism towards China.

Companies that could benefit from growth in China’s auto sector will be the parts suppliers. There are numerous small-cap companies in this category that trade on U.S. stock exchanges.