Shares of General Motors (GM) and Ford Motor (F) tumbled Wednesday as Morgan Stanle𒁏y downgraded the stocks and the overall U.S. industry sector because of competition from China.

Calling it the "China Butterfly Effect," the analysts wrote in a note that the "China capacity 'butterfly' has emerged and is flapping its wings." They noted that the country now produces 9 million more cars than it buys, "upsetting the competitive balance in the West." 

General Motors went to "underweight" from "equal-weight," and its price target fell to $42 from $47. Ford Motor was dropped to "equal-weight" from "overweight," with the price target going to $12 from $16.

US Auto Industry No Longer 'Attractive'

Morgan Stanley also downgraded the U.S. auto industry to "in-line" from "attractive," based on "a combination of international, domestic and strategic factors that we believe may not be fully appreciated by investors." The analysts said that "there are better ways to play rate cuts."

Despite today's 5% declines, shares of General Motors are up more than 25% year-to-date. Ford shares, which are down 4% Wednesday afternoon, are nearly 15% lower in 2024.