Morgan Stanley downgraded the U.S. auto sector and several companies in it because of growing competition from China.

Shares of General Motors (GM) and Ford Motor (F) plunged on Wednesday after Morgan Stanley downgraded both stocks, citing the growing competitive threat from China. The investment bank slashed its ratings and price targets for the two automakers, warning that China’s car production is now significantly outpacing its domestic demand, a trend they dubbed the “China Butterfly Effect.“

In their note, Morgan Stanley analysts pointed out that China currently produces 9 million more cars than it buys, which is “disrupting the competitive balance in the West.” As a result, they lowered General Motors’ rating to “underweight” from “equal-weight” and cut its price target from $47 to $42. Ford was downgraded from “overweight” to “equal-weight,” with its price target reduced from $16 to $12.

Morgan Stanley also downgraded the entire U.S. auto industry, moving it from “attractive” to “in-line.” The analysts explained that several international, domestic, and strategic challenges may not be fully understood by investors, making the sector less appealing. They suggested there are “better ways to play rate cuts” than investing in the current auto landscape.

Despite Wednesday’s 5% decline, General Motors’ stock is still up over 25% year-to-date, while Ford shares, down 4% during the day, have dropped nearly 15% so far in 2024. As China continues to expand its automotive footprint, U.S. automakers may face an uphill battle to maintain their competitive edge.