Volkswagen has been losing out to local competitors in China, its single biggest market.
London CNN  — 

Shares in Europe’s largest carmaker Volkswagen and its French rival Renault dropped sharply Friday after UBS analysts recommended investors dump the stocks, citing the growing threat to their business from Chinese competitors.

Volkswagen was down 4.4% in late afternoon trade in Europe and Renault 5.6% lower, while the benchmark STOXX Europe 600 index was flat.

On Thursday, analysts at Swiss bank UBS downgraded their recommendation on both stocks to “sell” from “neutral.”

“We believe it unlikely VW can weather the upcoming Chinese advance without negative earnings impact,” Patrick Hummel, David Lesne and Juan Perez-Carrascosa wrote in a research note.

China is the biggest single market for Volkswagen but its sales there have been declining in the face of pressure from local competitors. In the first quarter of this year, BYD, the Chinese electric vehicle maker backed by Warren Buffett, surpassed Volkswagen to become the largest brand by sales in China.

In their note, the UBS analysts highlighted the threat to the carmaker from “highly competitive” Chinese EVs.

“Legacy mass manufacturers are at greatest risk of structural market share losses due to intensifying competition from Chinese [companies] and Tesla,” they said in a separate note.

“Renault is one of the most exposed names here,” they wrote, adding that most indicators of the French carmaker’s financial performance were no longer improving.

Analysts at investment banks and brokerages rarely issue “sell” or “underperform” stock ratings. A research paper published last month found that such ratings made up only 9% of all recommendations on average, while “strong buy” and “buy” ratings represented 46%. The findings are in line with previous studies on “optimism” among so-called sell-side analysts, the authors wrote. (Buy-side analysts work for investment firms or funds.)

One such study, published in The Accounting Review in 2013, says it found “direct evidence” that big investors pressure sell-side analysts to publish upbeat opinions to support their investments in particular stocks.

China has been making a big push to electrify its transport infrastructure. Sales of EVs in the country soared in the second quarter of this year — hitting a record high in June — buoyed by generous price cuts by carmakers and local government subsidies, according to the China Passenger Car Association. Vehicles sold included those powered by batteries, plug-in hybrid engines and fuel cell engines.

Volkswagen, Renault and other global players have been teaming up with Chinese companies, too. Volkswagen said in July that it had bought nearly 5% of Xpeng for $700 million and agreed a strategic partnership to develop two new models as it attempts to reverse a decline in sales in the world’s biggest car market.

Earlier that month, Renault and Geely announced a joint venture to build engines for hybrid and gasoline-powered vehicles, with the partners agreeing to invest a maximum of €7 billion ($7.7 billion) in total.