Is GM Headed for Trouble in China?
Jul 10th 2012 7:55PM
Updated Jul 10th 2012 8:00PM
Despite rising concerns about the Chinese economy, General Motors (NYS: GM) has been doing pretty well in the Middle Kingdom. Total GM sales -- the company has three separate joint ventures -- in China were up 10.1% in June versus year-ago totals, as key GM products continue to find favor with Chinese consumers.
So far in 2012, GM's sales in China are up 11.3%, well ahead of the overall market. But new regulations in several Chinese cities may threaten that growth -- and knock the wind out of GM's Chinese sails.
Tough new limits on new-car sales
Here's the problem: Concerns about air pollution and traffic congestion are leading major Chinese cities to impose strict limits on new-car sales. The city of Shanghai -- ironically, the Chinese home of both GM and Volkswagen (NASDAQOTH: VLKAY.PK), the two biggest automakers in the country -- has limited sales to 20,000 per month for some time. China's capital city, Beijing, enacted a similar limit early last year.
Most recently, the huge (population nearly 14 million) southern city of Guangzhou surprised with an even stricter limit. Effective July 1, Guangzhou's city government will allow just 10,000 new-vehicle registrations per month, for a one-year trial period. Sales in the city had been running at about three times that rate, according to a report by Bertel Schmitt at The Truth About Cars.
GM China chief Kevin Wale said in a statement that he expects GM's sales growth in China to "remain steady" through the rest of 2012, thanks to demand in China's interior provinces. But what happens if, as many expect, other major Chinese cities follow Beijing's and Guangzhou's example? Will GM's much-ballyhooed Chinese success story have a rough ending?
A bigger piece of a stagnant pie
The limits certainly won't help GM, but even if they spread to other cities, their effects may be less dramatic than some expect. For one thing, GM's market share in China has been increasing even as overall auto sales have stalled. That trend could well continue. Like rival Ford (NYS: F) , GM has been investing aggressively for future growth: not just in additional production facilities, but also in new dealerships outside major metropolitan areas.
I think GM is likely to hold its ground, and even expand -- though at a far slower rate than in years past, when 50% increases were the norm. But even if GM's sales growth in China is curtailed, it's unlikely to be a disaster for the General's bottom line. While GM sold more vehicles in China than it did in the U.S. last year, its profits in China are split with its joint-venture partners. Last quarter, GM reported $423 million of equity income, nearly all of that from its Chinese joint ventures. That's real money, and it's important, but it pales in comparison with the $1.7 billion it earned in North America on roughly similar sales volumes.
Seeking growth markets beyond China
Still, GM is hedging its bets. Major new investments in Russia are following on a period of significant growth for GM in the country -- sales were up 21% in the first half of the year. Russia's auto market is still relatively tiny compared with China's, but just as Ford has been doing, GM is seeking to be well positioned should sales take off.
Meanwhile, GM has lost some ground in the other potentially huge Asian market, India, as a new line of low-cost cars designed to compete with local offerings like the Nano from Tata Motors (NYS: TTM) was delayed. According to a report in Automotive News, GM and its key Chinese partner, SAIC, encountered delays while racing to adapt two China-market models to the right-hand-drive configuration required in India.
Still, such problems will be overcome in time. GM's relatively strong position in all three markets -- China, Russia, and India -- give it an advantage over key rivals like VW, Ford, and Toyota (NYS: TM) , each of which is well behind in one or more of those countries. That, and GM's still-leading position in the all-important U.S. market, bode well for the General's hopes of staying at the top of the global automotive heap in coming years.
GM's stock, currently mired in the low $20s, could have significant upside in coming months as new products hit showrooms and improvements continue around the world. However, investors need to stay attuned to fluctuating demand and the ability of automakers like GM and Ford to respond in unison. For starters, one of our top equity analysts has compiled a premium research report with in-depth analysis on Ford's competitive edge. To find out what could propel Ford down the road, get instant access to this premium report now.
At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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