Is GM Investing Too Much in China?


The Buick Riviera concept car, developed by GM's joint venture in Shanghai, was a star of last week's Shanghai Auto Show. Photo credit: General Motors

Lately, the news has been thick with reports that General Motors is aiming to ramp up its operations in China even further.

GM is already the overall leader in China's still-hot auto market, with a 15.1% share of the market in the first quarter. But just like key rivals, including Ford and Volkswagen, GM is making a massive push to expand its base in China still further.


Last week, GM officials said that the company would spend $11 billion on new factories, new products, and new facilities - including hundreds of new dealerships - in China by 2016.

It's far and away GM's biggest investment of the moment. But GM is obliged to split the bulk of its China profits with Chinese joint-venture partners - in effect, with the Chinese government.

Is this massive commitment really the right course for GM?

GM's partner is a state-owned automaker
Bloomberg recently published an article comparing GM's push in China to Toyota's investment in U.S. expansion during the late 20th century. In some ways it's an apt parallel - GM, like Toyota, is building a big on-site presence in a massive growth market just as business is booming.

But in a way, there's a big difference. Unlike Toyota in the U.S., GM is obliged under Chinese law to be a partner (technically, a junior partner) in joint ventures with Chinese companies in order to build cars in the country.

GM's leading partner is SAIC, China's biggest domestic automaker. SAIC stands for "Shanghai Automotive Industry Corporation", and it is owned by the state - essentially, it's run by the city of Shanghai.

And make no mistake, even though GM is bringing the brands and the designs and the technology and the marketing know-how, SAIC is the leading partner, at least in Chinese eyes: There's a reason that their main joint venture is called "Shanghai GM" and not "GM Shanghai".

Big sales, but less-big profits
Whatever you may think of China's political system, SAIC has been a great partner for GM so far. But even setting aside all of the implications of the politics, just the fact that GM is in a partnership constrains its profits, because it has to split them.

Ponder this for a moment: Last year, GM North America (which is mostly the U.S.) earned $7 billion before taxes. GM's "International Operations" unit (which is mostly China) earned $2.2 billion.

Simply put, GM earned a lot more money here than it did in China. But it sold more vehicles in China than it did in the U.S. last year - 2,836,128-2,595,717, to be exact.

Some of that difference in earnings has to do with GM's ongoing investments - in China, and elsewhere in Asia. But a lot of it has to do with the fact that GM has to split its China profits with its partners.

And of course, those partners are learning a lot from their work with GM, which is a big long-term worry: Is GM just training a giant future competitor?

Will this story end well for GM?
Despite the fact that it has to split its profits, there's a good argument to be made that China's huge auto market is the best growth opportunity available to GM at the moment. And given that it has a strong partner, a strong market position, and a clear read on the opportunities ahead, investing big to build on that position and take advantage of those opportunities makes a lot of sense.

I get that. And as a GM shareholder, and as someone who wants to see American automakers do well (even the bailed-out ones), I actually agree with it. If I were running GM today, it is what I would be doing.

But sometimes I step back and look at all this, and I ask: Is this really going to work out well for GM in the long run?

What do you think? Scroll down to leave a comment and let me know.

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The article Is GM Investing Too Much in China? originally appeared on Fool.com.

Motley Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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jusloverly1

No big deal, if GM loses money In China they will just charge it off to US

April 29 2013 at 5:52 PM Report abuse rate up rate down Reply