GM: Growth Motors or Grinding Mediocrity?
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the worst of the financial crisis of 2009 looks to be behind us, car companies are eager to regain the sales momentum they enjoyed during the boom years. GM (NYSE: GM) is the poster-child for how financial excess and regulatory capture drove a company that produced and sold more cars in the world than anyone else into bankruptcy and nationalization. As they emerge from their restructuring (and stiffing their bondholders at the expense of the UAW) GM is looking towards the rapidly evolving economies in Southeast Asia as one of the roads it must travel to produce financial success, but that road is not necessarily a paved one.
Thai-ing the Knot
A near doubling of sales in Thailand from 2010 to 2011 and an exceedingly successful appearance by Chevrolet at the 33rd Bangkok International Motor Show (BIMS), taking away 5 ‘Car of the Year’ awards as well as building the new Trailblazer in Thailand for Southeast Asia specifically are two indicators that the GM is producing cars this market wants. But their footprint in Southeast Asia is poor outside of China, with just over 3% total market share across ASEAN.
For this reason GM is trying to re-engage Izuzu. For more than 35 years they were near equal partners until GM in stages sold off their 49% stake in the Japanese small truck maker. Izuzu’s expertise in small diesel engines is its prized possession and a number of people are interested in gaining access to it. Toyota (NYSE: TM) has a 5.9% stake in Izuzu but nothing has come from their relationship and they are considering selling it. Now, GM is looking to once again have a stake in Izuzu who rebuffed GM’s initial offer to buy a controlling stake. GM recently backed off but wants enough to get access to a meaningful portion of Izuzu’s revenue stream, its diesel engine designs and extensive presence around Southeast Asia where they and Toyota are major players, along with Nissan. Their latest offer is for approximately 10% of Izuzu which would make them the largest single outside shareholder.
The Thai market is one that GM is strategically targeting due to its high growth potential that they debuted the redesigned Colorado there last fall, before introducing it in the States where truck sales are so very important to U.S. manufacturers. While they only hold 5% of the total car market, their sales rose 81% year-over-year in April to 6,301 vehicles sold, and 58% overall in 2011. Thailand’s auto market in January saw 11.5% year over year growth.
South by Southeast
GM’s new models are hitting all of the segments with the strongest growth in the largest ASEAN markets. The SUV-Compact and light truck segments are seeing double digit growth in both Thailand and Indonesia. Though auto credit tightening by the Indonesian central bank has dampened expectations this year, dropping estimates from 940,000 by 10-15%, overall the future of car sales there is exceptional.
Their aggressive makeover of their product line has driven GM’s growth in this region; seeing first quarter growth from 2010 to 2011 in maritime and mainland Southeast Asian countries alike. The Philippines saw a 37% sales increase. Chevy is profitable in Indonesia with growth increasing 34%. Because of the importance of that market GM is investing $150 million in reviving their plant in West Java. GM is looking to increase sales 500% over the next three years from just 4,500 units.
Along with Thailand and Indonesia, Vietnam is a market that GM is pursuing with some initial success. Chevrolet had its best year in terms of total sales in 2011 and Vietnam’s 79% sales growth was second only to Peru as Chevy’s fastest growing market, though it is still an extremely small market overall. In the first two months of 2012, new car sales in Vietnam increased 44% over 2011 but that represents just 10,400 vehicles. Of that market, Truong Hai (Kia’s local subsidiary) and Toyota claim 59%. GM’s market share is just over 10%.
GM’s sales pace in China is impressive. Through the first three months of 2012 they have grown sales by 8.7% versus 1.8% for Toyota, selling three times the number of cars there as Toyota did in March.
For all of these ASEAN markets, however, that story is the same. While auto sales are growing at a steady rate, tracking with overall GDP growth at around 5% annually, they only represent a small fraction of the population. This is an area of the world that over the next 25 years will see the middle class expand six-fold from 500 million to 3 billion people. If the growth of new car sales in China is any indication of what the future holds for car companies in Southeast Asia, then the future is bright for all of them. As countries like Vietnam emerge from tight credit policies and their road infrastructure continues to mature, car sales should accelerate.
But, to me, the issue is brand quality and rebuilding the General Motors brand is essential for them to compete with the entrenched Japanese competition. GM’s reputation is not one built on quality but rather quantity, having sacrificed the former for the latter for the past 30 years.
The past has severely damaged their brand at a fundamental level, having chosen to focus on financing and captive fleet sales as opposed to innovation and leadership. GM has not been a market leader in any segment except cheapness for a long time. So, while they focus on units shipped and those sold, they are not doing so above a commodity level. The story they serve up is now that they are no longer burdened by their past they will be able to better serve the market with quality cars.
Recent reports from J.D. Power have some of Chevy’s models doing very well in layout and appeal in Thailand, but failing to even beat the average in initial quality surveys. Similar results were found by J.D. Power in Indonesia. In China, Chevy again competes on appeal but at the lowest end of the market. They have zero presence as a premium brand, Cadillac accounted for less than 2.5% of total Chinese sales, and as such will have a hard time pushing high margins in these expanding markets.
In the 1970’s the Japanese car makers like Toyota and Nissan, initially sold cheap but reliable vehicles to a skeptical U.S. population that had only known cars made by the Big 3. As they built their sales their reputations for providing quality and price grew and drove the Big 3 to the brink of extinction, eventually launching premium brands to compete with the German luxury giants like Mercedes. Toyota has its own challenges on this front but their brand, while damaged in the U.S. has begun rebounding faster than analysts had predicted with sales up 11.6% in April. The stronger Yen since Fukishima has seriously eroded margins and impacting build quality and materials. Perhaps things have come full circle for Toyota.
But, for GM the shoe is on the other foot now as they have to begin from the ground up; supplying the market with better value, not just a better sticker price and reversing the trend of cutting costs to drive sales of bad cars.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend General Motors Company. 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. If you have questions about this post or the Fool’s blog network, click here for information.