GM’s Chinese Dominance Threatened by VW

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

China is the biggest auto market of the world, seeing sales of 15.5 million passenger cars and a growth rate of 7.1% in 2012. The latest data for December 2012 by the China Association of Automobile Manufacturers (CAAM) shows that car sales went up by 6.9% to 1.46 million vehicles. By comparison, a total of 14.49 million cars and light-duty trucks were sold in the U.S in 2012, a 13.4% increase over last year, including 1.35 million sold in December, up  9% year-over-year. The biggest American and Japanese vehicle manufacturers have invested heavily in China and leading from the front is General Motors (NYSE: GM).

Although Chinese automobile growth numbers are promising they are lower than the estimated growth rate of 8%. CAAM attributes this decline to increasing fuel costs, economic slowdown, some of the major cities adopting policies to reduce carbon emission and traffic congestion. Moreover, the Beijing-Tokyo island dispute caused a serious dent in the sale of Japanese cars and while American firms have capitalized on this opportunity, they couldn’t keep up with expectations.

Foreign manufacturers in the Chinese automobile industry witnessed mixed outcomes in 2012. US auto manufacturers performed well whereas Japanese sales plunged. General Motors, having a joint-venture with SAIC Motor Corp, sold 2.84 million vehicles (11.3% growth), while Ford (NYSE: F) sold 0.62 million vehicles (21% growth). On the other hand, Toyota (NYSE: TM), Honda (NYSE: HMC), and Nissan sold 0.84 million, 0.59 million, and 1.18 million vehicles respectively. Toyota’s December sales plunged by 16% YoY to 90,400 units and the vehicle giant ended up selling the exact same number of cars in China as Nissan, the smallest of the three Tokyo vehicle giants. Overall, for 2012, Toyota, Honda and Nissan have reported a decline in sales of 4.9%, 3.1% and 5.3% respectively.

General Motors has two joint ventures in China; with SAIC called Shanghai General Motors Corp and with FAW Group called FAW-GM Duty Commercial Vehicle Co. GM now is working on another joint venture with SAIC Motor Corp and Wuling Motors Holdings Ltd called SAIC-GM-Wuling by building their third vehicle manufacturing facility in Chongqing. This $1 billion investment will produce 400,000 vehicles, out of which the majority will be minivans. Construction work is expected to begin as early as this year while the plant will become operational by 2015.

General Motors had been topping the list of foreign auto manufacturers who are conducting operations in China. In 2012, despite the massive 24.5% increase in the number of shipments by Volkswagen AG to China of 2.81 million vehicles, GM managed just barely to keep a narrow margin of 30,000 units. The major contributor to this success was the GM-Wuling Minivan. Currently, the partnership of SAIC-GM-Wuling covers 47.5% of the minivan market, mostly in the rural class. But, Volkswagen’s superior economy-of-scale and product line will likely out-compete GM in the long run. 

At its core, GM is still the same poorly-managed commodity producer it has always been.  Volkswagen’s MQB platform and huge advantages in existing technology, R&D spending and eventual production efficiency should prove too much for GM, who is capitalizing on the initial rush of first time car buyers in the Chinese market.  Meanwhile, GM is also estimating 8% growth in 2013. In keeping pace with the growing Chinese auto market, GM will be adding 400 dealers to its network, thus, raising the current dealership from 3,800 to 4,200.

General Motors is also thinking about the introducing alternative-energy vehicles for the Chinese market. This option has both, merits and demerits. The 2020 vehicle standards are very challenging in terms of achieving fuel-economy, being environmentally friendly and reducing carbon-emissions. Conventional combustion engines may fail to comply with the standards; hence, it is preferable to move into alternative and clean energy. The Chinese Government is also expecting companies to bring 0.5 million alternative fuel vehicles in 2015 and 5 million alternative fuel vehicles by 2020.  Volkswagen leads in these areas as well, while GM has the Volt which, frankly, it can’t give away except to government agencies.

SAIC is also pressuring GM to produce alternative fuel vehicles. This may seem to be a win-win situation for managers of GM as both government and local partners are supporting alternative fuel vehicles. However, General Motors is reluctant in introducing this latest technology in the country where intellectual property theft is rampant and its execution is poor.  So while GM is saying it is reluctant to trust the local players, I’m more inclined to believe that it is a matter of not wanting to introduce technology that is clearly inferior to its rivals like Toyota and Volkswagen. 

Nonetheless, if GM doesn’t innovate and deliver superior products to its millions of Chinese customer, then it is going to lose the coveted position of the biggest foreign player in the world’s largest automobile market.  Rock meet hard place and no bailout will help this time.

Whatever the situation is, one thing is for sure: General Motors is firm on the decision to invest $7 billion in China by 2015. However, such ambitious plans should also focus on the fact that the Chinese market of passenger cars is quickly reaching its saturation point. This segment saw an increment of merely 7.5% in the first seven months of 2012. Overall, the Chinese automobile industry is still a lucrative avenue for foreign manufacturers like GM and still has a lot of room for expansion. China Association of Automobile Manufacturers expects the growth rate to be 7% in 2013, and a sales target of 20 million vehicles has been set in 2013.

 

GM

Toyota

Volkswagen*

Stock 6M

47.88%

26.22%

30.29%

P/E

10.75

15.71

3.53

EPS

2.66

6.04

63.40**

Yield

N/A

1.4

1.71

ROA

2.90%

2.88%

2.52%

ROE

13.26%

7.96%

32.19%

 

In the last six months, GM’s stock rose by more than 47.88% but here too it is quickly being followed by its main Chinese rival Volkswagen’s ADR, which is up 40.32% in the same period. Volkswagen’s ordinary shares are traded in London where it offers an attractive yield at a far lower P/E and has delivered a higher return on equity as compared to General Motors or Toyota.  I’ve had a call on GM for months now as a medium term trade based on its ties to the Obama administration.  But, that effect will fade in 2013, and the fundamentals of both Toyota – piggybacking on the weak Yen – and Volkswagen are too attractive to ignore for much longer. 


PeterPham8 has no position in any stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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