GM Experiences Expensive $5 Billion Setback in Overseas Operations
GM Experiences Expensive $5 Billion Setback in Overseas Operations
Back in the day, China was seen as a goldmine for Detroit car manufacturers due to its expanding middle class and booming light-vehicle market. Companies like General Motors (GM, 0.78%) initially prospered in China, even making it their largest sales market for a while. However, recent developments have raised concerns, leading to significant changes for GM at a hefty price.
The Warning Signs
GM's sales in China peaked at 4 million vehicles in 2017, but since then, they've taken a nose-dive, falling by nearly half. This slide has significantly impacted profits, with GM posting a series of quarters in the red in China.
If year after year of plummeting sales in China wasn't alarming enough, Bank of America analyst John Murphy sent a clear message during his annual "Car Wars" presentation: "I think you have to see the Detroit Three exit China as soon as they possibly can."
The root of the problem can be traced back to China's government subsidizing domestic car manufacturers, particularly electric vehicle (EV) companies. Armed with these benefits, China's car manufacturers quickly dominated EV battery technology, and their markets followed suit.
In fact, as of July, half of the vehicles sold in China were battery electric or plug-in hybrids. With the U.S. and other countries considering steep tariffs on Chinese EVs to protect their domestic manufacturers from cheap competition, the question is how Detroit cars can compete in China's plug-in-heavy market without tariffs on their side? The answer is bleak - they can't, and that's why sales have tumbled. The picture isn't getting any brighter, with Chinese car manufacturers hinting at an escalating price war in 2025.
So, what is GM doing about its China predicament?
Time for a Turnaround
Instead of abandoning the market altogether, as Murphy suggested, GM is planning a major overhaul of its struggling Chinese operation, which will take a heavy toll on its earnings, over $5 billion to be precise. The restructuring will see GM take non-cash charges of $2.7 billion for the revamp and another $2.6 billion to $2.9 billion to account for the falling value of its stake in its SAIC Motor Corp. Chinese joint venture.
The restructuring will likely involve cutting several vehicle models and plant closures. The strategy is to focus on EVs, hybrids, and luxury imports, a challenging and competitive path. However, the silver lining is that GM aims to turn its Chinese business back into profitability by 2025 with a significantly reduced operation. To succeed in China without substantial or ideally any further investment, GM needs its China division to flourish.
The Takeaway
This is a necessary move, a better alternative than leaving completely - at least for the time being. The restructuring move will help stem losses, shrink its operation, and give GM a chance to demonstrate it can create an affordable platform of EVs that can compete, even in China.
The days of China being a goldmine for profits that could rival GM's flourishing North America region may be gone for good, and investors need to acknowledge this shift in their investment outlook. What was once a significant opportunity has evolved into a glaring weakness in GM's core business.
As for investors, one of the most critical factors going forward for GM's success will be the competitiveness of its EVs in the U.S. and abroad, and its ability to lower costs sufficiently to make the lineup profitable.
Generic Investment Advice: Given the shifting landscape of the Chinese automobile market, investors might want to reconsider their strategies when it comes to companies like GM, focusing on their capabilities in electric vehicle development and market competitiveness.
Revising Investment Strategy: In light of GM's significant financial commitments to restructuring its Chinese operations and the evolving nature of the Chinese automobile market, investors should consider adjusting their investment strategies to account for potential risks and rewards in this sector.