Raising GM Estimates On Strong Growth Prospects In China
General Motors (NYSE:GM) recently announced second quarter earnings that topped market expectations. Besides improving in Europe, the automaker continued to perform strongly in the U.S. and China with sales higher by 8.4% and 11.5% respectively. China has become significant for GM and it now accounts for about 45% of the stock value as per our estimates.
GM operates in China through 10 joint ventures although the SAIC-GM-Wuling JV accounts for almost half of the sales. SAIC-GM-Wuling Automobile is a joint venture between SAIC Motor, General Motors and Liuzhou Wuling Motors Co Ltd.
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The key to success in China is to have a strong portfolio of entry-level and low-cost cars. GM already has a China specific brand called Baojun under which it sells two models, namely the Baojun 630 which starts from $10,000 and the Le Chi that costs $6,400 upwards. It also has an array of microvans under the SAIC-GM-Wuling JV.
Although GM’s past success in China has hinged on possessing an array of low-cost cars, the future profits could be derived from the automaker’s luxury brand – Cadillac. A couple of months back, GM got the approval from the Chinese government to build a $1.3 billion plant with a capacity of 150,000 units to manufacture the Cadillac cars locally in China.
It recently began manufacturing the XTS sedan locally, and the ATS and CTS are expected to follow suit shortly. Its other models, including the SRX and the Escalade, will be exported from North America for the time being. Although GM is the market leader in China with ~15% share in the automotive industry, it could only manage to sell 30,000 Cadillacs in China last year.
That’s in stark contrast to the market leader BMW, which sold more than 325,000 units. But with the help of some price discounts and increased marketing (including roping in Brad Pitt), GM is targeting a 10% market share in China’s luxury car market by the end of the decade.
Higher Profitability
As per McKinsey, China’s luxury car market will swell to more than 3 million units sold by 2020 from 1.25 million sold last year. [1] A 10% market share would mean 300,000 luxury cars sold annually by GM, which is huge, given the fact it sold fewer than 150,000 in the U.S. last year. [2] Currently, the market is dominated by the German autos BMW, Audi and Mercedes, which together account for three-fourths of the market.
It is not just the volume that is important. The automaker will also earn more money per car. Last year, GM’s net income from China stood at $1.5 billion, which translates to an income of $536 per vehicle sold. It actually declined in 2012 due to a greater proportion of small cars sold. But selling more Cadillacs will raise the average income per vehicle. In the latest quarter, GM’s net income per vehicle sold rose to $558. [3] We expect this figure to rise by a modest 3-4% in the long term.
GM is investing a massive $11 billion in China within the next four years to build factories, set up R&D centers and expand dealerships. As a result, we expect GM to maintain its market share in the Chinese automotive market. Historically, GM has only gained market share and still continues to do so. It has a solid understanding of the Chinese market and given the investments it is pouring in, it will be really difficult for the competitors to steal much market share from GM.
We have raised our estimate for GM to $38, which is slightly above the current market price.
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Notes:- China Luxury Car Sales Seen Beating U.S. by 2016, March 4, 2013, bloomberg.com [↩]
- GM Investor Relations [↩]
- GM 10-Q [↩]