What GM Is Doing To Protect Itself From The China Slowdown

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The most important market for General Motors (NYSE:GM) is China, the world’s biggest auto market. The company sells more cars there than any other region, even more than in the U.S. It is also the second biggest seller of new vehicles in the region after Volkswagen. As a result, the changing economic situation in China is of utmost importance to the company.

In recent months, there have been signs of slowing economic growth in China. Stock market crashes usually impacts the economy at large as capital reductions diminish wealth. Accordingly, the Chinese equities crash has made consumers nervous and as a result new car sales have declined for three months in a row. Moreover, international car makers are facing pressure from up and coming local Chinese players for market share. Additionally, the Chinese Government has devalued the yuan, which means that new car sales will translate into fewer U.S. dollars, the currency in which GM reports its financial results.

We have a $38 price estimate for General Motors, which is about 20% more than the current market price.

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What GM Is Doing To Protect Itself in China

In the second quarter of fiscal 2015, GM’s equity income from Chinese joint ventures rose slightly to $503 million. [1] The U.S. auto maker managed to report a small increase in unit sales despite prevailing market conditions. The company also managed to avoid pricing pressures and new SUV models along with increased sales of Cadillacs led to a 10.2% margin in the region. More interesting, however, was the company’s outlook for the region in the second half of the year. [2]

The company guided for a low-to-mid single digit growth in unit sales in new vehicle sales for the full year in China. There were two reasons behind this outlook:

1) Many auto makers, including GM, are planning to introduce newer models in the second half of the year, which should boost demand.

2) The second half of the year is usually favorable for auto makers in China. Sales are driven by national holidays in the fourth quarter of the year.

SUV Sales Can Boost Profits

Even though new vehicle sales have declined on a year-over-year basis for three straight months, sales of SUVs have continued to rise. In July, as overall sales declined by 7%, SUV sales increased by 34%. Most of that growth was captured by local Chinese auto makers, but international companies like GM are hopeful that they can capture some of this growth going forward.

Earlier this year, the company launched the new Buick Envision. The Envision is a mid-size SUV that could make its way to the U.S. market in the coming period. [3] It is an extremely profitable upscale model that has already been boosting the GM’s results in China. In the first half of the year, GM sold close to 60,000 Buicks in China, helping the Buick brand double its overall sales of crossover SUVs. The Envision is available on the market from a starting price of $43,000 and ranges up to $55,000. Given that the Envision is closely related to the Chevrolet Equinox, which sells in the U.S. for around $26,000, it has been extremely profitable for the company.

GM is also looking to capitalize on the trend of rising sales of inexpensive SUVs made by local Chinese brands. [4] GM has an affordable China-specific brand called Baojun. This is an attempt to push back against these trends. With Baojun’s help, GM has recently launched two new SUVs — the 560 and the 730. [5] Both are affordably priced (the 560 is available at a price of around $12,000) and the company expects good results from them.

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Notes:
  1. GM 10-Q, SEC []
  2. General Motors Company’s (GM) CEO Mary Barra on Q2 2015 Results — Earnings Call Transcript, Seeking Alpha, July 2015 []
  3. GM may export China-made Buick to U.S., USA Today, August 2015 []
  4. The surprising reason China’s SUV sales are up almost 50%, Fortune, May 2015 []
  5. 2016 Baojun 560 Is The Brand’s First SUV For China, GM Authority, April 2015 []