How General Motors Can Benefit From The Volkswagen Scandal?

-8.32%
Downside
45.35
Market
41.57
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General Motors

In 2013, Volkswagen overtook General Motors (NYSE:GM) as the highest selling foreign car maker in China.  China is the largest market for General Motors and accounts for almost 50% of the valuation of the company. With the recent diesel emissions scandal, Volkswagen is facing management issues, penalties, criminal investigations and more importantly a reputation loss.  There is a possibility that, with loss of trust in Volkswagen, consumers may now move back to General Motors, allowing it to regain its number one position in China.  An increase in market share in China will have a an impact on GM’s valuation. The extent of this impact is explained below.

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A market share of 20% in China means a 10% upside in our price estimate

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Volkswagen’s market share in China was around 18% in 2014. [1] If GM is able to capture 1/3rd of this market share over the next few years, its overall market share can reach 20%.  This increase will lead to a 10% upside in our price estimate.  We can project this scenario using Trefis interactive technology.

GM1

Although Volkswagen does not sell too many diesel cars in China, the reputation loss can lead to market share shift and the above scenario is plausible.

Increase in U.S. Market share can help ease China slowdown pressures

Chevrolet Cruise is the only diesel car GM offers in the U.S.  The recent scandal can move buyers away from diesel cars and this could benefit General Motors.  Although U.S. car sales are not a significant component of GM’s valuation, an increase in sales in this segment can help ease out the pressure from the China slowdown (Read What GM Is Doing To Protect Itself From The China Slowdown).

Volkswagen’s reputation loss has definitely opened up the market for other players to grab.  GM has an advantage of being the previous market leader in China and does not have many diesel options in the U.S.  Both these factors favor GM and will help it  gain more market share which could potentially increase its valuation.

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Notes:
  1. LMC Automotive []