Why GM Must Maintain Its Profitability In China
General Motors (NYSE:GM) is one of the few U.S.-based companies ever to crack the Chinese auto market. The auto maker operates in China through joint ventures with local Chinese companies and its income from the region is reported in terms of its equity share in those companies. GM’s sales in China have grown at a fast pace over the past few years and it has become the highest selling international brand in the region. GM has increased its production so much in the region that it can now afford to import vehicles from China to the U.S. if it wants to save on labor costs. However, the growth rate of the Chinese market is expected to slow down and most of its growth is expected to come from first time buyers in Tier 3 and Tier 4 cities. The impact of these two trends is already visible in GM’s China equity income per unit, which grew at 4.0% and 4.6% in 2013 and 2014, respectively, but declined by 5.5% in 2015. Currently, we forecast GM’s equity income per unit sold to decline by 1% each year for the rest of our forecast period. If instead of declining by 1%, GM can grow its China equity income per unit sold at 5% for the rest of our forecast period, our target price for GM could increase by close to 10%. However, a 5% decline over the period would reduce our target price for GM by 5%.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors
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