Here’s Why General Motors Is Re-Assessing Its India Investment?

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Reports quoting company officials suggest that General Motors (NYSE:GM)  is re-evaluating its planned $ 1 billion investment in India, to which the U.S. automaker had previously committed.  The investment is aimed at doubling its market share in the region by 2020 and making the facilities a global export hub. The original investment was planned for launching a multi-purpose vehicle and a new modular platform to build low cost cars for emerging markets, among other things. The company is also putting on hold the planned new car platform. While the Indian automotive market is witnessing  very high growth (nearly 8%) and has a strong potential given the low penetration of cars (18 per thousand compared to the 800 per thousand number for the U.S.), changing regulations and consumer preferences have led General Motors to review its India investment strategy. We believe that, while India holds a strong long term potential for General Motors, the right strategy to target this market is critical.  A review at this stage can enable the company to better utilize its investments in the region.

Changing Consumer Preferences, Uncertain Regulatory Environment

According to a PWC study, consumer preferences in Indian urban areas are shifting towards superior car models that are available at affordable prices, as opposed to small cars. Nearly 40% of the demand for small cars in India comes from its rural areas and PWC expects this segment to come under pressure as the Indian economy grows and customers look at upgrading their cars. Automakers are seeing limited growth in the compact car segment in India and higher growth in the sedan segment.  These changing consumer preferences have led General Motors to reassess its India strategy. Regulations around diesel cars in the region are also uncertain. Recently India’s Supreme Court imposed a ban on the sale of 2000cc and above diesel vehicles in the capital of the country, with the National Green Tribunal proposing to extend this prohibition in 11 more cities. However, reports now suggest that the Court might consider lifting the ban if a one-time environment tax is paid for each vehicle.  General Motors’ strategy to review its product portfolio for the region in view of the regulatory changes can enable the company to launch products which are in line with the regulatory requirements.

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According to our estimates, the international segment accounts for nearly 10% of General Motors valuation and we expect the company’s international market share to remain steady at around 7% over our forecast period.

We expect the total vehicles sold by General Motors in international markets to increase steadily over our forecast period from nearly 21 million in 2016 to around 25 million by the end of our forecast period.

We expect the company’s focus on fast growing emerging markets to support the growth in total vehicles sold, although we do not expect General Motors to increase its international market share significantly over our forecast period.

Reviewing its strategy for emerging markets is critical for General Motors to tap into the growth of these markets and establish itself as a strong player in these fast growing regions. We believe the reassessment of its investment in India can enable the company to allocate resources in the right direction thus driving revenues in the long term.

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