A Look At GM’s China Sales

by Trefis Team
General Motors
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China has been making a lot of news for General Motors (NYSE:GM). The automaker recently opened a new factory capable of producing 400,000 vehicles annually. [1] At the same time, GM and its joint ventures (JVs) announced their decision to pour in another $1 billion to build their third plant in Southwest China which will raise the production capacity by another 400,000 units by 2015. [2] We estimates that the world’s biggest automobile market contributes almost 38% to GM’s stock price and is the most important division of the company.

See full analysis for General Motors

How Many Vehicles Does It Sell ?

Sales of GM and its joint ventures are up 10% to 2.6 million vehicles through November. In fact, the automaker has sold more cars in China this year than in the U.S. In 2011, the automaker sold a total of 2.5 million vehicles in the country. China accounts for more than 30% of GM’s global sales. [3]

GM has a presence in the country 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.

What Is GM Up To ?

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.

In addition to capacity expansion, GM will be introducing a new Cadillac model every year through 2016 to boost its portfolio of luxury cars. It also plans to add 600 dealers to take its total tally to 3,500. [2]

How Much Money Does It Make ?

GM does not consolidate its Chinese operations with the rest of the company’s financials. Rather, it reports the equity income earned from its JVs (i.e. income net of taxes and gain on disposal of investments). GM’s net income from its Chinese JVs stood at $1.5 billion in 2011 which translates to about $593 earned per vehicle sold.

The equity income earned per vehicle has declined this year which can be attributed to a greater proportion of lower cost (and therefore lower income generating) vehicles sold. We forecast net income per vehicle sold to stay at similar levels since we expect the lower cost models to account for the majority of the sales in the considerable future as well.

China’s automobile industry has slowed in the last couple of years and replicating the high historic rates doesn’t look likely. We forecast the Chinese automobile market to grow annually by about 4% in the long run. Of course, there is a possibility that the growth rates could exceed our forecasts. You can drag the trend-line to arrive at your own customized price estimate. Thus, if GM were to maintain its market share, there is plenty of money to be made.

We have a $26.90 price estimate for General Motors, which is about 5% more than the current price.

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  1. GM, its Chinese partners launch 2nd Baojun plant, November 20, 2012, freep.com []
  2. GM China Sets $1 Billion Plant, November 29, 2012, wsj.com [] []
  3. GM China November Sales Increase 9.7% on Buick, Chevrolet, December 7, 2012, businessweek.com []
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