Thursday, May 29, 2014

GM's China Growth Plans Face Speedbumps

This article was originally published by TheStreet on May 21, 2014.
By Sarfaraz A. Khan. Research Asst. Gohar Yousuf
NEW YORK (TheStreet) -- Leading U.S. automaker General Motors (GM_) has been struggling at home due to its worsening recall crisis, but it's expecting robust sales growth in its second home, China.

The company's president predicted 8% to 10% growth in vehicle sales in China this year, according to a report in The Wall Street Journal.

GM is the No. 2 carmaker in China, the world's biggest auto market. The company is expanding its production capacity in the country to meet the rising demand. It faces tough competition, however, from international rivals, particularly Volkswagen AG (VLKAY_), which plans to spend nearly $25 billion in the country over the next four years. 

Moreover, the slowdown in China's economic growth isn't helping. China has forecast 7.5% growth in gross domestic product, but economists doubt the country will meet that target. In the first three months of 2014, the country's GDP growth fell to its lowest levels in 18 months while its manufacturing activity has shown no signs of expansion.
So far this year, GM's shares have fallen by 19% and are currently changing hands for about $33.
Last month, GM, which operates in China through joint ventures with FAW Group and SAIC Motor, reported a 6.3% year-over-year increase in sales during April. Overall, in the first four months of this year, GM has witnessed an 11% increase in sales. Over the next three years, GM plans to invest $12 billion in China. The company is building five new plants in the country. Three will be opened in 2014 and two in 2015.
The five plants will be located in some of the major cities such as Wuhan, Chongqing, Jinqiao and Shenyang. The facility at Shenyang will produce engines while the rest are going to be vehicle assembly plants. The Jinqiao facility will be used to manufacture Cadillac sedans.
As a result, the company is expecting a 65% increase in its Chinese production capacity by the end of the decade.
The company has forecast a significant increase in Cadillac sales, to 100,000 by 2015 from just 50,000 last year.
Including the new Cadillac models, GM will bring 60 new or refreshed vehicles to its Chinese customers through 2018 as it aims to improve its position in the country after losing the title of being the biggest foreign carmaker in China, in terms of vehicle sales,  to Volkswagen in 2013.
Clearly, Volkswagen poses the biggest threat to GM's growth in China. Volkswagen, which has been operating in China longer than GM, is predicting a 10% increase in sales in 2014 to more than 3.5 million vehicles.
Volkswagen's Audi unit, which is already the biggest player in China's booming luxury car market, is a formidable rival for Cadillac.
Audi is expanding its dealership footprint by almost 50% to 500 within the next three years and is mulling increasing its production capacity by between 50% and 100%. Like its parent, Audi is looking to expand in the smaller cities in central and western provinces. Meanwhile, GM's American rival Ford (F_), which witnessed a 49% increase in sales in China in 2013, is eyeing further growth in the current year. And the three leading Japanese automakers (Toyota (TM_),Honda (HMC_) and Nissan (NSANY_)) are looking for a recovery in China following a slump in sales last year related to territorial disputes between China and Japan.
While the competitors will make things tough for GM, China's slower economy is certainly not helping.
In the first quarter of the current year, China's economic growth slowed to 7.4% from 7.7% in the final quarter of 2013. According to a forecast by economists at Nomura, the country's growth could further deteriorate to 7.1% in the second quarter.
The country's manufacturing activity remains weak. During April, China's HSBC Manufacturing Purchasing Managers' Index, a primary metric used to measure the growth of manufacturing activity, increased to 48.1 from 48.0 in March. Although this shows slight improvement, the key point here is that the metric has remained below 50 throughout the current year. Readings less than 50 indicate contraction in manufacturing. Similarly, during April, China's industrial output witnessed 8.7% year-over-year growth, down from 8.8% in March and easily missing market's growth expectations of 8.9%.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.