Is GM's Rebound the Real Deal?


The revival of Detroit is nearly complete, according to The Wall Street Journal. Chrysler made $166 million in the first quarter, its first profit in five years. Ford (F) made $2.6 billion in the same period, which was its best result since 1998.

But the clearest sign of Detroit's comeback is that GM (GM) is set to retake the No.1 spot as the world's largest manufacturer of cars and light trucks, if forecasts for 2011 hold up. Toyota (TM) took away that distinction three years ago as GM moved into Chapter 11, but the earthquake and tsunami that struck Japan in March have caused Toyota's production to falter. The Japanese automaker's sales have also been hurt by a series of recalls that began over a year ago.

GM's recent success has been based to a large extent on its sales in China, where by most accounts, it and its local joint venture partners are the top sellers of cars and light trucks. In addition, GM's domestic April sales rose 27% to 232,538 from a year earlier, and its market share was about 19.2%, up from 16.6% a year ago, further signs that its health has improved in the U.S. as well as abroad.

China is now the largest car market in the world, so GM's success there should cheer investors, but the car company's stock is down from its 52-week high of $39.48 to $32.18.

Fighting for the Future in China, India, Russia

Given GM's sales figures, it's reasonable to ask why its stock price is falling rather than rising. The explanation most commonly given for the relatively low price of GM's shares is that it faces stiff competition in the U.S. from its highly successful rival Ford, as well as smaller firms like Hyundai (HYMTF), which have begun to pick up market share here. The truth, however, is not that simple.

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GM's success in China could be short-lived. What was considered an unimportant market a decade ago has today become a major target for Europe's top car companies, as well as Toyota, Honda (HMC), and Nissan (NSANY). The Japanese automakers have all suffered production setbacks from the recent disaster, but those will be temporary. Toyota, for example, says it will have its plants back at full capacity before the end of the year. After that, it will be prepared to fight seriously again for market share in the world's most populous country, and no matter how successful GM becomes in the U.S., its position in China is essential.

GM also faces stiff competition in other high-growth markets which have only recently become important targets for global manufacturers. Chief among these is India, the world's second most populous nation. The number of cars sold in India in 2010 was only 1.87 million, which is tiny for a nation with more than 1 billion people. However, as India's average household income grows and the nation improves its highway system, it could eventually rival China as a critical market for global car firms.

The other large market with the most potential for huge sales growth over the next few years is Russia. Car and light truck sales in Russia are expected to reach only 2.24 million in 2011. While that figure is more than 10 times greater on a per capita basis than India's, Russia's auto sales are still quite modest for a country of its population.

GM may have achieved a major comeback in the U.S., and it may hold a strong position in China, but the future of the automotive business is quickly moving to other markets, and in those nations, GM's success is by no means assured.

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