GM's Global Search for Growth
It's a story that has captured much less attention than the recent safety concerns around the Chevy Volt, but it's arguably more important to General Motors' (NYS: GM) long-term prospects: GM and its key Chinese partner, SAIC, have announced moves to step up exports of cars from China.
Why is this a big deal? That requires some explanation.
Strong ambitions amid subdued growth
It's no secret that China's once white-hot automotive market has slowed: While it's still enormous, the eye-popping growth rates seen in recent years have fallen back down to Earth, thanks to changes in government policies and a less exuberant economic climate.
Still, despite slowing growth, GM and its joint-venture partners have continued to post solid gains in the Middle Kingdom. While overall auto sales in China were down 1.1% in October, GM managed a 10.4% increase on sales of small utility vehicles and strong consumer demand for popular models like the Chevy Cruze.
That's a healthy increase, but GM and its key partner, SAIC, have been gearing up for more dramatic growth. The partners have added several factories and advanced technical and design facilities in the Shanghai area, hoping to find additional growth by mid-decade.
It's now becoming clear that some of that growth will come from exports.
To Egypt, with love
Major domestic Chinese automakers like BYD Auto (OTC: BYDDF), which is partly owned by Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) , have been frustrated by slipping sales in their home market, a result of increased demand for products from global giants like GM, Volkswagen (OTC: VLKAY), Ford (NYS: F) , and Toyota (NYS: TM) . As a result, several have looked to less-developed areas of the world for growth in recent years. Top markets for Chinese vehicle exports have included Russia and Brazil, as well as Algeria, Vietnam, and Chile, among others.
They're about to get some bigger-league competition. The SAIC-GM-Wuling joint venture -- which makes the low-cost Baojun cars, as well as a line of popular, inexpensive small trucks and minivans sold in China under the Wuling brand -- will be exporting some of those vehicles as kits (sets of parts to be assembled at a local factory) to Egypt.
These small vans, which will carry the Chevrolet Move nameplate and Chevy's global grill and badging, will be the first Chinese-made vehicles assembled by GM in Egypt -- as well as the first Wuling products to be assembled outside of China. Initial aspirations are small, as GM says it plans to assemble just 5,000 of the little vans a year in Egypt, at least initially. But given that the Wuling version of the Move is one of GM's best-sellers in China, the potential for larger volumes is there.
GM sold about 68,000 vehicles in Egypt last year, where it's the market leader, but plans for the Move go beyond Egypt's borders. GM and SAIC expect to make the Move available in other parts of North Africa and the Middle East, where the global strength of the Chevy brand could prove to be a strong advantage over the Chinese domestic nameplates, just as it has been in China.
What this means for General Motors
While GM is China's No. 1 automaker by market share, the General doesn't actually make as much money in China as you'd expect. The government requires foreign automakers to operate via joint ventures with local partners, and while GM has a good partner -- SAIC is essentially the city of Shanghai's official automaker, a shining example of China's current communist-but-also-capitalist approach -- the nature of joint ventures means that profits are split.
The Wuling venture is one of GM's two major ventures in China (the other is Shanghai GM, which sells Buicks and Cadillacs, as well as more familiar Chevy models). The agreements in both of those ventures give GM the right to count all of the vehicles as GM products for purposes of calculating market share and sales totals, but in the case of Wuling, GM's profits are split with two other partners. As the Wuling products are inexpensive, low-margin vehicles to begin with, the per-sale profits for GM are quite small.
But even small profits add up if the volumes are strong. At this point, with its European operation in turmoil and the U.S. auto market stuck in the doldrums, GM is eager to find whatever growth it can. This move to export a popular product from China won't double GM's profits overnight, but it -- and more moves like it -- can only help the General's bottom line.
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At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Berkshire Hathaway and Ford. Motley Fool newsletter services have recommended buying shares of Ford, General Motors, and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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