GM's Electrifying Opportunity in China


General Motors had a great 2012 in the People's Republic of China, leading sales with 2.59 million units. But with Volkswagen close on the company's heels and gunning for No. 1 in the beginning of this year, the company needs to step up efforts to maintain its supremacy. Perhaps that is why it is reportedly shopping for struggling Chinese automakers. A native acquisition would certainly help it each its 2015 goal of 5 million units with an instant capacity boost. With the crop of losing automakers ripe for the pickin', GM has a great opportunity to greatly increase its footprint in the country at a value price.

Auto nation
The Chinese auto market is set to outperform its global parent in 2013, according to reports. And with the major Japanese automakers facing headwinds due to island territory scuffs between Japan and China, it looks like GM will only have to concern itself with Volkswagen, which outsold the U.S. automaker by about 10,000 units in November of last year. All in all, the auto climate looks favorable for GM in the People's Republic.

So far, the company has buoyed sales with its microvan, the Wuling. It's an ideal vehicle for the region, but it's also a low-margin product for General Motors. To carry not only the top line to new highs in 2013 but bottom-line profits as well, the company needs a cheaper way to boost capacity. Luckily for GM, China has a group of automakers that sprung up during the initial auto boom and are now in bad shape financially.

How does that happen with such a voracious nationwide appetite for combustion? Many of the automakers came to market quickly selling kit cars. They were cheap and based on popular models of other global brands. It worked in the beginning, but now that the prominent Chinese automakers have established themselves along with GM, Volkswagen, and the Japanese companies, the competition is stiff, leaving little room for the littler guys.

Near the tail end of 2011, things turned south for companies such as Chongqing Changan Automobile, FAW Car, and Warren Buffett-propped BYD (BYDDY.PK) as Beijing tax incentives ran up and the excess build-out caught up to an increasingly saturated market.

So, with valuations in the dirt, GM is in a great position to buy one (or more) of the smaller players in the space. Most of the companies listed above would be major acquisitions requiring big-time cash, but GM does have $23 billion in its piggy bank.

So what would be a good fit for the company?

More Buffett-GM cross-pollination please!
Warren Buffett's 20% stake in aforementioned BYD at one time was a huge winner for Berkshire Hathaway (NYSE: BRK-A, NYSE: BRK-B). But with net sales growth approaching absolute zero in recent quarters, the once-darling of the Chinese auto industry is back down into deep value territory.

Given GM's existing relationship with Berkshire and Buffett (in May of last year, the company disclosed a 10-million share position in the automaker), a controlling stake in BYD might not be a bad idea.

Part of the strategy for buying a Chinese manufacturer would be to take advantage of excess capacity. Many of the automakers are currently building far less than their factories can push out. In 2011, BYD was building facilities as if they were lemonade stands, and now the company needs some cash to plug the hole in the bottom of its business. And despite its recent troubles, which are largely due to its cell phone battery market share evaporation and other, non-vehicle related losses, the company actually makes a great product -- all electric vehicles designed by someone Charlie Munger calls "a combination of Thomas Edison and Henry Ford." BYD makes anything from compact sedans to large touring busses, all running on the lightning.

There isn't any reason to suggest that GM is in communication with BYD regarding a possible stake or acquisition, but it's a nice thought, in my opinion.

It ain't until it is
Bloomberg was one of the rags that scooped the possibility of a GM shopping spree, but it also mentioned that when it reached out to GM's Chinese representatives, they said there were no current plans to do such a thing.

At this point, it's rumor, but it's one that makes sense. Investors will want to keep a close eye on this story and, if rumor becomes reality, they may want to consider adding to their positions.

Until then, though, it is safer to assume no action.

More on GM from The Motley Fool

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Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool recommends General Motors. The Motley Fool recommends and owns shares of 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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