GM grabs top spot in China in 2011
However, changes in Chinese policy will likely increase capital expenditure and hurt the automaker's margins in the medium to long term.
In comparison, Ford's (F) China sales totaled 519,390 units, about one-fifth of GM's total. GM's China sales also outpaced those of Honda (HMC) and Toyota (TM), as the Japanese automakers were hobbled by the March earthquake in Japan and floods in Thailand.
We currently have a Trefis price estimate of $26 for General Motors's stock, which is more than 5% above the current market price.
GM, along with its joint-venture partners, introduced 12 new models in China in 2011, including new models for existing brands Buick, Chevrolet, Cadillac and Wuling as well as the Baojun 630, an entry-level passenger car, which was launched in August 2011. GM also continued expanding its production capacity in China to keep up with growing demand. The automaker, together with its partners, started or expanded production at five locations during the year.
Auto sales in China grew by only 2.5% in 2011, the slowest growth in over a decade. The risk to GM's near-term sales growth continues due to the overall slowing of the domestic auto market in China. This is being adversely affected by high levels of benchmark one-year lending rates in the country, as the People's Bank of China (PBC) strives to control inflation. High levels of benchmark rates will make auto loans more expensive for customers, which will likely further decelerate sales in the near term.
Additionally, recent changes in Chinese policy could be a dampener as well. Investors worried last month when China slapped tit-for-tat punitive duties on U.S.-made vehicles imported to China. And just as their fears were allayed by the announcement that only 1.3% of GM's 2.43 million sales in China last year were imported from the U.S., the car maker announced recalls of close to 10,000 vehicles in the country. Vehicle recalls will add further pressure on sales due to the adverse impact on customer perception.
China recently announced that it will end its seven-year policy to attract foreign investments by the end of this month to promote "healthy" competition and protect local manufacturers. This puts at risk GM's plans to boost production capacity by 25% to 40% over the next two years in the country.
While we expect that GM will continue with its expansion plans, the changes in Chinese policy will likely increase capital expenditure and hurt the company's margins in the medium to long term.
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