Al Root
General Motors is writing off some long-held investments in China. The stock is falling Wednesday.
There isn't any impact on the company's cash balances. The charges are another sign that the car business in China is tough. They are also a warning signal to American auto maker -- they can't avoid adapting to change.
General Motors announced Tuesday it would write down the value of its 50-50 joint venture with SAIC Motor, taking a one-time charge of about $2.8 billion. There will be an additional $2.7 billion restructuring charge as the joint venture tries to improve profitability. GM doesn't believe it will need to put in additional cash to support the restructuring.
The roughly $5.5 billion in expenses will hit fourth-quarter numbers.
Investors don't like asset write-offs, but they know the condition of GM's Chinese business. In prior years, the jojnt venture generated roughly $500 million in profit for GM each quarter. Over the past year, it's generated less than one-tenth of that amount.
GM stock was down 1.3% in premarket trading following the release. S&P 500 and Dow Jones Industrial Average futures were up 0.3% and 0.5%, respectively.
One reason for declining profitability is the structure of the Chinese car market. As it has gone increasingly electric, less room has been left for traditional cars while leaving the industry with too much capacity.
Chinese cars buyers will purchase about 23 million new vehicles in 2024, according to data from Citi analyst Jeff Chung. That's up from about 20 million five years ago. Only about 12 million of those vehicles will be solely powered by gasoline, down from 20 million five years ago. All-electric car sales have jumped to about 6 million from 600,000. Plug-in hybrid sales have jumped to almost 5 million from less than 200,000.
"The [SAIC GM] business performs well domestically and in export markets, and the SGM team has made good progress in the second half of the year to better balance production with demand," said GM in an emailed statement. "We are focused on capital efficiency and cost discipline and have been working with [SAIC GM] to turn around the business."
Sales of gasoline-only-powered cars are expected to drop another 50% in the coming two years as penetration of battery-electric and plug-in hybrid vehicles hits 75% by 2026.
Competing in that type of transition requires new investment in plants, equipment, and vehicle design.
Battery-electric and plug-in hybrid sales will account for almost 50% of all new car sales in China in 2024. The number for the U.S. will be closer to 20%.
As electrified vehicle sales grow in the U.S., the challenge for GM, and other traditional car makers, will be to manage profitability better than what's happened in China.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 04, 2024 06:57 ET (11:57 GMT)
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