The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Katrina Hamlin
HONG KONG, Dec 6 (Reuters Breakingviews) - Shrinking to mediocrity is one way forward. U.S. auto giant General Motors GM.N on Wednesday appeared to do that by rejigging its China business. International carmakers once reported reliably chunky sales and earnings in the People’s Republic. Those days may be long gone but there are some good reasons to stick around in the country.
The American company will shift some 1.6 million vehicles in China this year, analysts estimate, compared with over 4 million in 2017. Since then its market share has halved to just 6.5%. The bottom line is grimmer too: GM booked a $137 million loss in income on its Chinese operations in the third quarter. CEO Mary Barra is accepting the pain, writing down the equity value of its joint ventures by up to $2.9 billion and logging a similar charge for restructuring.
GM's struggle is widely shared. Foreign brands’ sales in the country represent only around a third of the total so far this year, down from two-thirds in 2020, data from consultancy Automobility shows. Earnings are likewise stalling.
True, the Chinese market is brutal: a price war has seen electric car rivals like BYD 002594.SZ, 1211.HK and peers use hefty discounts to win customers. Some, such as Nio 9866.HK and Xpeng 9868.HK, are willing to spend 10% of revenue or even more to churn out new models and features. That's unusually high.
But the ferocious competition forces foreign automakers to hone their skills: Volkswagen VOWG_p.DE, for example, which like GM partners with state-backed SAIC, has said lessons learned in China shaved 20% off the time needed to develop a design in Europe. What's more, even a relatively small slice of market share translates to greater negotiating power with key suppliers: China accounted for 29% of GM’s global deliveries in the three months ending in September.
GM has ample room to downsize so that it can, as it says, be profitable on a smaller scale: shrinking sales meant the business the company is restructuring was expected to have capacity utilisation of just 35% this year, per Visible Alpha. Honda Motor 7267.T and Hyundai 005380.KS have also trimmed production lines this year, and others like Nissan 7201.T could follow. Driving with a small engine in China is disappointing but may still be worthwhile.
Follow @KatrinaHamlin on X
CONTEXT NEWS
General Motors told shareholders on Dec. 4 that it would write down the value of its equity stakes in its Chinese joint ventures by up to $2.9 billion, and recognise an additional $2.7 billion loss for restructuring its operations in the country. Both are one-off non-cash charges, the company added.
GM's CFO Paul Jacobson said the U.S. company is seeking to be profitable in China next year and believes its joint venture can restructure without additional funds.
(Editing by Una Galani and Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))
Comments