GM Needs China More Than It Fears Trump
(Bloomberg Opinion) -- Sorry, Donald Trump: General Motors Co. isn’t leaving China anytime soon. It can’t and it won’t.
After the automaker announced plant closings across North America as part of a wide-ranging restructuring plan, the president lashed out on Twitter, threatening to strip GM of any U.S. government subsidies. He also pointed out that nothing was “being closed in Mexico & China” and that GM’s bet on China wouldn’t pay off. There may be some truth in that last point.
Why, on the face of it, would GM walk away from the world’s largest car market? Despite falling volumes, the company still expects to book $2 billion of equity income in China this year. While its market share has plummeted, margins still remain close to 9 to 10 percent there, higher than 6 percent to 7 percent for the company as a whole.
GM has committed to going big in China: It launched the Cadillac XT4 luxury SUV earlier this year and had planned to roll out as many as 10 models by Dec. 31. The company sells more cars wholesale in that market than at home – 835,934 of them, including joint ventures, in the third quarter, against 700,000 in the U.S.
China isn’t just large and lucrative, though, and CEO Mary Barra will have to steer carefully. As we’ve written before, American carmakers can no longer take success for granted. Overall, Chinese auto sales have fallen for four straight months, with only luxury holding up. That trend shows up in GM’s results: Its sales there were down almost 15 percent in the third quarter, and volumes fell for all brands except Cadillac – which accounts for only 5.5 percent of its retail business in China.
While Beijing’s push into a future dominated by electric cars has been aggressive and well-subsidized, production issues abound. In August, GM postponed the launch of its Buick Velite 6, a local version of the Chevrolet Volt, because Chinese-made batteries didn’t meet its standards. (The company killed the Volt, the Cruze and the Impala as part of the cost cuts announced earlier this week.)
Barra, who said she’d visited China twice in October, also said on an earnings call the company is watching the market there very closely. It wouldn’t be surprising to see GM double down on luxury models, if it can afford to do so. In Shanghai last year, Barra said “China is playing a key role in the company’s strategy” as she talked up electrification, autonomous vehicles and ride-sharing.
The push to leverage Beijing’s generosity – rather than Trump’s threats – may now be far more appealing to GM as it takes multibillion-dollar write-downs amid soaring costs. Not only is China its biggest market, GM has done a better job navigating the nation’s potholes than its peers Ford Motor Co. and Fiat Chrysler Automobiles NV.
Investors cheered GM’s sweeping cost cuts and prudent position. Now they should pay careful attention to the company's spending for clues it may prove Trump wrong on China.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
©2018 Bloomberg L.P.