TTAC has written many times about the growing dependency on China, and now there is a voice that says that GM is more enslaved to China than it is to Washington.
“The irony is that, while the Obama administration claims credit for saving General Motors, China actually did. GM sold 2.5 million vehicles in China in 2011. Moreover, these cars were sold at high prices. China probably has accounted for over 100% of GM’s profits over the past five years, i.e., it is losing money elsewhere.”
While many will debate that number, and will show spreadsheets that say that it is not true, the dependency of GM on China is a fact. GM sells more cars through its Chinese joint ventures than at home in the U.S. GM had to sell half of its India business to GM’s Chinese joint venture partner SAIC. During GM’s darkest hours, SAIC co-signed a loan that kept the lights on at GM. Careful books are being kept in China for favors granted, and GM will regret many times that it had to ask for this favor.
The car industry in China is suffering from more overcapacity than that of Europe. An Alix Partner study pegs the overall capacity utilization in the Chinese auto industry at 67.3 percent. Anything below 80 percent is considered toxic in this industry. According to Alix Partners, “this is an issue that affects international OEMs just as it affects local companies, as the resultant price-discounting can wind up affecting the entire industry’s pricing structure.”
Some comments from Chinese CEOs at the Global Automotive Forum in Chengdu were quite desperate. It is expected that Chinese companies will try to find salvation in an export push at low prices, and that the Chinese government will help by lowering the Chinese currency, which it had lifted to appease America. Already, the past steady rise of the Yuan against the dollar has stopped in 2012.
This can spell trouble for GM on several fronts:
- A drop in auto sales in China
- Eroding margins in China
- Lower earnings when converted into dollars
- Increased competition and pricing pressure in other markets
Volkswagen, also hugely dependent on China, has a similar exposure. Toyota, at only 883,000 vehicles sold in China in 2011, is less exposed.
(Hat tip to l’Avventura.)