By on September 26, 2012

Government Motors. (Picture courtesy

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.

Says Andy Xie in Marketwatch:

“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.)

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18 Comments on “GM Lives And Dies With China...”

  • avatar

    “Toyota, at only 883,000 vehicles sold in China in 2011, is less exposed.”

    Going forward, that exposure is likely to be further reduced.

  • avatar

    Here is my prediction..

    The Chinese currency will appreciate.

    This would increase the cost of those cheap China exports and make them more cost effective to be manufactured in their detination market. (If a large market) Any dumping will be countered by WTO actions.

    Chinese currency appreciation will show more earnings in dollars offsetting margin reductions in the Chinese market.

    WTO reduces importation costs of auto imports into China. US, Japan, and Germany reduce their growth in China domestic investment.

    The China growth story is over and now the Chinese currency can start to depreciate. Now insert the article above.

  • avatar

    Thanks for the hat tip, Bertel.

    I think this is a good opportunity to discuss Andy Xie’s article above. And QE3’s impact on the global automotive industry (its likely the single most important thing the auto-industry will deal with in the next few years).

    Summary: the US will conduct unlimited QE3 (money printing) at the tune of $40 Billion a month ($480 billion a year) until unemployment is below 7% (meaning AT LEAST 3 years of QE3). This is massive amount of money entering the global economy. TARP was $700B, China’s 2008 stimulus, which is credited for China’s recent buying power, was ~$600B. QE3 will be in the trillions.

    What does it mean for the auto-industry:

    1.) The dollar will weaken even further. There is no way that any country can match the US’ monetary expansion with QE measures of their own (only the US can expand their monetary supply this much), the yuan and yen will continue to appreciate. Japanese and Chinese exports get even more expensive. GM may benefit from a strong yuan, but China’s economy (and consumer demand) will be very negatively effected.

    2.) Higher gas prices. QE3 will mean higher prices of commodities as more money floods the market while natural resources remain the same. For the US, $5 or $6 a gallon gas in the next few years is not unthinkable. What does this mean for full-sized SUV/pickups that are already struggling for sales and still contribute so much the Detroit’s bottom line?

    3.) Asian labour unrest. As Andy Xie points out, QE3 will mean the developing world will have to deal with massive inflation. Meaning that either wages will have to rise or we will see more strikes and labour riots as the cost of living increases. Higher cost of production in China (and Asia) will likely see a shift to manufacturing expansion in cheaper locations in South East Asia, Latin America, and we may even see increased production in the US as a weaker dollar makes this more feasible.

    …let’s not forget that Europe has also has announced ‘unlimited’ QE as well.

    • 0 avatar

      All quite correct. Except that China can do with the Yuan whatever it pleases. The yuan is not freely traded like other currencies. Look at the chart.

      • 0 avatar

        You’re absolutely right China can do what it pleases with the yuan.

        So the question is what will China do? Try to keep the yuan weak by printing more yuan, and deal with inflation and labour issues? Or they can allow the yuan to appreciate significantly (which would hurt Chinese exports)?

        The reality is, its not an either/or situation. The question is how MUCH more yuan will the Chinese put into their economy. They recently announced a 1 trillion RMB stimulus (~$150B), but the US will print that much money in just a little over three months ($40B a month).

        Its a damned with you do, and damned if you don’t situation for China.

        China ultimately can’t match the US’ QE3. They can’t print $40B each month. Its inevitable that the yuan will appreciate, inflation will rise, commodity prices will rise, and worker wages will also rise. But how much is the question, and how fast. Will their export-based economy sustain this rapid change?

    • 0 avatar

      China does not need to print more yuans to match the dollars. The yuan is not a freely traded currency. The exchange rate is set by government policy.
      Also oil prices is tied to oil demand, and a large part of that is chinese oil consumption. It is not tied to any QE appreciably.

  • avatar

    “there is a voice that says that GM is more enslaved to China than it is to Washington.”

    Can someone tell me of a large multinational American company where this isn’t the case? Every American should be proud when they look at China and South Korean Hyundai’s progress – AFTER ALL, WE PAID FOR IT.

    I’ve heard conspiracy theories that say the US government is trying purposefully to decrease the value of the dollar. When the dollar’s value goes down, foreign companies prefer to build here because it’s cheaper for them (ie: toyota in Mississippi). Whether it’s true or not, I can’t believe that the government could be passing stimulus after stimulus without knowing the negative effect it has on our money.

  • avatar

    no soon enuf GM will meant Guandong Motors.

    one of my fnd told me, Guandong aka Canton brings in the most taxes for their federale, so one day speaking Cantonese will prevail.
    Canto was only a couple of hundred yrs younger than good Lord Jesus.
    Whilst Pu Tung hwa or mandarin is not as old.
    Or if Dr. Sun Yat Sen had lived longer Canto would have been more spoken nowadays. Dr Sun was from Canton.

  • avatar

    Why is the loan of money to GM from SAIC termed a favor? They got an increased share in the Indian business. Wouldn`t a favor have been – we lend you money and you pay us back when you can. With nothing in return except the cash plus interest?

    GM does sell more in China than in the US (if you count all those Wuling’s), but the US and China are not the only regions of the world. So even accounting for all the JV’s they sell China accounts for around c25-30% of their sales (2.5M out of 9+M production). A large amount for sure but not surprising now China is the second largest economy in the world.

    Is it possible for GM to maintain their sales due to the difficulties Japanese companies have now encountered in China. Those disgruntled Chinese buyers have to go somewhere.

    • 0 avatar

      Until the leaders tell the masses that it was the US with the Senate passing and Nixon signing the Okinawa Reversion Treaty who gave administrative control of the islands back to Japan in 1971.

  • avatar

    C’mon, Bertel, you know better even if Andy Xie doesn’t.

    • 0 avatar

      John, Bertel has his disclaimer in the article :
      “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.”

      So even though Andy Xie is probably wrong it doesn`t matter if that can be proven with facts. Because that would mean this article would not have been written.

      I find it strange that companies like Ford are, correctly in my opinion, criticized on TTAC for being slow to China and having minimal sales. But when someone like GM , who was one of the first in, has a solid position in China they are also criticized for that.

      • 0 avatar

        GM gets around $500 million in pretax profit from its Chinese JVs every quarter. Compare that to the roughly $2 billion it makes in North America every quarter (on a similar number of vehicles sold, incidentally). Like Ford, GM is really only “dependent” on one market: the U.S.

        That’s not “spreadsheets”, it’s reality, and I’m quite sure Bertel knows it as well as I do.

  • avatar

    Not surprisingly, a headline eviscerating GM while VW, which is even more exposed in China gets a small mention at the end.

    1st off, GM makes more of its profits in the US than in China w/ its higher margin truck sales and the combined sales of higher margin Cadillac and Buick.

    As the Cadillac and Buick lineups get expanded, the 2 will generate even greater profits for GM in the US.

    Right now, Cadillac sales in China are relatively low since GM imports Cadillacs to China, but that’s going to change with Chinese production of the ATS and XTS.

    VW is much more exposed to China since their other main market, Europe, is going thru an economic crisis, and b/c Audi is what drives the vast majority of profits at VW and Audi’s largest market w/ Europe is China.

    Now if the anti-Japanese sentiment continues in China, both GM and VW may benefit, alleviating somewhat the market conditions.

    Also interesting (but hardly surprising) that there is no mention of Ford, which has already built 2 plants in China and is building at least 3 more.

    • 0 avatar

      bd2- enough with your facts, you were warned in the article!

      “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.”

      I agree that consistency (viz a viz VW) was lacking.

  • avatar

    What exactly is the problem with GM living or dying on the back of its Chinese sales? M-B,and BWM were in the same situation with the U.S market for many years.

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