Can Chinese Car Buyers Save General Motors?

The world's most populous nation is experiencing huge growth in auto sales. For General Motors, the hitch is that all other carmakers on the planet know that, too.

So what do you do if you're a carmaker with a market at home that's not buying as many cars as it used to?

If you're General Motors, you invest in making and selling cars in China as fast as you can.

Great plan.

Best-selling cars of 2010

The result is a capital-spending spree so large, and resulting new manufacturing capacity so great, that it could be the cause of the next collapse and shakeout in the global auto industry. And the best guess is that this shakeout could arrive as early as 2015. That's long before companies such as GM, working to emerge from bankruptcy, or companies such as Toyota, struggling to rebuild profitability, will have put away cash for a rainy day.

The collapse is likely to be even more brutal than that of the U.S. car industry in the recent recession. (The auto industry story is just an extreme version of what I've called the danger of a profitless economic recovery. For more on what that means across the global economy, see this blog post from my website.)Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=1bb26b25-ba3f-4410-a4d9-3f95ee20c884,f5fb0c63-6875-446a-a4da-3c1420610b80,143fe23d-4486-477f-8efe-edd4aa7f619f,443c1165-437d-4ef6-9b4c-a19eeeb0d102,717b6201-1bb3-4138-b3e9-fbe3df4bd35a,e1f2642e-c516-4f2b-b53c-ef6e954aa2c4,6f8c77c2-eaa2-436f-831e-ef1acd0271ed,429f1c18-2161-4b38-bc6a-8fc944c00eb9", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=1bb26b25-ba3f-4410-a4d9-3f95ee20c884,f5fb0c63-6875-446a-a4da-3c1420610b80,143fe23d-4486-477f-8efe-edd4aa7f619f,443c1165-437d-4ef6-9b4c-a19eeeb0d102,717b6201-1bb3-4138-b3e9-fbe3df4bd35a,e1f2642e-c516-4f2b-b53c-ef6e954aa2c4,6f8c77c2-eaa2-436f-831e-ef1acd0271ed,429f1c18-2161-4b38-bc6a-8fc944c00eb9;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4'); I don't think there's any way that the auto industry can avoid this collapse. The logic behind expanding in China is just too irresistible.

The Chinese market is already the biggest in the world by sales, having passed the struggling U.S. car market in 2009. Car sales in China jumped 45% last year and are projected to rise 20% in 2010.

As stunning as that rate of growth is, some individual carmakers are doing even better. For example, General Motors' sales in China in March 2010 were up 65% from a year earlier. For all of 2010, GM (and its local partners) could sell 2 million cars in China. Last year the company sold 2.1 million cars in the U.S. market. At Volkswagen, the market leader in China, sales rose 61% in the first quarter of 2010, and that was a disappointment; the overall market in China grew 72% in the quarter.

And it's very easy to spin a story that says sales growth -- if not at the 45% rate of 2009, then at the 20% rate projected for 2010 -- will continue for years and years as China gets wealthier.

The growth story goes like this: China has the world's largest population, at 1.3 billion, with as many as 300 million belonging to the middle class. But only 41 of every 1,000 Chinese own a car, Goldman Sachs estimates. That compares with more than 500 cars per 1,000 inhabitants in Germany and 780 cars per 1,000 in the United States.

There's a lot of room for car sales between 41 cars per thousand people and 500 or 780 cars per thousand.Autos, autos everywhere The problem for GM, and for Volkswagen and every other company selling cars in China, is that the growth in demand is only part of the story. There's also the supply-side story. And that's where things get ugly.

Everybody wants a piece of the growth in China's auto market, and everybody is building plants in a bid to capture that growth.

Volkswagen, for example, announced April 26 that it would add about $2.2 billion to its capital-spending budget to build two plants in China. That brings the company's capital-spending plans to $8 billion for the next three years.

BMW, currently No. 4 in the Chinese market, announced in November that it and its Chinese partner would invest $728 million to build a second plant in China. The company is already counting on expanding production at its first China plant to 100,000 vehicles a year by 2012 (the company is looking to sell 120,000 cars in China in 2010, but many of them will be imported from BMW plants outside China). With the second plant, BMW will be able to produce 300,000 cars a year in China by 2015.

Volvo, which is being purchased by China's Geely Holding Group from Ford Motor (F, news, msgs), has added $2.1 billion to its spending on car plants.

Toyota's new plant in Changchun will start production in late 2011, with a capacity of 100,000 cars a year.

Nissan is investing to raise production capacity in China to 900,000 vehicles a year by 2012. That would be a hefty increase from the 535,000 it can produce now.

Hyundai is adding a third plant in China that will increase production capacity by 50%, to 900,000 vehicles a year by 2012.

Continued: China revs up its productionMore from MSN Money and MoneyShow.com

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Jim,  I am a bit concerned considering an article yesterday that China has just recalled all exported cars to Europe because of complaints about workmanship and quality.  This generally precludes some retaliation to keep exports out of China.

 

bizown,  GM was liquid and turning a profit until they removed 6 billion in assets from their books in 2004.  I have not been able to find the reason for the loss of equity on their books.

ReplyReport Abusethe next timeup #7Tuesday, May 04, 2010 8:24:14 AMLets see Jim, why don't we build cars in America.  Da because the international corporations bribed the politicians to change the trade laws to benefit them and now Americans don't have the incomes to support the industry to purchase them.  We have had NAFTA now and such for 15 years and what a benefit.  We are totally in debt and no viable plan to get out of it.  When will the oh so smart long term business folks see we are on a dead end road and realize our lifestyle is now resembling a Chinese citizen rather than an American.  No ticky no shirty makes sense now.ReplyReport AbuseSarduci1 #8Tuesday, May 04, 2010 9:30:07 AMA typical Jim Jubak doom and gloom article.  How does this guy continue to get article space on MSN?  Am I the only one who notices his articles are always the same preaching doom and gloom?ReplyReport AbuseYuansomemore #9Tuesday, May 04, 2010 10:21:58 AMI suppose if Jim lived in China, things would be looking up!ReplyReport AbuseBohomme Richard #10Tuesday, May 04, 2010 11:15:00 AM

Forget GM!! They and their dealers, at least Global Auto Mall in N.Plainfield, NJ are completely crooked! When I refuse $2700 in out of pocket suggestions from Global, my 1.8 hr mandatory steering system recall took 3 days. Days afterward the steering was inoperable, I returned to Global only to have their Service Mgr repeatedly tell me that they didn't damage my hoses as the steering hoses aren't attached to the steering system. I kid you not! He also tried to claim it was a slow leak that built up over a year despite their technicians missing it during their $2700 suggestions. Contacted GM directly and they refused to help since Global wouldn't return their calls and I had to have the repairs to Global Auto Mall's work repaired at a private shop at my cost. In 20 years, I've always driven Chevy, but will NEVER own a GM again! Avoid GM and especially Global Auto Mall!

ReplyReport Abuse1 - 10 of 12PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/JubaksJournal/can-chinas-car-buyers-save-gm.aspx?page=2&','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*

The Chinese market is already the biggest in the world by sales, having passed the struggling U.S. car market in 2009. Car sales in China jumped 45% last year and are projected to rise 20% in 2010.

As stunning as that rate of growth is, some individual carmakers are doing even better. For example, General Motors' sales in China in March 2010 were up 65% from a year earlier. For all of 2010, GM (and its local partners) could sell 2 million cars in China. Last year the company sold 2.1 million cars in the U.S. market. At Volkswagen, the market leader in China, sales rose 61% in the first quarter of 2010, and that was a disappointment; the overall market in China grew 72% in the quarter.

And it's very easy to spin a story that says sales growth -- if not at the 45% rate of 2009, then at the 20% rate projected for 2010 -- will continue for years and years as China gets wealthier.

The growth story goes like this: China has the world's largest population, at 1.3 billion, with as many as 300 million belonging to the middle class. But only 41 of every 1,000 Chinese own a car, Goldman Sachs estimates. That compares with more than 500 cars per 1,000 inhabitants in Germany and 780 cars per 1,000 in the United States.

There's a lot of room for car sales between 41 cars per thousand people and 500 or 780 cars per thousand.Autos, autos everywhere The problem for GM, and for Volkswagen and every other company selling cars in China, is that the growth in demand is only part of the story. There's also the supply-side story. And that's where things get ugly.

Everybody wants a piece of the growth in China's auto market, and everybody is building plants in a bid to capture that growth.

Volkswagen, for example, announced April 26 that it would add about $2.2 billion to its capital-spending budget to build two plants in China. That brings the company's capital-spending plans to $8 billion for the next three years.

BMW, currently No. 4 in the Chinese market, announced in November that it and its Chinese partner would invest $728 million to build a second plant in China. The company is already counting on expanding production at its first China plant to 100,000 vehicles a year by 2012 (the company is looking to sell 120,000 cars in China in 2010, but many of them will be imported from BMW plants outside China). With the second plant, BMW will be able to produce 300,000 cars a year in China by 2015.

Volvo, which is being purchased by China's Geely Holding Group from Ford Motor (F, news, msgs), has added $2.1 billion to its spending on car plants.

Toyota's new plant in Changchun will start production in late 2011, with a capacity of 100,000 cars a year.

Nissan is investing to raise production capacity in China to 900,000 vehicles a year by 2012. That would be a hefty increase from the 535,000 it can produce now.

Hyundai is adding a third plant in China that will increase production capacity by 50%, to 900,000 vehicles a year by 2012.

Continued: China revs up its productionMore from MSN Money and MoneyShow.com

 1 | 2 | next >

Check out Jim's top stocks for the next 12 months.

Read how to invest with Jubak's showcase portfolio.

Follow the long-term portfolio from Jim's book "The Jubak Picks."

See Jim's new portfolio to help navigate the treacherous interest-rate environment.

Jim,  I am a bit concerned considering an article yesterday that China has just recalled all exported cars to Europe because of complaints about workmanship and quality.  This generally precludes some retaliation to keep exports out of China.

 

bizown,  GM was liquid and turning a profit until they removed 6 billion in assets from their books in 2004.  I have not been able to find the reason for the loss of equity on their books.

Forget GM!! They and their dealers, at least Global Auto Mall in N.Plainfield, NJ are completely crooked! When I refuse $2700 in out of pocket suggestions from Global, my 1.8 hr mandatory steering system recall took 3 days. Days afterward the steering was inoperable, I returned to Global only to have their Service Mgr repeatedly tell me that they didn't damage my hoses as the steering hoses aren't attached to the steering system. I kid you not! He also tried to claim it was a slow leak that built up over a year despite their technicians missing it during their $2700 suggestions. Contacted GM directly and they refused to help since Global wouldn't return their calls and I had to have the repairs to Global Auto Mall's work repaired at a private shop at my cost. In 20 years, I've always driven Chevy, but will NEVER own a GM again! Avoid GM and especially Global Auto Mall!

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