Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is GM Investing Too Much in China?

The Buick Riviera concept car, developed by GM's joint venture in Shanghai, was a star of last week's Shanghai Auto Show. Photo credit: General Motors

Lately, the news has been thick with reports that General Motors (NYSE: GM  ) is aiming to ramp up its operations in China even further.

GM is already the overall leader in China's still-hot auto market, with a 15.1% share of the market in the first quarter. But just like key rivals, including Ford and Volkswagen, GM is making a massive push to expand its base in China still further.

Last week, GM officials said that the company would spend $11 billion on new factories, new products, and new facilities – including hundreds of new dealerships – in China by 2016.

It's far and away GM's biggest investment of the moment. But GM is obliged to split the bulk of its China profits with Chinese joint-venture partners – in effect, with the Chinese government.

Is this massive commitment really the right course for GM?

GM's partner is a state-owned automaker
Bloomberg recently published an article comparing GM's push in China to Toyota's (NYSE: TM  ) investment in U.S. expansion during the late 20th century. In some ways it's an apt parallel – GM, like Toyota, is building a big on-site presence in a massive growth market just as business is booming.

But in a way, there's a big difference. Unlike Toyota in the U.S., GM is obliged under Chinese law to be a partner (technically, a junior partner) in joint ventures with Chinese companies in order to build cars in the country.

GM's leading partner is SAIC, China's biggest domestic automaker. SAIC stands for "Shanghai Automotive Industry Corporation", and it is owned by the state – essentially, it's run by the city of Shanghai.

And make no mistake, even though GM is bringing the brands and the designs and the technology and the marketing know-how, SAIC is the leading partner, at least in Chinese eyes: There's a reason that their main joint venture is called "Shanghai GM" and not "GM Shanghai".

Big sales, but less-big profits
Whatever you may think of China's political system, SAIC has been a great partner for GM so far. But even setting aside all of the implications of the politics, just the fact that GM is in a partnership constrains its profits, because it has to split them.

Ponder this for a moment: Last year, GM North America (which is mostly the U.S.) earned $7 billion before taxes. GM's "International Operations" unit (which is mostly China) earned $2.2 billion.

Simply put, GM earned a lot more money here than it did in China. But it sold more vehicles in China than it did in the U.S. last year – 2,836,128-2,595,717, to be exact.

Some of that difference in earnings has to do with GM's ongoing investments – in China, and elsewhere in Asia. But a lot of it has to do with the fact that GM has to split its China profits with its partners.

And of course, those partners are learning a lot from their work with GM, which is a big long-term worry: Is GM just training a giant future competitor?

Will this story end well for GM?
Despite the fact that it has to split its profits, there's a good argument to be made that China's huge auto market is the best growth opportunity available to GM at the moment. And given that it has a strong partner, a strong market position, and a clear read on the opportunities ahead, investing big to build on that position and take advantage of those opportunities makes a lot of sense.

I get that. And as a GM shareholder, and as someone who wants to see American automakers do well (even the bailed-out ones), I actually agree with it. If I were running GM today, it is what I would be doing.

But sometimes I step back and look at all this, and I ask: Is this really going to work out well for GM in the long run?

What do you think? Scroll down to leave a comment and let me know.

Is GM's stock a strong buy? Or should you avoid it like the plague?
Few companies lead to such strong feelings as General Motors. But ignoring emotions to make good investing decisions is hard. The Motley Fool's premium GM research service can help, by telling you the truth about GM's growth potential in coming years. (Hint: It's even bigger than you think. But it's not a sure thing, and we'll help you understand why.) It might help give you the courage to be greedy while others are still fearful, as well as a better understanding of the real risks facing General Motors. Just click here to get started now.

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2013, at 7:14 PM, prginww wrote:

    I was reading up on a topic similar to this and so far I've been seeing that the Chinese parts of the joint venture have essentially been overwhelmed and become reliant on the U.S. automakers. I don't hear much of that from our end, nor do you see an issue in the increased sales in China.

    So when I read that I was a little skeptical, but haven't dug further into it. If that really is the situation now, I can't imagine it staying that way for long.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2394641, ~/Articles/ArticleHandler.aspx, 9/30/2016 3:06:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
DOW 18,143.45 -195.79 -1.07%
S&P 500 2,151.13 -20.24 -0.93%
NASD 5,269.15 -49.39 -0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 4:00 PM
GM $31.48 Down -0.42 -1.32%
General Motors CAPS Rating: ***
F $11.97 Down -0.12 -0.99%
Ford CAPS Rating: ****
TM $115.99 Down -1.64 -1.39%
Toyota Motor CAPS Rating: ***
VLKAY $28.05 Down -0.50 -1.73%
Volkswagen AG (ADR… CAPS Rating: **