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GM's Electrifying Opportunity in China

Michael B. Lewis
February 11, 2013

General Motors (NYSE: GM) had a great 2012 in the People's Republic of China, leading sales with 2.59 million units. But with Volkswagen close on the company's heels and gunning for No. 1 in the beginning of this year, the company needs to step up efforts to maintain its supremacy. Perhaps that is why it is reportedly shopping for struggling Chinese automakers. A native acquisition would certainly help it each its 2015 goal of 5 million units with an instant capacity boost. With the crop of losing automakers ripe for the pickin', GM has a great opportunity to greatly increase its footprint in the country at a value price.

Auto nation
The Chinese auto market is set to outperform its global parent in 2013, according to reports. And with the major Japanese automakers facing headwinds due to island territory scuffs between Japan and China, it looks like GM will only have to concern itself with Volkswagen, which outsold the U.S. automaker by about 10,000 units in November of last year. All in all, the auto climate looks favorable for GM in the People's Republic.

So far, the company has buoyed sales with its microvan, the Wuling. It's an ideal vehicle for the region, but it's also a low-margin product for General Motors. To carry not only the top line to new highs in 2013 but bottom-line profits as well, the company needs a cheaper way to boost capacity. Luckily for GM, China has a group of automakers that sprung up during the initial auto boom and are now in bad shape financially.

How does that happen with such a voracious nationwide appetite for combustion? Many of the automakers came to market quickly selling kit cars. They were cheap and based on popular models of other global brands. It worked in the beginning, but now that the prominent Chinese automakers have established themselves along with GM, Volkswagen, and the Japanese companies, the competition is stiff, leaving little room for the littler guys.

Near the tail end of 2011, things turned south for companies such as Chongqing Changan Automobile, FAW Car, and Warren Buffett-propped BYD (BYDDY.PK) as Beijing tax incentives ran up and the excess build-out caught up to an increasingly saturated market.

So, with valuations in the dirt, GM is in a great position to buy one (or more) of the smaller players in the space. Most of the companies listed above would be major acquisitions requiring big-time cash, but GM does have $23 billion in its piggy bank.

So what would be a good fit for the company?

More Buffett-GM cross-pollination please!
Warren Buffett's 20% stake in aforementioned BYD at one time was a huge winner for Berkshire Hathaway (NYSE: BRK-A, NYSE: BRK-B). But with net sales growth approaching absolute zero in recent quarters, the once-darling of the Chinese auto industry is back down into deep value territory.

Given GM's existing