General Motors’ (GM, Financial) stock tumbled to $24.62, a 52-week low, as investors grew wary over China concerns. Though the stock price has recovered to an extent, the slowdown in the Chinese market has put the global auto market on alert. The sluggish economic condition poses threat to the global car market as the Asian economy happens to be the world’s largest auto market, where carmakers are pouring in billions to expand their operations. General Motors already has strong footprints in China. Though this has worked in favor of the Detroit player, the exposure is now turning into matter of concern. Let’s take a look at how this could impact General Motors and what’s in it for investors.
Exposure to China becomes a point of concern
General Motors, one of the top foreign auto companies with massive exposure in the country, is in a tough spot. The automaker sells more cars in China than in the U.S., and it happens to be its largest market. A big chunk of the company’s profit and cash flows come from China. The country has been a steady incomes stream for the carmaker, helping it earn around 32% of its net profit in the 2013 and 2014. The economy also accounts for nearly half the automotive cash flows for the company. Under the present scenario, it goes without saying that the American carmaker’s fortune is highly aligned to the growth curve of China.
China has been experiencing a tough phase with a difficult economic environment. This is becoming worse with the fact that several foreign investors are now withdrawing their investments out of the nation. What further escalated the matter was People's Bank of China’s move of devaluing yuan, which is a clear indication that the economy is in a contracting mode. Evidently, such uncertainties shook investor confidence, and as a reaction got translated into an enormous selling spree across the globe.
China is the biggest purchaser of cars, so an economic pullback is expected to hit the auto industry hard. In 2014, more than 23 million cars and vehicles were sold in China. In the first half of 2015, the country bought over 12 million vehicles, which compares with 8.5 million units sold in the U.S. This explains why a meltdown in China could be big blow for the automotive sector.
The recent economic uncertainty has raised doubts regarding General Motors short to medium-term outlook. In the past few months, the automaker has witnessed a significant slump in sales of sedans, seeing declining sales for six straight months. It should be noted, though, that slowdown in China is not impacting only GM. Other global stalwarts are also seeing their sales stall.
How is GM responding to the issue?
General Motors is running its Chinese plants below capacity in response to the fading demand. Its German counterpart Volkswagen (VLKAY, Financial) is also following the same strategy as sales slow. According to the China Passenger Car Association, General Motors along with joint venture partner SAIC Motor lowered production by 2.4% in the first six months on the year. A company spokesperson said "We expect a more volatile market in China as growth moderates," however, that “hasn't changed our long-term view of China. We continue to believe that the market will grow." The largest American automaker intends to augment annual production to 5 million vehicles by 2018 compared with current 3.5 million units in China.
The company along with its Chinese joint venture will also be investing around $470 million to build a facility with annual capacity of 200,000 units for manufacturing green cars. This is expected to have great prospects in the country where environmental regulations are becoming stricter.
Final takeaway
The slowdown in China has raised anxiety among investors who are keeping a close watch on events to determine their position. General Motors’ China sales declined for the third consecutive month in July, however, the company has seen strong growth on account of the economy. There’s no doubt that the prevailing sluggish environment would impact GM’s overall performance. However, it should not be as severe as many think considering that the company has diversified global footprints.
