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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (26) 

GM Beats Tesla in China: What It Means for the Stocks

Selling more vehicles in China won't help the capital holders of Tesla and General Motors, as both companies have a negative economic profit

November 14, 2020 | About:

General Motors Co.'s (NYSE:GM) tiny electric car raced ahead of Tesla Inc.'s (NASDAQ:TSLA) Model 3 to become China's top-selling electric car.

Through the three months that ended on Oct. 31, GM sold 55,781 Hongguang Mini's while Tesla sold 35,283 Model 3's, according to the Wall Street Journal.

With close to 1.4 billion people and rising incomes, China's consumer market has been an appealing destination for overseas vehicle makers. But winning the minds and wallets of Chinese consumers isn't easy, as Edward Tse discussed in his book, "The China Strategy."

"In China, instead of products arriving in a predetermined order, from essentials to luxuries, from low end to high, everything has arrived almost simultaneously…thus the masses of Chinese people tend to be difficult for marketers to reach: fickle, willing to change brands rapidly, often shopping on price alone. And yet there is a rapidly growing group of people at the high end who are very brand conscious, with the ultimate goal of showing off their wealth as they acquire known brand name products."

The simultaneous rise of the high-end EV market and the low-end EV market is a case in point. Tesla's Model 3 is catered to the upper end of the market—the brand-conscious consumers, while GM's Hongguang Mini is catered to the low end--- the price-conscious consumers. Tesla's Model 3 sells for $37,600, while GM's Mini sells for $4,300.

Still, GM's rapid EV sales cannot be explained by price alone. Other factors are in play. One of them is GM's early presence in the Chinese market. The automaker's first China venture dates back to 1997, with the launching of Shanghai General Motors Company Ltd., which is also known as Shanghai GM.

Then there are the joint ventures with local vehicle producers. Local partnerships are essential for every company that expands its overseas presence. This is especially true in China, where local partners have close ties to the Chinese government, determining who will be in what business and for how long.

Localization is also a factor. Some Buick models and small Chevys, for instance, have been branded for the Chinese market. The same is true for electric vehicles, aggressively promoted by the Chinese government.

Still, there's one more factor: innovation. GM is adopting China's "commercialization model," which brings new products to the market quickly.

A few words of caution

China isn't a usual emerging market economy, but a mature semi-communist economy, whereby the communist party is nurturing capitalism. The Communist Party directly or indirectly controls every major sector of the economy, deciding who will be in what business and for how long. Rushing and racing to take advantage of the vast Chinese automobile market is a big gamble. It has huge risks and rewards.

Meanwhile, selling more vehicles in China won't help the capital holders of Tesla and General Motors, as both companies have a negative economic profit. This means they destroy rather than create value as they grow.

Company

ROIC

WACC

ROIC-WACC (Economic profit)

GM

1.34%

3.57%

-2.23%

Tesla

4.60%

12.39%

-7.79%

Value investors should look elsewhere for better opportunities for their money.

Disclosure: I'm short shares of Tesla.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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