Tags: Auto Industry, General Motors

General Motors Veers Towards Emerging Markets After U.S. Sales Stall

By , Money Morning •

By Jason Simpkins
Associate Editor

General Motors Corp. (GM), the world's largest automaker, will invest as much as $5 billion in China over the next five years.

Detroit- based GM has fallen on hard times in its home market recently, but business in emerging markets has shown promise.  With its status as an industry leader on the line, the company understands that the Chinese marketplace is its best opportunity to re- invent itself and lay a whole new foundation for the future. 

GM's restructuring efforts date back to 2005 when it first announced its "Four Point Turnaround Plan." The plan included healthcare cost reductions, adjustments to the company's product line, and 30,000 job cuts. The plan had some success but lost traction last month when the company announced its largest quarterly loss.

Over the course of its restructuring effort, GM accumulated a number of deferred tax credits. Unfortunately, the company's auditors determined that a weak financial position meant GM would not be able to claim those credits and had to account for their value. As a result, GM took a $38.6 billion deferred tax charge.

GM was also devastated by losses related to its financing arm. GM owns 49% of General Motors Acceptance Corp., which was previously the company's life preserver. But in the third quarter, GMAC contributed a $757 million loss, most all of which could be attributed to mortgage write- offs.

Even without the near $39 billion bombshell, GM said it lost $1.6 billion, $2.80 a share, in the third quarter - more than ten times the loss initially forecast by industry analysts. That's partly because GM also reported a net loss of $247 million from its North American automotive operations, an area in which analysts expected the company to turn a small profit. In 2006, the company lost $660 billion in North America. So, it's no surprise that GM is ramping up its foreign operations.

Globally, GM's automotive operations earned $122 million in the third quarter. Total revenue reached a record high $43.1 billion. According the New York Times, sales of cars and trucks increased 4% worldwide in the third quarter, to a record 2.39 million.

In the first nine months of 2007, GM sold 7.05 million vehicles, enough to pull even with Toyota Motor Corporation (TM), which had held the title of world's largest automaker for the first half of the year. Over that same nine- month period, GM posted a net income of $481 million in the Asia Pacific region and $754 million in Latin America.

Gaining Ground in the Fastest Moving Auto- Market

With North American profits running in the red, a shift in business towards emerging markets looks to be the company's best play. To that end, carving out a niche in China, the world's fastest growing major auto- market, is absolutely vital.

It appears the company understands what it needs to do. GM is currently building a $250 million research and development center in Shanghai. The new building will also serve as the company's China office and Asia- Pacific headquarters.

And, as Kevin Wale, president of the company's China unit, told Bloomberg News, GM will also spend about  $1 billion a year on production and sales in China over the next five years.

Wale also said China's total automotive demand will rise to 9.5 - 10 million vehicles next year, and that GM expects to sell more than 1 million cars in the region in 2008, a 150- fold increase in sales from a decade ago. 

"GM's main hope is put in Asia Pacific, within which China is the most important part," Ashvin Chotai, an analyst with Global Insight Inc. told Bloomberg.  "Even with this $1 billion a year, it'll be tough to remain No. 1 in China. With China becoming the most important strategic market in the world, it's crucial to have their investment to stay in the race."

The China Association of Automobile Manufacturers estimates 2007 will total between 8 - 8.5 million vehicles, which means Wale's 2008 estimate could be right on target. And it seems as though every major carmaker is competing to get a piece of China's automotive market share.

Volkswagen (VLKAY) has set a 2007 target of 900,000 units, and Toyota expects to sell more than 450,000 vehicles this year. Toyota also started construction on a plant in Guangzhou in June that will make Camry sedans and Yaris compacts.

Still, GM is currently the China market leader, and with a preponderance of domestic troubles it will no doubt be looking to increase its role in the global marketplace.

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