GM planning deals in China to reach 5 million sales goal, report says
DETROIT (Bloomberg) -- The Chinese auto industry is overdue for consolidation and General Motors Co., with local partner SAIC Motor Corp., is interested in acquiring ailing automakers, people familiar with the companies’ thinking told Bloomberg.
GM, already the top foreign carmaker in China, aims to increase sales by about 75 percent by 2015 to 5 million, and a deal with another automaker is one possible way its ventures can expand, said the people, who didn’t want to be identified because the plans are private.
China’s government wants to preserve jobs even as it encourages consolidation that echoes the auto industry’s contraction a century ago that made GM the world’s largest for eight decades.
Expanding in China isn’t as simple as going out and buying another plant. Foreign companies face restrictions on the number of partners they can have or how much of a factory they can own. Last year, China said it wouldn’t give incentives for further foreign-owned auto plants. That started raising the value of underused auto plants, of which there are plenty: 10 of China’s 71 automakers didn’t sell a vehicle last year.
“It is much easier to get the government to sign off on their acquisition than to approve new capacity,” said Han Weiqi, an analyst with CSC International Holdings Ltd. in Shanghai. “It is in line with the government’s mandate of consolidating the industry and reducing the number of players.”
Most overcapacity
China has the world’s most overcapacity. Factories in China are able to produce about 10 million more vehicles than they currently make, according to LMC Automotive. That’s more than the number of autos made in any country other than China or the U.S.
GM and SAIC have plans to open two assembly plants in China in 2014. Even then, their joint ventures may be capable of making only about 4 million cars, sport-utility vehicles and microvans a year. One way to stay on track with the 5 million target set when growth was more exuberant would be by taking over assembly plants that aren’t operating at full production.
GM has built up what it calls a fortress balance sheet with more than $23 billion in cash that gives it flexibility to make acquisitions.
“There are no current plans to increase GM’s manufacturing capacity through acquisition or consolidation,” Dayna Hart, a GM spokeswoman in China, said this week in an e-mail.
SAIC declined to comment.
China passed the U.S. in 2009 to become the world’s largest vehicle market and still has room to grow: While 627 in 1,000 in the U.S. own a car and 517 in Germany, according to the World Bank, in China, it’s only 44.
Best month
The recovery of residential property prices in China’s major cities has accelerated since early 2012, potentially increasing demand for new passenger vehicles, said Kevin Tynan, Bloomberg Industries automotive analyst. GM sales in China last month soared 26 percent from a year earlier to 310,765, its best month ever. Buick and Chevrolet sales each gained 22 percent.
GM has been the largest foreign automaker in China for the past nine years, with about 14.7 percent of the market in 2012. GM said it earned $1.5 billion in 2011 from its joint ventures in China, or almost a sixth of the company’s $9.19 billion profit that year. Analysts project the automaker, which emerged from a government-financed bankruptcy in 2009, will report its 12th straight quarterly profit on Feb. 14.
While GM has many opportunities among Chinese automakers, which of them is the most probable target is a complex equation that depends on proximity to markets, ease of transportation and incentives offered by local governments in return for the investments, said Han, the Shanghai-based analyst.
Detroit, Chicago
Some local governments may resist investment and management from overseas or even from another city in China.
“Consolidation does not come easily in China because the governments, central and local, own 50 percent or more of most of the ventures,” Michael Dunne, head of industry researcher Dunne & Co., said in an e-mail. “It might be a good idea for Chicago to take over management/ownership of Detroit but getting there is not easy, even unthinkable.”
China signaled in late 2011 that it would be less inclined to sign off on new plants when it said foreign automakers would only be eligible for incentives on new factories approved before Jan. 30, 2012.
A struggling domestic manufacturer’s ability to build cars in China “becomes an asset,” said Matthew Stover, an analyst with Guggenheim Securities LLC based in Boston. “You’ve got a license, you may not be making many cars with it and your facilities may need a lot of help. But you have a license, so you then become an acquisition.”