General Motors: Not Really An American Car Company Anymore (NYSE:GM) (2024)

As the trade war rages on, many industries will be affected. One of those most affected will be the automotive industry for multiple reasons. The first is the tariffs on steel and aluminum, both large components of car manufacturing. Others will be the ability for certain brands to economically market their cars in certain places. In this article, I will look at how the trade war will affect NYSE:GM and some of its peers.

The first relevant factor here is the level of exposure GM has to China. While GM is technically an American car company, it actually sells more cars in China than it does in the US.

(Daily Shot)

On the surface, this makes the company look very exposed to the trade war, but surprisingly it is less than you would imagine. The reason is that the company actually manufactures its Chinese cars in China which exempts them from many tariffs and potential tariffs. This is good for the company because as can be seen in the chart above, the company is heavily reliant on its Chinese car sales and its JV enterprises in China.

Not only does the company rely on China as its largest source of revenue but it is also the only reason the company is profitable. Below are the financials in terms of operating income for the company. As can be seen, equity income from China during the first quarter was $597 Million but the rest of the international sales lost $408 Million. As net income from China grew by 18.5%, it is clear it is the base of their international growth.

(10-Q)

The importance of China becomes even more clear when you see the trend in the U.S. As income in China is growing, GM outside of China is struggling. The company has had shrinking revenue and rapidly shrinking operating margins which have caused the company's net income to fall 60.25% YoY outside of China.

(10-Q)

This trend on their income statement makes more sense when you look at the trends in terms of market shares and the general market growth in both the U.S. and China. In China, the auto industry is growing fairly fast. The market grew 8% with GM's share remaining constant at 14.8%, representing 8% growth YoY.

(Vehicle Sales in China By Year- Statista)

Now compare this to the U.S. where despite growing market share from 16.8% to 17%, the revenue grew only 2.3% due to the more stagnant market. Although the market share did slightly grow, with trucks making up the majority of growth, this is likely to see decreases with the rising price of oil and increases in cost of aluminum and steel.

(10-Q)

The company is shrinking and margins are shrinking and the company is completely reliant on China for its profitability. Over half the company's net income is from China despite only 46% of their sales coming from there (as can be seen in the picture of their financial statements below). However, as said in their 10-K, even that growth may not last long:

GMI China industry sales were 6.7 million units in the three months ended March 31, 2018 representing an 8.0% increase compared to the corresponding period in 2017. Our China retail volumes totaled 1.0 million units for market share of 14.8% in the three months ended March 31, 2018, which was flat compared to the corresponding period in 2017. We continue to see strength in sales of our Cadillac and Baojun passenger vehicles and SUVs, as well as positive momentum in Chevrolet sales driven by new product launches. Wuling sales were impacted by the market shift away from mini commercial vehicles. Our Automotive China JVs generated equity income of $0.6 billion in the three months ended March 31, 2018. We expect low industry growth in 2018 and a continuation of pricing pressures, which will continue to pressure margins. We continue to expect equal to increased vehicle sales in 2018 driven by new launches and expect to sustain strong China equity income by focusing on improvements in vehicle mix, cost efficiencies, and downstream performance optimization.

(10-Q)

While growth has been good in China, most growth is likely over in the short term for both the U.S. and China. As pent-up anxiety and consumer sentiment worsens, we will likely see car purchases begin to decline.

(Daily Shot)

In addition, as people stop being able to afford their homes, it decreases room for spending in other places.

(Daily Shot)

(Trading Economics)

While the last couple of years have been good for auto manufacturers with high wage growth and low unemployment, these numbers are starting to look less appealing and are at risk for reversion.

(Trading Economics)

When you add this to increasing interest rates which increase the cost of financing a car, we should expect sales to start declining. While all these indicators are affecting the U.S., they will likely be even worse in China as tariffs hit all their major exports. This could hurt sales there hugely.

(Trading Economics)

These indicators along with high oil prices imply a likely drop in car sales. However, talks of tariffs on imported cars would help domestic car producers as they face less fierce competition and while the retaliations would hurt exports for many other car companies the fact that GM makes their cars in China would allow them to be exempted. Considering GM's strong presence in both countries, while the effects of increased aluminum and steel prices would likely counteract any gains from better market conditions caused by tariffs, this would likely not be true in China where GM could be a large beneficiary. That being said, the worsening in economic conditions in both countries largely due to the trade war will likely have as big if not an even bigger negative effect than the slight positive effect and this does not bode well for the company.

I am a Senior Finance major at the University of Maryland Smith School of Business. The capital markets are a big passion of mine and working in them is my future career goal. I usually focus on short-term long ideas unless I notice something else that I feel compelled to post.