China is currently the largest and fastest-growing automobile market in the world, and therefore, it is a highly lucrative market for national as well as international automakers. During the first quarter of 2014, vehicle sales in China increased 10.1% year-over-year, and January 2014 saw record sales of 1.85 million units that outpaced the yearly sales volume of India in 2013. China is proving itself as a hyper-competitive market in the passenger vehicle segment, so domestic automakers are experiencing competitive pressures. That may be because of customer preference for international cars over domestic brands. Nevertheless, China's passenger vehicle sales volume is forecasted to grow at a CAGR of 9.1% between 2014 -2017. Last year, the China Association of Automotive Manufacturers predicted industry-wide sales growth of 7%, while actual sales were up 14% year-over-year. This year, we can expect actual sales to cruise comfortably ahead of estimates. I will be focusing my article on General Motors (NYSE:GM) and its strategies to penetrate into the Chinese automobile market and deal with competitive rivalry in the region.
General Motors is battered in its home market due to the recall issues, but the auto giant is optimistic about its future prospects in China. General Motors has 12 joint ventures, two wholly-owned foreign enterprises and 35,000 employees in China. The company derives more than 30% of its total sales from China and 60% of its free cash flows in the form of dividends and royalties received from the country. In 2013, General Motors managed to sell 3.2 million passenger vehicles in China, up 28% from 2.5 million vehicles sold in 2011. For 2014, General Motors expects to sell its one-millionth vehicle in the country during the 2014 Beijing Auto Show. General Motors seems to be on track to exceed last year's set target of 3.2 million vehicle sales. General Motors had been the sales leader in China for seven consecutive years, before it was eclipsed by Volkswagen AG (OTCPK:VLKAF). Volkswagen was the first among international automakers to start producing cars in China during the 1980s, and has been benefiting from its first-mover advantage. It has achieved a deep penetration in the eastern areas of the country that were rapidly developing, like Shanghai and Guangzhou, which is why it does not need more dealers there. Now, it has turned its focus to western areas that were previously neglected, and aims to raise the number of dealerships there by almost 50% to more than 3600 over the next 3 years. According to the company's CEO, Martin Winterkorn, it is aiming to deliver more than 3.5 million vehicles this year, up from 3.27 million in 2013, reflecting an increase of 7%. The company will introduce 100 new or revamped models throughout the next year. Volkswagen aims to maintain its position as the top-selling foreign brand in China with the help of aggressive spending in the country. Its two venture partners, First Automotive Works and Shanghai Volkswagen, have plans to spend 18.2 billion euros through 2018, equivalent to $25.16 billion. In short, Volkswagen is making strides towards becoming the global industry leader by 2018 and besting Toyota Motor Corporation (NYSE:TM).
To compete with its aggressive rivals in the Chinese auto market, General Motors intends to invest $12 billion in the country over a period of 4 years from 2014-2017. Moreover, during the next year, the company may be building more plants to bolster its production facilities in the country. Out of its 5 new plants to be built in China, four will be vehicle assembly plants, while one will be an engine plant.
According to Matt Tsien, president of GM China, GM is going to launch new products under its Cadillac brand this year, as well as next year to bolster the sales of the Cadillac brand in China. General Motors aims to sell 100,000 units of its flagship Cadillac Sedans, and one of its new plants will solely make Cadillac Sedans. General Motors has a vision that by 2020, compact Sedans will be the most popular segment and their sales will be around 10 million annually. Moreover, GM is launching a new Chevrolet Trax and a redesigned Chevrolet Cruze compact car, along with 3 dozen other vehicles at 2014 Auto China. Through 2018, the company aims to launch 60 new and upgraded vehicles in the market.
Volkswagen's spending in China is more than double the spending of General Motors in the region. Volkswagen's sales in 2013 were 1.3 times more than the sales made by General Motors. Volkswagen has made its foothold stronger in the region than General Motors. However, figures released to date show that General Motors is ahead of Volkswagen in terms of sales in China during the first quarter of 2014. For the first quarter of 2014, General Motors delivered 919,114 vehicles up 13% year-over-year, while Volkswagen managed to deliver just 880,700 units. According to sales volume achieved by the two companies during January 2014, Shanghai Volkswagen, with sales of 199,688 vehicles, was ahead of Shanghai GM, with sales of 171,755 vehicles. The coming months will clarify the picture for both companies' performances in China.
Both of the companies are trying hard to grab market share and maintain their leads in this lucrative market. The key thing that will decide the winner will be the customers' vote, and to gain that, both auto makers have to come up with products that can appeal to customers in China. In this regard, the introduction of new models into the country with customized features catering to the local consumers' taste can help the two companies. Product affordability will also remain a critical factor.
In short, it can be argued that the fast-growing Chinese automobile market is important for the fortunes of multinational car companies. In fact, China will pave the way for global success for international auto makers if they are well-received in China. The key thing to look for is the intensified competition in the region and the strategies of auto giants in response to the competition to deliver better results for customers and shareholders. However, domestic brands are not expected to be robust competition, but many international companies will compete for a chunk of the market share in China. General Motors will see its top and bottom lines bolstered leveraging on the robust results in the Chinese auto market. This adds to many reasons why investors should consider investing in this stock that is currently trading at a depressed valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.