How Will The Antitrust Probes Impact General Motors' Prospects In China?

Aug.31.14 | About: General Motors (GM)

Summary

China became the leading market for General Motors in 2010, even crossing the U.S. market.

Most of the brands of General Motors that have slower sales in other regions of the globe have proved to perform well in the Chinese market.

A trend has been seen where the prices of the vehicles in China are extremely high compared to prices charged in other countries.

Over the last two years, the Chinese government has initiated investigations on foreign companies within the country mainly to lower prices of products offered by several industries, including the automotive sector. General Motors has become the latest target for the Chinese government, with allegations being imposed on them stating that the company has violated the antitrust policies of the country. Chinese locals have put forward complaints about high prices being charged for imported vehicles and vehicle parts.

Shanghai General Motors (NYSE:GM) sells GM's Buick, Cadillac and Chevrolet cars. This joint venture between GM and Shanghai Automotive Industries Corp. is being investigated by the Chinese authorities. Before the allegations on GM, other companies, including Volkswagen's Audi, Fiat's Chrysler, Daimler's Mercedes-Benz and Toyota's Lexus, had also faced huge penalties.

Largest market for General Motors

China became the leading market for General Motors in 2010. Based on volume, General Motors is the second biggest auto company in China after Volkswagen. GM has a huge base in the U.S., but its sales in China have significantly increased over the past few years, surpassing sales figures in the U.S. This trend could be seen from sales figures achieved in the first half of 2014. Sales for GM vehicles in China rose by 10.5% compared to the prior year, totaling 1.73 million vehicles. Comparables for U.S. sales improved by 2.8% in the same time period, totaling 1.46 million vehicles. Japanese auto companies have a significant amount of market share in China, providing a vacuum for U.S. auto companies to take hold of the region's market.

Most General Motors brands that have slower sales in other regions around the globe have performed well in the Chinese market. For instance, Cadillac saw an increase in sales of 72% during the first six months of 2014. In contrast, Cadillac experienced a decrease of 1% year over year in the U.S. By the year 2020, China is expected to become the biggest market for luxury cars. General Motors has also focused on the Chinese small car market, along with the luxury car market. It performed well in the first half of 2014 selling 890,000 vehicles.

Anti-trust Probe effects

The anti-trust probe against the auto companies has two parts. First is an investigation of the prices set by these companies for their cars. Second is an investigation into the prices that these companies charge for auto parts that are ultimately used during repair or servicing. Auto parts can be bought through three markets. Parts can be bought through official means by the company. Another avenue is through the black market where they are copied and engineered unofficially. The third option is through dealerships which are not permitted to sell auto parts under their brand name.

Auto parts bought through the official channel or through dealerships are extremely expensive compared to the unofficial market. However, the Chinese government has launched investigations into the third option, focusing on dealerships that are given permission to sell the auto parts that they manufactured under their own brand name. If part manufacturers were allowed to make the sales directly, then these dealers would be capable of lowering their prices and gaining more market share. Until then, prices will be impossible to compete with those prices formed in counterfeit markets. Right now, some consumers are willing to pay a slightly higher price in return for better quality parts that come with factory guarantees.

The impact of higher prices is seen when looking at the expenditures on auto parts once the car has been purchased. It is estimated to be around 40% of the price of the car. However, if China fixes the problem, it is likely that revenue generated from the sale of auto parts would likely decrease. The upside is seen with more affordable repair services, offered with the legal parts, will now be accessible for customers, in turn driving service revenue higher. Unfortunately, there is no definite change that can be expected from the imposition of the anti-trust probes.

High car prices in China

Chinese consumers are charged excessively high prices for cars by foreign auto companies. These automakers claim that taxes are the cause for higher prices. The Chinese government has levied a 25% tax on imports, a 17% tax on purchases and also a consumption tax based on the size of the engine. Automakers therefore shift the burden of these taxes onto the consumers by charging higher prices. A trend has been seen showing that prices of comparable vehicles in China are extremely high compared to prices charged in other countries. For example, BMW's X5 has a MSRP of around $100,000 in the U.S., but in China the X5 price range tops out at $330,000.

Conclusion

General Motors still charges a fair price in the Chinese market. General Motors plans to combat the import tax by building a $1.3 billion plant in China, enabling the ability to manufacture cars within China. Sales of General Motors cars in China has shown a positive upward trend due to the reasonable prices charged by the company and also due to the company's plan to expand within China with the installments of manufacturing plants that would lead to lower costs and increased profit margins for General Motors once the import tax is removed from its pricing ability. Therefore, even if General Motors faces anti-trust probes in China and is forced to pay penalties, the long-term impact should not affect sales nor deteriorate its business strategy of expanding market share in China.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.