General Motors (GM) has clearly decided that its future is on the Eurasian landmass. The company has unveiled new expansion plans that could save its struggling European operations, expand operations in a growing auto market and tap the manufacturing capacity it is developing in China. These plans could make GM one of the best growth stocks in the automotive sector.
General Motors Making Russian Expansion
Having had success in China, General Motors is making plans for a major expansion in America's other Cold War rival, Russia. Specifically, GM CEO Dan Akerson is hoping that the Russian market can bail out his ailing Adam Opel GP division. If successful GM's Russian adventure will boost its stock by demonstrating that it can expand its overseas operations.
The Russian expansion plans call for doubling production at GM's plant in Russia's old imperial capital of St. Petersburg. Capacity will be increased from 98,000 to 230,000 vehicles by 2015. The focus of the expansion will be Opel's Astra Sedan. Popular American vehicles, such as GM and Chevy trucks and Cadillac sedans, will also be assembled there.
Beyond St. Petersburg, GM is planning to spend $1 billion to build new factories and expand capacity over the next five years. The location of the other new factories has not been announced yet, but they will probably be in other historic Russian industrial centers, such as Magnagrosk and Yekaterinburg.
This kind of aggressive expansion could be very good for GM's stock because it is the only thing that can save the European division. Opel Vauxhall has been unable to compete in markets such as Germany.
Russia could be an excellent market for GM products, particularly big American style SUVs, vans, and pickup trucks, which should appeal to Russians. American style SUVs should be popular on Russia's notoriously bad roads. Russians also drive much longer distances, so they might appreciate a bigger, American-style sedan.
GM is already doing very well in Russia. Right now, Chevy is the best-selling foreign auto brand in the country. Other American automakers have done well in the Russian Federation as well. The Ford (F) Focus is one of the best selling cars in Russian showrooms.
Russian Adventure Could Be Risky
General Motors will be taking some serious risks by trying to bring Opel to Russia. It has had success in bringing Chevy to China, but not in introducing Opel to that nation. There is no guarantee that Opel will be any more appealing to Russians than it is to Chinese and Germans. Opel only has around 5% of Germany's auto market, even though it is one of the country's historic brands.
Another problem GM faces is the Russian economy, which is doing well, only because of high international commodities prices. Now that prices for natural resources, such as oil, gold, copper, and nickel, which are the basis of Russia's economy, are falling, it could face falling demand. Unemployed Russian miners are not likely to run out and buy a new pickup truck.
General Motors has already had to cut shifts and lower production in another resource based developing nation, Brazil. In Brazil, auto sales have fallen because the nation's economy is sluggish due to low commodity prices and demand. General Motors is not the only company that got burned in Brazil. Tata (TTM) recently put plans for a new Jaguar-Land Rover factory in Brazil on hold because of low sales.
GM Could be An Interesting Long-Term Play
Still, GM could be a good long-term auto industry play because it appears to be trying to lay the groundwork for another big overseas market. Russia is very similar to China: it's a former Communist empire that turned into a capitalist stronghold with a growing middle class. Russia lacks China's vast manufacturing growth, but it has vast mineral wealth and potentially huge oil reserves.
Another advantage for General Motors is that Russia lacks Europe's aggressive union cultures. It should have more flexibility in hiring workers and building plants in the Russian Federation. Those factories would be in an excellent position to tap other developing markets, including Ukraine, Central Asia, and Western China. It could have a source of low-cost production close to Europe in order to take advantage of any future European recovery. St. Petersburg is a short rail and sea trip from Europe's largest auto markets in Germany, France, and the United Kingdom.
Production in Russia would also give GM access to a cheap source of components and engines, namely China. The car parts could be shipped to Russian plants over the Trans-Siberian Railway, which has been greatly expanded. That could give General Motors a cheaper manufacturing capability that could make it more competitive in Europe. General Motors could also use the Trans-Siberian to ship some Russian products to China or to Vladivostok for export to Asia.
Competition Growing in China
If General Motors can develop the kind of infrastructure in Russia that it has in China, it will have laid the groundwork for becoming a 21st century automotive powerhouse. The company is taking huge risks, but the rewards appear to greatly outweigh the gains. If GM can jettison the dismal European market and successfully expand in developing countries like Russia, it could have a bright future.
General Motors is taking some huge chances these days. The rewards could potentially be great, in the form of a huge share of the international market, but the risks could be greater. New markets like Russia and China could become cash cows or new European debacles where GM ends up losing huge amounts of money for a tiny amount of market share.
GM is an interesting investment, but it is not a stock for the fainthearted. The risks of this company are huge, and any gains won't be realized for a long time. One of those risks is the large number of competitors expanding aggressively in markets such as China. These competitors include Nissan. Reuters reported that Nissan has plans for a $785 million car factory in Dalian, in Northeast China (or Manchuria).
The plant would be owned and operated with Nissan's partner, Dongfeng Motor Group, and could produce as many as 240,000 vehicles by 2017. The focus of production will be on upscale vehicles, such as SUVs and Sedans, in an attempt to tap China's growing middle-class market.
This planned expansion could boost Nissan's stock value because it expands the company's operations in the world's fastest growing auto market. Nissan's CEO, Carlos Ghosn, has said he wants sell at least 2.3 million vehicles in China by 2015. He hopes that will raise his company's global market share and profits to 8%. Nissan sold around 1.25 million cars in China in 2011. That was a 21.9% increase over 2010.
A successful Nissan expansion in China would be a threat to GM because China is now GM's biggest market outside the US. It sold 231,183 cars in China in May. General Motors' strength in China is demonstrated by the fact that Nissan is making big expansion plans in Northeastern China where GM's presence is not that big. If competitors like Nissan could take even a portion of GM's Chinese market they could hurt its stock value.
Nissan is trying to expand its presence in China's Northeastern region where Toyota (TM) and Volkswagen (VLKAY.PK) are the most popular brands. Volkswagen's Jetta and Toyota's Corolla have been selling well in that area for years. Both flagship sedans are manufactured in the region.
Nissan's moves in China demonstrate that General Motors made the right decision by betting on China. It moved in early and established a large local manufacturing base quickly. If GM could do the same thing in Russia, this new market could offset losses from increased competition in China.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
