China, General Motors and Unintended Consequences of the Trump Trade Policies

With Donald Trump tweeting this stream of consciousness about American companies operating in China:

…I thought that it would be interesting to look at one of America's largest companies that operates in China, General Motors, the beneficiary of $13.4 billion in assistance from U.S. taxpayers during the darkest days of the Great Recession.

According to GM's 2018 Annual Report, we find the following references to China:

"We also have equity ownership stakes in entities that meet the demands of customers in other countries, primarily in China, with vehicles developed, manufactured and/or marketed under the Baojun, Buick, Cadillac, Chevrolet, Jiefang and Wuling brands" (page 1)

Here is a table from page 2 of the annual report showing sales of GM vehicles in China:

In 2018, GM sold 3.645 million vehicles to Chinese consumers, making up 13.8 percent of China's vehicle sales in 2019 and putting them in second place for market share.  This is down from 4.041 million (14.3 percent) in 2017.  While sales in China  were down in 2018, General Motors sold only 2.954 million vehicles in the United States, 691,000 less vehicles than they sold in China.  As well, sales in China accounted for 43.5 percent of General Motors total worldwide sales of 8.384 million vehicles.

General Motors also operates its GM Financial automotive financing arm in China through joint ventures.

According to GM's annual report, the company realizes that there are risks to an American company doing business in China for several reasons as we see on page 12:

"Our significant business in China subjects us to unique operational, competitive and regulatory risks. Maintaining a strong position in the Chinese market is a key component of our global growth strategy. Our business in China is subject to aggressive competition from many of the largest global manufacturers and numerous domestic manufacturers as well as non-traditional market participants, such as domestic technology companies. In addition, our success in China depends upon our ability to adequately address unique market and consumer preferences driven by advancements related to infotainment and other new technologies. Increased competition, increased U.S.-China trade restrictions and weakening economic conditions in China, among other things, may result in price reductions, reduced sales, profitability, and margins, and challenges to gain or hold market share. In addition to increased competition, Chinese regulators have announced aggressive "green" policy initiatives and quotas for the sale of electric vehicles, which have challenging lead times. 

Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our foreign investments and business conducted within China. In order to maintain access to the Chinese market, we may be required to comply with significant technical and other regulatory requirements that are unique to the Chinese market, at times with challenging lead times to implement such requirements. These actions may increase the cost of doing business in China and reduce our profitability. In particular, the announced intention of several Chinese cities to implement new China 6 emissions regulations in July 2019 represents a risk for the sales of our Chinese joint ventures." (my bold)

General Motors claims that the company's Automotive China Joint Ventures generated equity income of $1.981 billion in the year ended December 31, 2018 and while the company projects that industry sales will remain flat with a continuation of pricing pressures in 2019, the company should be able to sustain strong China equity income by focussing on improved vehicle mix, cost efficiencies and downstream performance optimization.  Here is a table showing the finances and operational data for Automotive China JV for the year ending December 31, 2018:

Let's close this section of this posting with what GM has to say about the Chinese market:

"We view the Chinese market as important to our global growth strategy and are employing a multi-brand strategy led by our Buick, Chevrolet and Cadillac brands. In the coming years we plan to leverage our global architectures to increase the number of product offerings under the Buick, Chevrolet and Cadillac brands in China and continue to grow our business under the local Baojun and Wuling brands, with Baojun focusing its expansion in less developed cities and markets. We operate in the Chinese market through a number of joint ventures and maintaining strong relationships with our joint venture partners is an important part of our China growth strategy." (my bolds)

From the data presented in this posting, you can see that the Chinese market and General Motors manufacturing and sales joint ventures form a very, very important part of the company, its sales and ultimate profitability.  With cars sold in China making up just under half of all of General Motors worldwide sales, the company would be a far smaller and less profitable entity if it were forced to leave China and rebuild itself as the General Motors of the past."

With all of this in mind, let's close by looking at a recent op-ed piece that appeared in China's Global Times, a news media outlet that acts as the mouthpiece for China's Communist Party:

"US President Donald Trump has ordered US companies to "immediately start looking for an alternative to China." If US firms obey his dictate, such actions will have serious consequences.

China is now the biggest market for some US-based enterprises, such as US automaker General Motors (GM). The automaker's China sales came to 3.65 million cars in 2018, exceeding its total sales in the US market, where GM delivered nearly 3 million vehicles. Some statistics have shown that China's car market is even bigger than those of the US and Japan combined. GM is already facing weak sales in the US. The automaker will suffer a fatal blow if it loses the Chinese market.

GM is a big player in the US auto industry, an important component of the US economy that is particularly prominent in some Midwestern and Southern states. 

According to statista.com, motor vehicle and parts dealers in the US had about 2 million employees as of March 2019. If GM's profits fall or it loses money, the whole US auto industry will be affected, the country's auto supply chain will shrink and mass unemployment will result.

In China, the vehicle industry is a fully competitive market. If GM withdraws from China, homegrown brands and   automakers from countries outside the US will fill the gap in auto sales. As long as China has the world's largest vehicle market, there will be no shortage of auto-related investment. China has the initiative in this game… 

To keep its foothold in China, GM has to keep producing in China – despite Trump's order…

US companies are welcome to invest and operate in the Chinese market, but if some US companies want to obey Trump's order and join Washington's trade war, the result is bleak. A decision to give up the Chinese market is just suicide."  (my bolds)

Not surprisingly, Washington's trade actions against China will have a series of unintended consequences for Corporate America, not the least of which is a drop in sales, a corresponding drop in profits and, most painfully, a drop in share prices which will directly affect the value of stocks held by the executive officers of America's largest corporations.  The example of General Motors shows us how quickly a company that is reliant on China for a significant portion of its operations could become vulnerable to the whims of the current president.

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