China was once the land of promise for Detroit automakers. With the country's booming middle class, and surging light-vehicle market, the companies could only see dollar signs. At first, automakers such as General Motors (GM 0.43%) thrived in China, and it became GM's largest market for sales volume for a time. However, the alarm bells have been ringing for some time, and now GM is making drastic changes, at a significant cost.
Alarm bells
General Motors' sales in China peaked in 2017 at 4 million vehicles, but have since dropped by almost half. This has obviously had a huge effect on profits, with GM posting three consecutive quarters of losses in the country.
If years of sliding sales in China weren't alarming enough, Bank of America analyst John Murphy sent a pretty clear message during his annual "Car Wars" presentation: "I think you have to see the [Detroit Three] exit China as soon as they possibly can."
If you're wondering how we got to this point, it all starts with China's government heavily subsidizing domestic automakers, specifically electric vehicle (EV) automakers. With that push and incentives in hand, China's automakers rather quickly took command in EV battery technology, and its consumer markets responded.
In fact, in July, 51% of vehicles sold in China were battery electric or plug-in hybrids. At a time when the U.S. and other countries are debating heavy tariffs on Chinese EVs to protect domestic automakers from being crushed by low prices, how are Detroit autos supposed to compete in China's plug-in-heavy market without tariffs to help? The answer is that they simply aren't, and that's why sales have spiraled. It's also not going to get any easier in the near term, with Chinese automakers hinting that the price war could intensify in 2025.
So with substantial investment over decades, what's General Motors doing about its China problem?
Time for a change
Rather than exiting the market entirely, as Murphy suggested, General Motors is planning a substantial restructuring of its maligned China business that will dent the automaker's earnings by more than $5 billion. More specifically, GM will take noncash charges of $2.7 billion for the restructuring, and another $2.6 billion to $2.9 billion to account for the declining value of its stake in its SAIC Motor Corp. Chinese joint venture.
The restructuring will almost certainly include the axing of multiple vehicle models, as well as plant closings. The plan is to focus on EVs, hybrids, and high-end imports, which will be an uphill and competitive battle. The silver lining is that the automaker hopes to return its China business to profitability in 2025 with a much smaller operation. General Motors needs its China business to succeed without substantial, or preferably any, investment going forward.
What it all means
This is an absolutely necessary move, and currently a better option than exiting completely -- at least for now. The restructuring move will curb losses, shrink its operation, and buy General Motors some time to prove it can develop a low-cost platform of EVs that can compete, even in China.
The days of China being the promised land for profits that could compare to GM's lucrative North America region are likely gone for good, and investors have to note that development in any investment thesis. What was once a huge opportunity is now a glaring weakness in its core business.
Going forward for investors, one of the most important aspects of GM's business will be the competitiveness of its EVs in the U.S. and abroad, and its ability to lower costs enough to make the lineup profitable.
