It’s almost hard to believe a little over a decade ago that automakers such as Ford Motor Company (F -1.88%) were grilled for not getting into China’s booming automotive market sooner. China’s market was finally supposed to turn into a second region that could rival the impressive profits found in North America; it was where automakers looked to for massive growth.
General Motors (GM -3.15%) even sold more vehicles in China than the U.S. for many years, but that’s all changed now, and the sad part is China’s lucrative market may never be the opportunity it once was for foreign autos — so how are the Detroit juggernauts adjusting?
Gone, but not forgotten
General Motors once thrived in China and generated roughly $2 billion annually for its bottom line. In fact, you can see the abrupt change in GM’s China results in the graphic below.
Data source: General Motors filings with the Securities & Exchange Commission. Chart by author.
“China as an entity I think will be smaller than it has been historically,” said GM Chief Financial Officer Paul Jacobson, according to The Wall Street Journal. “But we’ve always committed to getting it to profitability and ensuring that it can support itself.”
If you’re wondering what happened to foreign automakers in China, it was simply a rapid evolution toward electric vehicles. China’s government subsidized its EV industry in hopes to more quickly develop technology and EVs that could compete not only in China, but around the globe.
The strategy worked, and it worked almost too well as it caused a flood of competition that created a brutal price war with automakers racing to the bottom of price tags to lure in entry-level consumers. China’s demand for EVs soared along with its growing prowess, and soon new-energy vehicles — which include hybrids, plug-in hybrids, and full EVs — accounted for roughly half of China’s automotive sales.
For context, know that over the course of a few years, China’s EV makers were able to bring EV prices down to under $20,000 in some instances, at a time when foreign automakers are fighting to plan for $30,000 EVs.
What’s an automaker to do?
The good news for GM investors is that the company isn’t exiting China without a fight. GM took a $5 billion restructuring charge to restore its China operations to a more sustainable business, and it returned to an adjusted profit during the fourth quarter — an impressive reversal from the prior three quarters.
Data source: General Motors’ Q4 Presentation. Chart by author.
Ford has also changed up its game plan in China by streamlining its product offering, also reducing capital expenditures as GM is doing, and exporting vehicles from China — it’s all had a positive impact. Here’s Ford CEO Jim Farley during the second-quarter conference call: “As you know, we flipped our international operations many years ago from deep losses to now profits and positive cash flow with more opportunities ahead, and that includes China.”
There are still meaningful ways for China’s market to be an opportunity for foreign automakers, especially as the companies become more competitive in EVs. Ford’s showcasing that with its China export strategy, and perhaps GM can use its deep joint venture ties to learn a thing or two from its Chinese counterparts, as they did from foreign autos over a decade ago.
This is a development investors have to keep aware of, and it’s important to note that China is no longer a “holy grail” region that will grow into a second pillar of profits, next to North America, for Detroit automakers anytime soon. For investors, the current hope is that Ford and GM don’t have to spend much capital in China to sustain profitable operations while the dust settles in such a rapidly evolving market.
Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.
