GM's bet on Chinese market paying off

Updated: 2013-05-03 12:41

By Michael Barris in New York (China Daily)

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Despite record sales of luxury vehicles in China, General Motors Co posted a 14 percent drop in first-quarter profit amid one-time costs and weaker earnings in its core North American market.

The results again show GM, the leading foreign automaker in China, benefiting from its investment in the world's biggest car market. It was the US company's 13th-straight quarterly profit since emerging from a government-led bankruptcy restructuring in mid-2009.

Detroit-based GM, which had 15.2 percent of the Chinese market during the January-March quarter, has said it expects to invest at least $11 billion in China between 2013 and 2016, adding four assembly plants and raising capacity by 30 percent to 5 million vehicles. It will boost capacity in the country 20 percent this year from a year ago, Chairman and CEO Daniel Akerson told analysts on a conference call after Thursday's earnings release.

"Other Detroit manufacturers are behind the curve in the Chinese market," Jeremy Anwyl, vice-chairman of auto industry information website, told China Daily. "GM stepped up and committed to expanding in China, and it's really paid off for the past several years."

Illustrating the role of China in GM's growth, Brian Johnson, Barclays Capital head of equity research for global autos and auto parts, noted that the market accounted for about 40 cents of the 58 cents-a-share profit reported for the first quarter. He also pointed out that margins in GM's Chinese joint ventures were 11.7 percent, up from 10.2 percent in last year's first quarter. Margins in North America were about 4 percent. GM has 12 joint ventures and two wholly owned foreign enterprises in China.

Net income for the latest quarter was $1.2 billion, or 58 cents a share, reflecting preferred dividends. A year ago, GM's profit was $1.3 billion, or 60 cents a share. Excluding a special loss item that reduced net income by $200 million, results beat the forecast of analysts surveyed by data provider FactSet of 54 cents. Revenue fell 2 percent to a better-than-expected $36.9 billion.

As sales of luxury sedans and sport-utility vehicles in wealthy Chinese coastal cities slow, foreign automakers are turning attention to West China. They hope high-volume sales of functional sedans to less-affluent buyers will offset an expected drop in margins. GM and its Chinese JV partners in 2015 plan to open a $1 billion factory in the western city of Chongqing that will produce 400,000 cars a year.

GM sold a record 816,373 vehicles in China in the recent quarter, a 10 percent jump from a year ago. As part of its effort to win over Chinese luxury-vehicle buyers who favor German brands BMW, Audi and Mercedes-Benz, the US company in February put its XTS Cadillac sedan on sale in China. Buyers responded by snapping up more than 2,000 of the cars in March, despite the $56,000 price. GM China President Bob Ferguson has said he expects Cadillac sales in China to triple to 100,000 by 2015.

Worldwide sales rose 3.6 percent to more than 2.3 million. Sales in the US rose 9 percent.

Profits in GM's international operations, including China, fell 5 percent to $495 million. Gains in China helped offset weakness in other regions, including India, GM said.

Earnings in North America fell 12.5 percent to $1.4 billion.

The results came a day after GM apologized and removed a Chevrolet commercial that included a song referring to "the land of Fu Manchu" where girls say "ching-ching, chop suey". The Hong Kong-based South China Morning Post deemed the ad "racist" in a headline.

"Our intent was not to offend anyone and we're deeply sorry if anyone was offended," Ryndee Carney, a Detroit-based GM spokeswoman, told Bloomberg News. "We're reviewing our advertising approval processes to make sure this doesn't happen again."

The English-language ad for the Chevrolet Trax SUV featured a 1920s motif and included music from Austrian performer Parov Stelar, Carney said. The ad had been running on television in Canada since March and was posted to Chevy's European website.