The writing was on the wall regarding GM’s (GM) woes in China, but now investors have some visibility into how dire the situation actually is. The news arrived as automakers like Ford (F) and Volkswagen (VWAGY) struggle on the China mainland.
In a filing this morning, GM reported it would take a charge of $2.6 billion to $2.9 billion in its China joint venture with local automaker SAIC due to a “material loss” in value of that business stemming from “market challenges and competitive conditions.” The company did not elaborate on what those challenges were, but deep discounting and the sheer number of competitors in China are known issues.
In addition, GM will recognize additional equity losses of approximately $2.7 billion resulting from impairment charges recognized by the China joint ventures related to “plant closures and portfolio optimization.” GM did not elaborate further.
GM said it will recognize the majority of the charges in the fourth quarter but said they will be non-cash charges and won’t affect its EBIT (earnings before interest and taxes) adjusted results. GM stock was down slightly in midday trade.
GM’s issues in China are no surprise to the automaker. The company lost $347 million in the region through Q3 of this year and saw sales slipping 19% through the same period compared to a year ago.
China autos expert Michael Dunne of Dunne Insights believes the situation in China won’t improve and that GM might need to exit.
“GM had a tremendous run in China — two decades of growth, profits, and harmony with their joint venture partner. That era is suddenly over,” Dunne told Yahoo Finance. “The off-ramp for GM in China is approaching fast.”
While GM CFO Paul Jacobson said sales were improving recently in China, with inventory levels coming down too, the overall results paint a more dire situation.
GM CEO Mary Barra has admitted that the Chinese domestic market is a difficult one, with local Chinese automakers that “don’t seem to prioritize profitability,” she said during the Q&A portion of GM’s Q3 earnings call.
Dunne believes it’s all but over for GM in China, as well as for other automakers like Ford and Volkswagen trying to make their joint ventures work. Volkswagen reported Q3 sales fell 12% year over year in China, reflecting weakening demand for its products versus competitors. Even Tesla (TSLA), which gained a foothold in China and operates its own plant in Shanghai, reported sales falling over 4% in November.
“There will be no comeback story for GM — and many other global automakers — in China,” Dunne said.
