Gm in China - Individual Case Analysis

GM in China

Group GM

Transcrição de GM in China

Problem Statement:

What should GM (China) Investment Corporation do in China moving forward?

Key Issues:

1) What is the forecast for supply and demand in the vehicle market in China?

2) What is the forecast for profit margin in the sedan and truck segments in China?

3) Should GM (China) Investment Corporation enter the bus market?

4) Where should GM (China) Investment Corporation's new joint ventures locate their new plants?

2003 Supply & Demand

386,710 vehicles sold with $2,267 in profit per vehicle

Projected shift in demand

Fall in expected prices reduces demand.

Projected shift in supply

Drop in price for similar products attracts more producers and increases inventories and the supply.

New Equilibrium

Combination of decreased demand and increased supply lowers the price equilibrium.

Supply & Demand meets Profits

Solution

GM in China

Donna Edwards, Jared Robertson, Chris Tyler

* When prices decrease, demand increases.

* Prices projected to decrease by 10% matches projected 10% increase in demand.

* Assuming price cuts are taken directly from net profit, the 10% price reduction along with 10% increased demand, lowers net profit 1% due to price elasticity and the availability of substitutes.

2003 $2,267 x

2004 $2,040 x

2005 $1,836 x

2006 $1,652 x

2007 $1,487 x

386,710 = $875m

425,381 = $868m

467,919 = $859m

514,711 = $850m

530,000 = $788m

Ec = Equilibrium before increased demand.

Eb = Equilibrium after increased demand from growth.

Profit per vehicle

units sold

Data Pertaining to Supply & Demand:

Change from previous year

-1.0%

-1.0%

-1.1%

-7.3%

2003 Est avg price per GM vehicle $10,000. Chevy Spark (small car) $7,500.

BYD Flyer (bottom of market $4,700.

Total

Profit

To maximize profits, GM (China) Investment Corporation should continue with its current strategy and maintain production capacity to meet projected increases in demand in the sedan and truck segments but also start two new joint ventures to manufacture buses; one with SAIC in Shanghai and one with Shanghai GM Dong Yue Motors Co. Ltd. in Shangdong.

Data Pertaining to Profit Margin:

...huge investments by competing firms would result in substantial increases in production volumes, threatening a reduction in prices and consequently in gross margins and profits. (p. 2)

With a combined manufacturing capacity of 530,000 vehicles, GM and its joint ventures offered the widest portfolio of products among foreign manufacturers in China. (p. 2)

...the top 20% of China's population would soon be able to afford automobiles. (p. 6)

Mr. Devine said GM expected the market to maintain double-digit growth "for some time" on the back of continuing economic growth, cheaper cars and the approval of vehicle financing for three foreign manufacturers. (p. 7)

GM China sold 386,710 vehicles in China last year (2003) through its various joint ventures, up 46% on 2002. Saloon car sales increased 82% year-on-year. (p. 7)

For the motor vehicle sector, the year 2004 witnessed an abrupt end to the 50% annual sales growth of the previous years. Some of the best-selling models experienced particularly sharp decreases, as customers shifted to less expensive automobiles. for some models, September 2004's sales dropped more than 50% from the September 2003 level. Analysts pointed to a series of new forces: a loss of consumer confidence, expectations of further vehicle price decreases..." (p. 7)

Essentially, there was a substantial increase in aggregate demand due to higher consumer incomes, increased levels of exports and substantial foreign investment. (p. 13)

Demand and supply projections seemed subject to great uncertainties. (p. 16)

Figure that GM and its Chinese partners had a combined net profit of nearly $875 million, or about $2,267 per vehicle sold in China. (p. 5)

That means GM China was nearly 15 times more profitable, per vehicle sold, than GM North America. (p. 5)

Analysts expected prices to continue to fall at a rate around 10% a year. (p. 6)

...the intensification of competition was resulting in price cuts that would inevitably reduce profit margins. (p. 8)

World prices for natural resources, and particularly oil, were skyrocketing, and this threatened to drive up cost levels and, therefore, prices in China. (p. 13)

Data Pertaining to Entering the Bus Market:

Of particular concern was the continuing requirement that foreign ownership of assembly factories would be limited to 50%, requiring a government-owned enterprise as an equal partner. (p. 1)

...air pollution was becoming extremely severe, and the road system was becoming increasingly inadequate. These developments, as well, meant that government interventions to limit pollution and to expand the road system would be important determinants

...