Despite a slowdown in China’s economic growth to 7.7% in the first quarter, the nation still represents a new frontier for automotive makers. The big mover in this market so far is General Motors Company (NYSE:GM), which has just committed $11 billion by 2016 for building new plants and hiring workers. This strategy should lead to four new plants capable of churning out five million new cars annually, nearly double the output of its more modest American plants. These additions will give the Detroit automaker 17 plants in China, and will expand its dealership network from 3,500 to 5,100, according to Bloomberg. According to General Motors Company (NYSE:GM), the gamble is worth it because the company expects the size of the Chinese car market to reach 35 million in 2022, which could set GM up for long-term success in China.
Not to be outdone by its rival, Ford Motor Company (NYSE:F) is also looking to make a name for itself in China, and it is already seeing the effects of the Chinese appetite for cars, especially among the growing middle class. Led by the Ford Focus and the Kuga, sales in April jumped 37%, sending the stock price up to $14.12/share. Like General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) is also making a push to double its production capacity in the country to 1.2 million vehicles by 2015, embarking on the largest expansion the company has undertaken in a single country in nearly half a century. Compared to a year earlier, Ford’s sales have jumped 49% in the four-month time frame, showing that China is not just a potent car market; it could be the new battleground for two of America’s “Big Three” automakers.
Even though these two companies are definitely competing with one another for Chinese supremacy, in both cases, there is a lot of room for long term investment potential, assuming the Chinese economy can continue to grow. Realistically, the only way General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) can make these big investments work is if the economy in China continues its modest growth. If it does, there will be an even bigger middle class than what exists right now, which means more people buying cars and other luxury items. However, China’s slowdown, as well as regional unrest regarding the spat with Japan over some East China Sea islands (which has led to a decrease in Japanese imports), and growing uncertainty on the Korean peninsula, could hamper Chinese growth forecasts and keep investors for committing too heavily in the country. Growth at 7.7% is still pretty great given all the political turmoil, and it should improve further once the conflicts resolve themselves (or at least don’t deteriorate).
As such, from the long-term perspective, General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are making some pretty smart investments in growing their Chinese footprint. It’s good for the companies because they are showing a commitment to diversification beyond the stagnant markets of US and Europe. This new strategy should lead to some strong yields for investors over the long haul, especially as China is a growing, and untapped, car market.
It’s a new American car race–except this time, the cars are speeding down highways in Beijing and Shanghai, rather than the sunny beaches of California. It’s a big play for these two American car titans, but it’s a good risk to take. The Chinese want cars, and the Americans are all too happy to oblige.
The article The Coming American Car War in China originally appeared on Fool.com.
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