Over the next five years, General Motors Company (NYSE:GM) will invest $1 billion in the Russian car industry. The official announcement was released in the last few days of 2012 and it is reported that GM will concentrate more on Russia than ever before. Considering the dismal car market in Western Europe and North America, Russia is set to be the next big automobile market for General Motors and other companies. In this article, I will discuss how GM’s plans in Russia will help the company increase its long-term profitability.
General Motors Company (NYSE:GM) intends to expand its presence in the “automobile capital” of Russia, the city of Nizhny Novgorod, by manufacturing 30,000 Chevrolet Aveo annually. The new investments will be channeled to the industrial enterprises of the city and Toliatti AvtoVaz. Next year, GM plans to invest $200 million in the modernization and expansion of the all-terrain Chevrolet-Niva, which is very popular in Russia.
According to the Automotive Logistics Russia, Russia remains the only light amidst the darkness of the crisis in the European market. The European market recorded a sharp drop in sales. In Russia, the first half of 2012 saw sales volume growing by 40%. In this context, GM does not intend to cede ground to its main competitors – companies as Ford Motor Company (NYSE:F), Nissan, Volkswagen and Renault. For Europe, the Russian auto market has been playing a similar role as the Chinese market for Asia, representing a colossal space for demand growth in the process.
According to New York Times, Russia will see an increase in the number of cars per capita to match the current European level. This is due to a special attitude of Russians towards car ownership, which automatically suggests affluence and a certain elevation in social status.
According to analyst Vlad Ivanenko, the Russian middle class consists of people who are well off in a sufficient manner and can afford fine cars despite the economic crisis. Russian demand for cars will only increase as the possession of cars is seen as a status symbol. GM was not mistaken in their expectations. It is logical to adopt and implement programs for long-term cooperation, and make big investments worth $1 billion.
Meanwhile, experts from the European Union (EU) are sure to be able to turn Russia’s largest sales market in the Old World. According to the Association of European Businesses, for every thousand Russians, there are 250 cars. For comparison, the figures are 11 in India, 49 in China, 500 in Germany and 600 in the U.S. Therefore, the growth potential of the Russian market is big and relevant for General Motors Company (NYSE:GM). Investing in Russia is akin to investing in the future of the company.
What GM’s competitors are up to
In early March, Bloomberg reported that General Motor’s lead over Toyota in China widened by 7.9% with respect to sales gains. This is something that I would seriously consider. China is one of the largest car markets, and like Russia, it has a huge middle class population that views car ownership as a status symbol. If General Motors can beat Toyota, an Asian company, in China, it can certainly do a lot more in Russia. Meanwhile, Toyota is considering the possibility of temporarily suspending the construction of new factories and rather focus on investing in those that are already in operation. As part of its strategy, Toyota Motor (NYSE:TM) plans to suspend plans for the construction of new plants beyond those already announced. This year, the company expects to complete its two new factories in Thailand and Indonesia.
Ford’s Fusion Energi, a new plug-in hybrid Ford was declared the “Connected Car of 2013” during the Consumer Electronics Show of 2013 in Las Vegas, USA. The automaker ensures that the new Fusion offers the most advanced connectivity and driver assistance systems in the segment of luxury sedans. The plug-in hybrid version is equipped with the SYNC connectivity system of last generation and with the MyFord Mobile app for smartphones.
2012 saw an outstanding performance by Renault, which is among the automotive brands that were spotlighted in Brazil in recent years. For the third consecutive year, the company registered above-market growth and spawned more than 241,000 units, representing an increase of 24.3% over 2011, compared to a market that grew 6.1%. During the year, the market share was 6.65% vs. 5.67% in 2011.
Volkswagen intends to end its partnership with Daimler AG since Volkswagen seeks to develop closer ties with the subsidiary of MAN SE trucks. Volkswagen began developing a new model of the utility Crafter, which has been produced by Daimler under a collaboration agreement that expires in 2016.
Conclusion
General Motors Company (NYSE:GM) has a market cap of $46.93 billion and an enterprise value of $31.66 billion. Its profit margin is relatively low at 3.79%, but it has a huge revenue of $150 billion. The investments that are being made in Russia are vital to General Motors’ growth. With the crisis in developed countries, the solution seems to be to invest in emerging markets like Brazil, Russia and China. Of these three countries, Russia places a lot of importance on car ownership. This will provide immunity to General Motors even if the country’s economy is not in a very good shape. I anticipate Russians will continue to buy their favorite GM cars, and revenue will continue to rise.
The article General Motors Looks to Russia for Increased Sales originally appeared on Fool.com and is written by Maxwell Fisher.
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