General Motors (NYSE:GM) automobile business in China has sold more vehicles than any other markets in the world. For the whole year ended on Dec 31st, 2019, GM sold a total of 3.1 million vehicles in China alone. Compare that figure with that of other countries, China represents GM’s largest market in the world.
The following snapshot shows GM’s total vehicle sales by region.
As seen from the table above, GM sold roughly 2.9 million vehicles in the United States and only 669,000 vehicles in South America for the 12 months ended on Dec 31st, 2019.
In the same table, GM sold slightly more vehicles in China than in America which makes China the largest market for GM in 2019.
GM’s Joint Ventures in China
With millions of vehicles sold in China, you must be thinking that the revenue streams from China would represent GM’s largest revenue source.
The fact is that all the vehicles sold in China did not directly translate to GM sales revenue. This is due to how GM is doing business in China. When GM first started its automobile business in the Chinese market, it did so through joint ventures with local Chinese companies.
The joint ventures approach has been a requirement for a foreign company to enter the Chinese market as seen in Wikipedia and the New York Times: Joint Venture in China and GM’s Joint Venture Partner in China.
Although GM is allowed to do business in China through joint ventures, the company is doing so without owning more than 50% of all the subsidiaries in China. As the following snapshot shows, of all the joint ventures in China, GM owns up to only 50% or less.
The above snapshot was extracted from the Q4 2019 annual filing to show readers the direct interest GM has in China automotive joint ventures. With up to a maximum of only 50% stake, GM has basically no controlling interest in all of the China joint ventures.
Revenue Streams from China
Due to GM not owning more than 50% of its businesses in China, all of the vehicle sales in China does not actually contribute to GM’s coffers in the form of revenue. However, vehicle sales in China does contribute something to GM in the form of Equity Income.
As pointed out by Investopedia, for join ventures that is in between 20% and 50% of equity interest, GM recognizes the sales from China joint ventures as “Equity Income” in its income statements.
As shown in the following snapshot extracted from GM’s Q4 2019 annual filing, GM’s equity income from China totals about $1.27 billion for the 12 months ended on Dec 31, 2019.
While China contributed over $1 billion of profit to GM in the form of equity income as shown in the income statement above, the equity income from China was less than a quarter of GM’s $5.5 billion operating income which was largely contributed by GM North America.
In short, GM made only a quarter of the profit from China despite selling the most number of vehicles there than any other countries in the world.
GM’s Largest Revenue Streams
Since China’s automotive joint ventures do not contribute a single dime to GM revenue streams, what makes up GM largest revenue source then?
As mentioned earlier, GM sold about 2.9 million of vehicles in the United States of America for the past 12 months ended on Dec 31st, 2019. Without doubt, the United States of America contributes the largest stream of revenue to GM’s coffers.
As you will see in the following charts, GM North America (inclusive of USA and Canada) has been the single largest revenue as well as profit contributor to General Motors over the past 5 years.
Chart of GM’s Automotive Revenue
The chart above shows GM automotive revenue over the past 5 years from 2015 to 2020.
GM’s automotive revenue plotted in the above chart is the aggregate of multiple revenue streams from such regions as GM North America (GMNA), GM International (GMI), GM Europe (GME) and GM Corporate.
As seen in the chart above, GM’s automotive revenue increased slightly prior to 2017 and reached the highest at $41 billion in 4Q16 but has since declined to only $29 billion as of 1Q 2020.
Automotive revenue remained flat between 2017 and 2020 when GM’s global vehicle sales especially those from North America have trended downward over the past 3 years.
A significant drop of revenue was observed in 2017 when GM sold off its GM Europe subsidiary in the same year.
GM reported a global automotive revenue sequential increase of about 7% to $29.1 billion in 1Q 2020 or a year over year decrease of 7% in the same quarter.
Overall, GM quarterly automotive revenue has remained flat between $30 billion and $35 billion from 2017 and 2020, signaling that global vehicle sales may have reached a plateau.
Chart of GM’s Automotive Gross Margin
The chart above shows the quarterly automotive gross margin over the past 5 years from 2015 to 2020.
Gross margin is a measure of profitability of the products. In GM’s case, gross margin takes into account of cost of sales while excluding selling, general and administrative (SGA) expenses.
That said, a higher gross margin often means a higher gross profit as a result of higher sale prices and better brand power which in general, commands better pricing power. Besides, higher gross margin also indicates efficient resource allocation during the manufacturing stage of the products which usually results in lower cost of sales.
When we look at the current chart, GM automotive revenue gross margin has consistently stayed at the 13% level on a quarterly basis from 2015 to 2017. However, automotive gross margin declined significantly in 2018 to only 9% in average.
GM’s automotive gross margin improved slightly in 2019 to 10% despite a slumping revenue compared to 2018. The gross margin improvement has been largely due to the restructuring initiative that started in 2017.
As of 1Q 2020, GM’s automotive gross margin slumped again and dropped to 8% only. The declined was largely due to the slowing economies around the world and the advent of a pandemic in 2020.
Chart of GM Automotive Revenue by Region
The chart above shows the breakdown of GM automotive revenue into several regions such as the GMNA, GMI and GME.
Without doubt, GM North America (GMNA) took up the lion’s share of automotive revenue, contributing close to 90% of sales at $26 billion to automotive revenue as of Q1 2020.
This was followed by GM International (GMI) which contributed about $3.3 billion of sales to GM’s automotive revenue, making up 10% of GM’s total automotive sales. Be reminded that the international sales figure does not recognize any revenue contribution from China as GM does not have a controlling stake in any of the businesses in China.
Although the bulk of automotive revenue came from GMNA, its growth has been flat over the past 5 years. As seen from the chart, GMNA sales has been fluctuating between the range of $25 and $30 billion, signaling sluggish or no growth in the North America region.
As of 1Q 2020, GMNA’s revenue of $26 billion represents a year over year decline of around 6%. Sequentially, GM managed to increase GMNA revenue by roughly 14% from the 4Q19 quarter.
GM Europe (GME) was classified as discontinued operation starting 2Q 2017 and the revenue from GME was not consolidated in the financial statements. GME revenue had ceased to exist by the end of 2017 when GM completed the sale of GME.
Weak demand for GM’s automotive products did not just occurred in North America region. GM International also saw the same trend in which a slumping revenue has occurred for the past 5 years between 2015 and 2020. GM reported an automotive revenue of only $3.3 billion from international regions in 1Q 2020 compared to $3.85 billion in the corresponding quarter a year ago, representing a year over year decline of 15% or 26% if measured sequentially.
In short, GM saw its automotive revenue declined the most in its GMI segment at 15% year over year while the company reported a year over year declined of only 6% in North America region in 1Q 2020.
Ratio of GM’s Automotive Revenue to Total Revenue
The chart above shows the ratio of automotive revenue to total revenue expressed in percentage.
I created the chart above to show readers the importance of automotive revenue towards the company. As seen in the chart above, automotive revenue took up close to 90% of total revenue in 1Q 2020, making it the largest revenue stream for the company. The rest of the revenue came from GM Financial.
Although automotive revenue contributed the largest revenue stream to GM coffers, the ratio in the chart above has been decreasing from 2015 to 2020. As shown, automotive revenue contributed over 96% of total revenue in 1Q 2015 but the figure has dropped to slightly less than 90% in 1Q 2020.
The likely reason for the drop could be the declining sales of automotive segment and the rise of GM Financial revenue streams. For your information, GM Financial has been one of GM’s most profitable segments although the segment contributed only 10% of revenue.
GM’s Automotive Revenue Sequential Growth
The chart above shows the quarterly growth of GM’s automotive revenue over the past 5 years from 2015 to 2020.
From a spreadsheet calculation which I did not show here, the average quarterly growth rate for the past 20 quarters was roughly -0.5%, indicating that automotive revenue sequential growth has been stagnant between 2015 and 2020.
The quarter over quarter growth was the worst in 2017 when automotive revenue decreased by near double digits in 3 consecutive quarters. Part of that reason was due to GME being disclosed as discontinued operation which has excluded the earned revenue from this region in the financial statements.
Growth rates had not improved either in 2019 when 3 out 4 quarters were having negative sequential growth rates. The latest quarter of 1Q 2020 shows a quarterly growth rate of 7% which means automotive revenue has actually increased from the prior quarter of 4Q 2019.
GM’s Automotive Revenue Year Over Year Growth
The chart above shows the year over year growth rate of GM’s automotive revenue over the past 5 years from 2015 to 2020.
From a spreadsheet calculation, the average yoy growth for the past 17 quarters was around -3.8%, indicating that automotive revenue average year over year growth has declined between 2015 and 2020.
Similar to sequential growth, automotive revenue year over year growth was the worst during 2017 when GM reported 4 consecutive quarters of double digits yoy decline.
In 2019, GM’s automotive revenue yoy growth had turned from bad to worse when year over year decline happened across all quarterly results, with 4Q 2019 quarter being the worst offender when the reported yoy growth rate was -21.8%.
Similarly, GM posted an automotive revenue year over year decline of 7% in 1Q 2020 on the back of weak vehicles demand as a result of the COVID-19 disruption in the automotive sector.
Automotive revenue growth is probably over for GM as seen from the chart above. The best growth occurred back in 2016 when revenue growth was seen in 5 consecutive quarters. Since then, automotive revenue had either slumped or showed little or no sign of recovery.
The fact is that GM’s largest revenue stream came not from China but from the United States of America despite having the most vehicle sales in China in 2019.
Although China contributed the most vehicles sales to GM, those sales were not translated to revenue for the company. The reason is due to GM not having a controlling interest in all of the automotive joint ventures in China. As such, GM can only recognize these vehicle sales as “equity income” in its income statements.
GM’s equity income from China represents a quarter of the company’s total operating income in 2019, indicating that GM made only a fraction of the profit despite selling the most cars in China.
Although vehicles sales from the United States of America was only behind that of China in 2019, the North America market contributed the largest revenue stream to General Motors at nearly 90% of total revenue.
References and Credits:
1. Financial figures in the charts above were obtained from General Motors SEC Filings.
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