General Motors (NYSE:GM) automobile business in China has sold more vehicles than any other markets in the world. For the past 9 months ended on Sept 30th, 2019, GM sold a total of 2.3 million vehicles in China alone. Compare that figure to other markets in the world, China represents GM largest market.
The following snapshot shows GM total vehicle sales by region.
As seen from the table above, GM sold roughly 2.2 million vehicles in the United States and only 493k vehicles in South America for the 9 months ended on Sept 30th, 2019. In Europe, GM sold only 3k of vehicles as its European subsidiaries do not belong to the company anymore.
Revenue Streams from China
With millions of vehicles sold in China, you must be thinking that the revenue streams from China would represent GM largest revenue source.
The fact is that all the vehicles sold in China did not directly go to GM sales revenue. This is due to how GM does business in China. When GM first started its automobile business in the Chinese market, it did so through joint ventures with local Chinese companies. This is a requirement which is through joint ventures for a foreign company to enter the Chinese market as seen in this Wikipage 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 2018 annual filing to show investors the direct interest GM has in China automotive joint ventures.
You may be asking if there is anything that the automotive China joint ventures contribute. Yes, it does. As pointed out by Investopedia, for join ventures that is less than 50% but more than 20% of equity interest, GM recognizes the net income from these joint ventures as “Equity Income” in its income statements.
As shown in the following snapshot which was extracted from Q3 2019 quarterly filing, GM equity income from China totals about $893 million for the 9 months ended on Sept 30, 2019.
China 9 months equity income has slumped by more than 2X in Q3 2019 compared to the same quarter in 2018. The decline has been due to the sluggish vehicles sales in 2019 as seen in this article: GM vehicle sales and market share.
GM Largest Revenue Streams
Since China automotive joint ventures do not contribute a single dime to GM revenue streams, what makes up GM largest revenue source then? As mentioned at the started of the post, GM sold about 2.2 million of vehicles in the United States of America for the past 9 months ended on Sept 30, 2019. Without doubt, the United States of America contributes the largest stream of revenue to GM coffers.
As you will see in the following charts, GM North America (inclusive of USA and Canada) is the single largest revenue contributor to GM automotive revenue.
Chart of GM Automotive Revenue
The chart above shows GM automotive revenue over the past 5 years from 2015 to 2019.
GM automotive revenue consists of revenue streams from multiple regions such as GM North America (GMNA), GM International (GMI), GM Europe (GME) and GM Corporate. I have created a chart below that breaks down the automotive revenue into individual revenue stream based on regions.
Before discussing the revenue breakdown by region, let’s focus on the automotive revenue and gross margin first.
As seen in the automotive revenue chart above, GM automotive revenue has remained more or less the same over the past 5 years. In fact, the long-term trend of the plot shows that the revenue has actually declined slightly in 2019. For example, back in 2015, GM automotive revenue was consistently at $35 billion or more per quarter. However, the quarterly automotive revenue was only a little more than $30 billion in 2019.
A significant drop of revenue was observed from 2016 to 2017 when GM sold off its GME subsidiary by the end of 2017.
Overall, GM quarterly automotive revenue has fluctuated between the $30 billion and $35 billion level throughout 2018 and 2019, signaling that revenue growth may have reached a plateau.
Chart of GM Automotive Gross Margin
The chart above shows the quarterly automotive revenue gross margin over the past 5 years from 2018 to 2019.
Through gross margin, investors can find out a lot of information about the profitability of the products. For example, a higher gross margin often means the respective company can command a higher price on its products or the brand value is much stronger than its competitors. Besides, higher gross margin also indicates better efficiency in resource utilization when manufacturing the products.
As seen from the chart above, GM automotive revenue gross margin has declined throughout 2018 to only 8%. Fortunately, automotive gross margin came roaring back starting 2019 and reached a high point of 12%.
You may wonder why gross margin could improve at such a significant rate when automotive revenue remained stagnant in 2019. The improvement in gross margin has something to do with GM restructuring initiative that has started in 2017. As seen from this article, GM Sales Revenue Breakdown, the purpose of the restructuring initiative is to cut cost and improve gross margin. In 2019, GM has managed to cut cost and improve efficiency, thereby leading to margin expansion from 8% to 12% in 2019.
In short, while quarterly automotive revenue has remained laggard from 2018 to 2019, the company has successfully cut cost and improve profitability. During the same period, GM quarterly operating income has doubled from 2018 to 2019.
Chart of GM Automotive Revenue by Region
The chart above shows the breakdown of GM automotive revenue into several segments such as the GMNA, GMI, GME and GM Corporate.
Without question, GM North America (GMNA) took up the lion’s share of automotive revenue, contributing close to 90% of sales to automotive revenue as of Q3 2019. The rest of automotive revenue were contributed by GMI and GME. GM Corporate revenue was negligible as its contribution was less than 1%.
Although the bulk of the automotive revenue came from GMNA, its revenue growth has been flat over the past 5 years. As seen from the chart, GMNA sales has been oscillating between the range of $25 and $30 billion in the shown period, signaling sluggish or no growth at all.
GME was classified as discontinued operation starting 2Q 2017 and the revenue from GME was not consolidated in the financial statements. Nevertheless, I have included the revenue from GME in 2017 in the chart above. Revenue from GME had ceased to exist by the end of 2017 when GM completed the sale of GME.
In addition, GM International (GMI) is another revenue stream that has shown slowing growth. Take note that GMI revenue does not include any revenue streams from sales in China. Particularly in 2019, GMI quarterly revenue has dropped below the $5 billion threshold and reached a record low of $3.8 billion as of Q3 2019. The decline in revenue for GMI tells us that GM competitive advantage in the international market may have been seriously challenged by competitors.
In conclusion, although GMNA automotive revenue has been falling behind in recent years, GM has managed to defend its turf in the North American market as seen from the bouncing revenue in the chart above. Unlike its subsidiaries in the international market, the downward trend of the revenue stream has been quite significant, signaling that a downturn in the automobile business may have already started.
Ratio of GM 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 impact of automotive revenue has on total revenue. As seen in the chart above, automotive revenue took up more than 90% of total revenue, 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 2019. As shown, automotive revenue contributed over 96% of total revenue in 1Q 2015 but the figure has dropped to slightly less than 90% in 3Q 2019.
The reason for the drop could be due to a multiple factors such as declining sales of automotive segment and the rise of GM Financial revenue streams.
GM Automotive Revenue Sequential Growth
The chart above shows the quarterly growth of GM automotive revenue over the past 5 years from 2015 to 2019.
From a spreadsheet calculation which I did not show here, the average quarterly growth rate for the past 18 quarters is -0.2%, indicating that automotive revenue sequential growth has been stagnant.
The quarter over quarter growth was the worst in 2017 when automotive revenue decreased at double digits rate in 3 consecutive quarters. Part of that reason was due to GME being disclosed as discontinued operation.
Growth rates had not improved either in 2019 when 2 out 3 quarters were having negative sequential growth rates. The latest quarter of Q3 2019 shows a quarterly growth rate of -1.9% which means automotive revenue has slumped slightly from the prior quarter of Q2 2019.
GM Automotive Revenue Year Over Year Growth
The chart above shows the year over year growth rate of GM automotive revenue over the past 5 years from 2015 to 2019.
From a spreadsheet calculation which I did not show here, the average yoy growth for the past 15 quarters is -2.4%, indicating that automotive revenue year over year growth has declined.
Similar to sequential growth, the year over year growth was the worst during 2017 and 2018 when 4 consecutive quarters showed double digits decline in automotive revenue.
Moving forward to 2019, automotive revenue yoy growth had not improved either. Although revenue decline had narrowed in 2019, we are still seeing negative growth rates for 3 consecutive quarters.
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 the largest revenue streams came not from China but from United States of America based on the chart analysis and a series of snapshots that we have seen in this article.
Although China contributed the most vehicles sales to GM, those sales were not translated to sales revenue for the company. The reason is due to GM not owning more than 50% of equity interest in all of the automotive joint ventures in China. As such, GM can only recognize these sales as “equity income” in its income statements.
Although vehicles sales from the United States of America was only behind that of China, the US market contributed the largest revenue streams to GM.
References and Credits:
1. Financial figures in the charts above were obtained from General Motors SEC Filings.