GM Moves To Target Next Growth Frontiers
BMI View : We believe GM's decision to move its international headquarters from Shanghai to Singapore is aimed at positioning itself to strategically target the next growth markets in the region as the Chinese market slows down. The automaker's move to Singapore also attests to the country's conducive business environment, predicated on a strong rule of law, competitive tax rates and a highly educated workforce proficient in English.
US automaker General Motors Company (GM) has announced that it is shifting its international headquarters from Shanghai to Singapore as part of its strategy to increase its focus on rapidly growing foreign markets. The new Singapore headquarters, which is slated to open in Q214, will house 120 employees and oversee GM's regional markets such as South East Asia (SEA), Australia, Africa, India and the Middle East.
Announcement May Raise Some Eyebrows…
At first glance, this move may seem puzzling. GM is the industry leader in China, together with German carmaker Volkswagen AG, and has a joint venture with the largest Chinese state-owned automaker, SAIC Motor. This move could be seen as a snub by Beijing, which could then negatively affect GM's operations in China.
Furthermore, China is a strategically important market for GM and accounts for 30% of the automaker's sales. The combined sales of the firm and its affiliates in China were up 11.2% for the first 10 months of 2013, to 2.6mn vehicles. Singapore, on the other hand, does not have an auto manufacturing industry and its domestic market is miniscule compared with China (less than 40,000 units a year).
…But China's Importance Still There
However, it is important to understand that GM is not giving up on the Chinese market but is instead re-orientating its internationalisation strategy. This move follows the firm's reorganisation announced in August 2013, whereby GM will split its China operations away from its international operations and give its Chinese business a dedicated management team instead.
SEA Next Growth Frontier For GM
Additionally, the carmaker's headquarters in Singapore is not meant to serve the local market but will instead serve as a beachhead to target fast growing regional markets. One such market we would like to highlight is Indonesia. The accompanying chart compares the vehicle sales growth rate of Indonesia and China over our 2013-2017 forecast period.
|Looking Beyond China|
|Indonesia And China Vehicle Sales Growth Rates|
While Chinese auto sales will still remain high in absolute terms, they will face slower growth in the future, and when taken into context of the high double-digit growth rates the market used to enjoy in the past few years, the market may no longer be as attractive to established incumbents. Further supporting our view is the slower Chinese economic growth over the coming years forecasted by our Country Risk team, as well as the country's ageing demographics which could curtail demand for cars.
On the other hand, most of the countries in SEA are set to enjoy economic tailwinds over the coming years due to their favourable demographics. As a large number of young people enter the workforce in these economies in the near future, they will add to the ranks of the fast growing middle-class consumers, a segment which will provide strong demand for passenger cars.
Therefore, we conclude that while China has been vital to GM's expansion strategy over the past few decades, the carmaker is now looking ahead to position itself to take advantage of the next growth frontiers as the Chinese market slows down.
Singapore's Strengths Showcased
Lastly, we cannot neglect the advantages of Singapore, which must have lured GM to set up its international headquarters in the country, given that it could have chosen China or Hong Kong, with both these countries also enjoying close proximity to the new growth markets targeted by GM.
Singapore enjoys a conducive business environment predicated on competitive tax rates, a highly educated workforce proficient in English, strong legal frameworks, as well as robust infrastructure. A similar move recently by German chemical manufacturer Lanxess to base its global butyl rubber business headquarters in Singapore attests to the county's attractiveness to multinational firms ( see 'Business Environment Will Support Lanxess' Rubber Exports').