Share price of General Motors Company GM slipped 0.8% to $37.56 on Feb 26 after media reports revealed that the automaker will discontinue its manufacturing operations in Indonesia. In light of the challenges faced by global automakers in the country, General Motors announced that it will stop the production of its vehicles there and eventually close its assembly plant at Bekasi, thus leading to the layoff of 500 workers.
Operations in Indonesia are challenging for General Motors as the automaker faces significant competition in the region from Japanese rivals, including Toyota Motor Corp. TM. In order to compete with Japanese automakers, General Motors had attempted to locally manufacture the Chevrolet Spin. However, most parts of the Spin had to be imported, making it difficult for the company to generate enough profits from its sales.
The Spin was priced at $12,000 and competed with Toyota's Avanza. In 2014, General Motors sold only 8,412 Spin cars in Indonesia and exported 3,000 vehicles. Though the Bekasi plant had an annual production capacity of 40,000 vehicles, the automaker only produced less than a quarter of the total capacity.
General Motors operates in Indonesia along with its Chinese partner, SAIC Motor Corp., and together, the companies plan to open a manufacturing facility near Jakarta to support the Wuling brand. Thus, SAIC is not interested in taking over the existing Bekasi plant. Moreover, General Motors is now shifting its focus to sport utility vehicles (SUVs) in Indonesia. The automaker will reposition the Chevrolet brand across Southeast Asia and emphasize on SUVs, including Captiva and Trailblazer.
Based on these factors, General Motors will stop the production of the Spin in Indonesia by the end of June and close the Bekasi factory. After the restructuring, the Indonesian unit of General Motors will only operate as a sales unit.
Previously, global automakers focused on the emerging markets to recoup their global sales by increasing capacity investment to meet the growing demand. Over the last few years, global automakers have invested billions in Brazil, Russia, India, China and other emerging markets.
However, now many emerging markets are witnessing a drop in both sales and profits. Thus, these automakers are reconsidering investments in the emerging countries. Ford Motor Co. F, along with General Motors, Toyota and other Korean automakers, faced sluggish demand in Brazil, Russia and India in 2014.
Ford incurred an $800 million one-time charge in fourth-quarter 2014 due to volatility in the Venezuelan currency. General Motors wrote down $194 million of assets in Russia, and reduced production there. Toyota faced weak demand in Thailand and Indonesia, and saw its sales decline 11% in Asia.
Despite these negatives, General Motors expects that half of its global sales improvement by 2030 will be generated from emerging markets. According to IHS forecast, sales in India, Brazil and Russia will rise 40% by 2020 to more than 12 million vehicles.
General Motors carries a Zacks Rank #2 (Buy). A better-ranked stock in the same industry is Superior Industries International, Inc. SUP, with a Zacks Rank #1 (Strong Buy).
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