GM (NYSE: GM) will spend $5 billon on expansion efforts to sell more cars in developing nations. The premise for this investment may be faulty. People in places like Brazil and India may not want cars enough, or cannot afford them, for market penetration of ownership to come close to that in the U.S.
The GM investment will be a joint venture with its major China partner SAIC. Most of the cars carry the Chevrolet name plate, which is GM’s flagship. The No. 1 U.S. car company must believe that the Chevy brand is more well-known around the world than any of its other brands. Whether that assumption will actually work in developed markets begs the question of whether local brands should carry local names.
There are four large barriers to car ownership in markets like India. Roads are poor, and the countries may not have the tens of billions of dollars needed to improve them. Cars are expensive, relative to income, even if the cars are inexpensive compared to those in the U.S. Air pollution has become a huge problem in the major cities of developing countries. And, finally, in densely populated area, people often do not need cars.
The developing world is attractive to car companies because there is currently a low penetration of car ownership, even if the reasons for these numbers make sales challenging. In the U.S., there are about 800 cars per 1000 people. In Germany and Japan, the figure is closer to 600. The figure in India is 20. In China, the number is just over 100. In Brazil and Mexico, the number is about 250.
Nations with low car ownership penetration have is household incomes which are a small fraction of the U.S. Much of this income is taken up by the cost of basic housing, food, and clothing.
Many large cities in China have severe problems with air pollution. Mexico City has similar problems. According to the WHO, New Delhi has the worst air quality of any large city in the world. The situation is not just dangerous; it is widespread. In a recent study, the organization pointed out:
“The risks from air pollution are now far greater than previously thought or understood, particularly for heart disease and strokes,” says Dr Maria Neira, Director of WHO’s Department for Public Health, Environmental and Social Determinants of Health. “Few risks have a greater impact on global health today than air pollution; the evidence signals the need for concerted action to clean up the air we all breathe.”
The population density which makes air pollution so great is another blow to car company sales.
Cities with dense populations need fewer cars because the distances people need to travel are short.
GM’s initiative is not much different from those of the other largest car manufacturers. Since ownership penetration in much of the developed world is high, the car sales are a zero sum game.
However unexpected it may be, that zero sum game may extend to nations where ownership penetration is small
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