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TheStreet Open House

Big Three Face Uncertain Drive Overseas

"GM is investing a lot of money in these markets in order to expand and keep up with growth, but on the other side of the equation, they're selling small, inexpensive cars where the profit margin is going to be far less than that on, say, a Cadillac Escalade," says Erich Merkle, analyst with IRN.

A GM spokesman said well over half its sales in Russia are vehicles that cost less than $14,672. The average price for a vehicle in North America is around $28,000.

For its part, Ford has a smaller presence in Russia, with mainly a plant in St. Petersburg, but the company plans to invest $100 million in the country through 2009 to increase capacity to 125,000 cars a year. In China, Ford said it sales were up 27% for the first nine months of the year, and it recently opened a new manufacturing plant in Nanjing.

"These markets are about future opportunity," says Merkle. "As these consumers emerge and expand their middle class, they'll eventually start to move up market more in terms of the vehicle selection and the ability they will have to afford more expensive vehicles."

Merkle estimates auto markets like Russia's are still 10 to 15 years away from generating profit margins that are comparable to North America, so he says they should not be viewed as a viable alternative for the U.S. auto industry in the near term. The bulk of China's economic growth still comes from exports that go chiefly to the U.S., so if the U.S. goes into recession as a result of the housing downturn, overseas markets are likely to follow.

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