GM sees China as an open road to profits

May 13, 2011

– On summer holidays here, Chinese are increasing jumping into their cars and engaging in what was once considered a quintessential American pastime, — the road trip. And that’s great news for U.S. carmaker General Motors, which has ridden the booming Chinese auto market to recover from bankruptcy and now sees mostly a long open highway to bigger profits ahead.

With a mix of high-end Buicks, minivans and low-end Chevrolets, GM has emerged as one of the top sellers of passenger cars in the world’s largest automobile market, surpassing Toyota this year and second only to Volkswagen.

In what was seen as a turning point for the company, GM last year sold more cars in China than in the United States, and the gap is only expected to widen as an increasing number of Chinese grow rich enough to purchase their first car.

By contrast, Ford and Chrysler are relatively late coming to the China market, and their brands don’t even fall in the top ten for sales.

And despite the Chinese government’s efforts to slow the economic growth rate to calm inflation, and even though some cities, like Beijing, the capital, are putting new restrictions on private car registrations to ease congestion, GM’s top official here isn’t worried about a slowdown in sales anytime soon.


“Simple economics say it will” continue, said Kevin E. Wale, president and managing director of GM China Group. China’s economy “is growing between 8 and 10 percent,” he said in an interview at the company’s sprawling campus in Shanghai’s industrial zone. “We don’t see that trend here changing in the next 10 years or so.”

He said he sees the demand for vehicles in China growing 10 percent to 15 percent a year for the next five years at least.

“Even with the recovery in the U.S., the Chinese market is going to be significantly greater than the U.S. market,” he said. “For everyone, China is the most important market. It is the fastest-growing car market in the world.”

How fast is it growing? “It will be greater than the combined growth of the next seven or eight largest markets,” including Brazil and Russia, Wale said. “It’s the big gorilla out there.”

Auto industry analysts agree. In its demand for passenger cars, they say, China today is comparable to the United States in the 1950s, which saw the building of the Interstate Highway System and the explosion of automobile ownership by American families, who came to see driving not only as a means of transport but also as a leisure activity for weekends and holidays.

Current car sales in China – more than 3.3 million passenger vehicles sold in just the first three months of this year – are considered just the tip of the potential demand, since most new vehicles are sold in Beijing and in the major cities along the prosperous east and southern coasts.

The hallmark of China’s growth today is the spread of wealth into what are known as the third- and even fourth-tier cities – places with populations of more than a million people. As the country’s affluence slowly flows inland, more Chinese are moving into the middle class, and the demand for new cars is expected to grow – particularly lower-end, entry-level cars for first-time buyers.

“This is a region where the consumers are much less affluent,” said Klaus Paur, an auto industry analyst and managing director for Asia of Synovate, a market research firm. “Their demands are different.”

GM is offering less pricey, lower-end models exclusively for China, like the new Baojun 630 Sedan, which will sell for as low as $10,800 for a basic car that has cloth seats and limited options.

But GM is also competing hard on the high-end. The company discovered that while the Buick may have lost some of its allure in the United States, it is still seen as a luxury car of choice for many Chinese.

Wale keeps on his wall a framed reminder of why the Buick never lost its luster in China: an old black-and-white photo of Sun Yat Sen, China’s revolutionary hero, sitting in a 1912 Buick. Ever since, the Buick in China has been associated with power and the elite.

GM also has found a Chinese market for its much-maligned minivan, which was discontinued in the United States because of its faded image as a utilitarian workhorse for suburban soccer moms. In China, the minivan is enjoying a renaissance as a high-end vehicle for corporate executives being shuttled around town by their chauffeurs.

China’s appetite for GM cars proved to be a financial lifesaver for the company, which was forced to declare bankruptcy in 2009 and undergo a painful reorganization that saw the discontinuation of some of its best-known brands, like Pontiac, Saturn and Hummer.

It was just at the time of the bankruptcy that China’s auto market began to soar — and GM was already well positioned to take advantage.

“China has been part of GM’s long-term strategic plan for literally almost two decades,” said Michael Robinet, an auto industry analyst based in the Detroit area for IHS Automotive, which tracks the industry. “This is not a Johnny-come-lately windfall for General Motors. Without China, GM would not have been able to snap back as quickly.”

Other analysts agreed. “This was really the lifeline for GM,” Paur said. “At the moment when they were in trouble in the United States, they had China.”

China’s growing importance to GM has led some to suggest the firm is now essentially a Chinese company. But GM officials point out that while they sell more cars now in China, the company generates more revenue in the United States. That’s because GM still sells more of its higher-value cars in America, and with all the optional extras.

Also, company officials say, China’s booming market directly helps the U.S. side of the firm, giving GM a large-volume market to support research and product development that will eventually transfer back stateside.

At GM’s Shanghai campus, for example, construction is underway for a new research facility devoted to developing the next class of electric vehicles.

Meanwhile, Ford is racing to catch up.

At the just-concluded Shanghai Auto Show, Ford announced plans to introduce 15 new models into the China market by 2015. “The new lineup will significantly strengthen our penetration in existing segments and drive new growth in others,” a Ford spokeswoman said in written answers to questions. “We also plan to double our number of dealerships and workforce in China in the next four years.”

Chrysler suffered some early setbacks trying to crack the Chinese market and has been largely absent in the past few years.

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