A BizTimes reader recently was intrigued with a short report about General Motor Co.’s successes in China and wanted to know more about what this means in terms of the United States and the future.
An American institution started in 1908, GM created the world’s largest automobile company through acquisitions, marketing, financial and political clout. It benefited from 80 years of economic prosperity and dominated the U.S. and world automobile industry for 77 of them.
The reign hit a hiccup in 2008, when Toyota took the U.S. title and then again on June 8, 2009, when GM filed for Chapter 11 bankruptcy protection. On July 10, 2010, after with a multibillion dollar bailout from the government, the company reemerged.
So, what was saved?
Prior to its filing in 2008, GM was in the top spot for sales of light vehicles (think passenger cars and pickup trucks) in the United States. Today, China is GM’s biggest market, and the United States is No. 2. In this regard, GM was only following a broader trend which saw China supplant the United States as the world’s largest vehicle market after 2008.
A temporary glitch? Probably not, with China’s market growing in double digits and our struggling to return to pre-economic meltdown numbers, the trend lines do not look even remotely promising.
One question which can be asked is: How is it that GM, which seems to have blundered its way into mediocrity in its home market, is apparently succeeding in China? Two reasons: the proclivities of China’s last emperor and the market.
The last Chinese emperor had a Buick. In the mid-1990’s, when GM was scouting China, they discovered brand gold. On Dec. 15, 1998, the first Chinese-made Buick rolled off the assembly line, built by a joint venture between GM and SAIC, a Chinese state-owned entity (SOE). It quickly became the leading foreign luxury brand by sales. GM was ecstatic. They had successfully negotiated entrance into China’s market using fully depreciated Buick models and manufacturing equipment.
Not content with prosperity, GM decided to try to extend the Buick brand, American style, by adding the emblem to a mix of smaller more affordable offerings. When the smoke cleared, GM learned that wealthy Chinese bosses and their wives did not care to be driving the same brand of car as their employees and service providers.
The market grows
Having got its foot in the door and then its mouth, GM was poised to benefit from the rapid double-digit growth in China’s market that followed. In 1977, there were 1 million cars in China. By 2008, there were 51 million. During the same time, there was a 4,600-percent increase in nominal incomes; which is the bottom line explanation of why China has become No. 1 in the world for cell phones, beer, microwave ovens, luxury goods and cars.
As with the waves of prosperity that drove GM’s growth in the United States, as China has grown, so has GM China. There were certainly a lot of issues doing business as a joint venture partner with a Chinese SOE, but over time GM seems to have learned the game and through a number of additional joint ventures it has extended its lines into light trucks.
In China, GM also benefitted from cheaper construction and labor costs which benefitted the bottom line and allowed them to sell cheaper cars and commercial vehicles. In China in 2008, you could buy a cheap GM minivan for $4,000 U.S.
Also keep in mind that any car imported into China pays a 100-percent plus tariff. I often point out to visitors that cars that sell for $80,000 in the United States cost over $200,000 U.S. dollars in China because they were imported.
As you can imagine, there is some cachet to having an imported car, but at over twice the cost, not including their version of a gas guzzler tax, it does not seem to have much of a future. Frankly, at the pace the major auto manufacturers are racing to build Chinese factories, it will shortly no longer be really necessary.
While this may be of some interest, much of the above can be gleaned from the pages of various news and industry resources, but what is rarely talked about are who will be the GM of tomorrow. In 1999, China was 14th on the list of world auto producers; it produced half a million cars and 1.2 million commercial vehicles. The United States, No. 1 overall, produced 5.6 million cars and 7.3 million commercial vehicles. In 2009 China rose to No. 1. It produced 10.3 million cars and 3.4 million commercial vehicles, while the United States fell to sixth place, producing 2.2 million cars and 3.4 million commercial vehicles.
What a difference 10 years makes.
Conclusion
The short answer is that GM was fortunate. They got into China early, benefitted from some favorable brand recognition and seem to be doing fine at the moment, but it is doubtful that they will ever dominate China the way they dominated the U.S. market. China has a number of automotive manufacturers which are struggling to compete, similar to the way the American automotive scene was before they were assimilated into the big three. It is probable that there will be similar consolidation pressures in China, but that is a tale which cannot be told yet.
The alarming part is what has happened and looks likely to continue to happen to our domestic automobile manufacturing. Due to poor management and uncompetitive manufacturing costs, it seems to have become a zombie in search of a grave.
If you have an issue or question about China, please feel free to forward it for consideration.
