General Motors Chief Executive Mary Barra said the overcrowded Chinese market was a “race to the bottom”. For GM, it’s a competition that has left the automaker saddled with losses and reconsidering its options.
The American automaker revealed on Wednesday that it will be required fees and asset write-offs more than $5 billion for its investment in a joint venture with Shanghai-based SAIC Motor Corp. and for restructuring operations in China, including closing factories.
In a country that not so long ago counted Buick and Chevrolet as the two most popular foreign brands, GM’s profits and market share have fallen so much that, like other multinationals, the company’s long-term presence in China is anything but certain.
Barra led the meeting in late October to try to restart the SAIC venture, a once key partnership dating back to the 1990s. The idea was to restructure because GM could no longer afford to spend hundreds of millions of dollars a year. With today’s big revaluation, Barra signals that the automaker is scaling back its ambitions.
Once the backbone of GM’s global strategy, the company’s operations in China are in free fall. Sales data released Thursday showed that GM and its joint ventures in China delivered just over 200,000 vehicles in November, including more than 100,000 NEVs. By comparison, market leader BYD Co. delivered a record 504,000 plug-in hybrids and battery electric vehicles last month.
The automaker hasn’t given many details about its plans, but the partners are considering tough options to reduce its presence. The joint venture is likely to lay off workers and shutter factories, according to people familiar with the matter. GM plans to phase out certain models, turning brands like Buick — once the favorite car of the Chinese emperor in the 1920s — from a household name into a minor player.
Those decisions will have major implications for GM’s willingness to remain in China beyond 2027, when its contract with SAIC expires. The company said it has no plans to leave and planned cuts will help, but it will have to assess how long it can last amid price wars.
GM is struggling to compete on price with domestic models subsidized by the Chinese government and could eventually exit the venture if losses continue, people familiar with the matter said. And if SAIC is no longer getting cutting-edge technology or branding from working with the big-name U.S. manufacturer, it may have reasons to leave, the people said.
In a statement on Thursday to local media outlet Cailian, GM China said the China business is a high-quality asset for now and in the future, and that it is cooperating and communicating with SAIC more closely than ever to achieve profitability. “To achieve our long-term development goals, we are taking measures to reduce inventory, produce on demand, protect our pricing system and reduce fixed costs,” the company said.
Barra, who turns 63 this month, could be retired by the time GM is due to make that call, but even that possibility underscores the plight of the Detroit-based company, which was the first American automaker to establish a successful business in what is now the world’s largest car market. GM’s market share was nearly 15% a decade ago; in September it fell to 6.8%. And it has already lost $347 million this year.
What is becoming clear for GM — and other legacy giants like Ford Motor Co., Volkswagen AG and Toyota Motor Corp. — is that the party in China is over. Foreign companies are losing ground to rising Chinese players, who have benefited from more than 230 billion dollars in state subsidies over the past 15 years.
“We’re seeing a decline in market share and profits all at once,” said Mike Dunne, a former GM executive who consults on the Chinese market. “And the established automakers are powerless to stop it.”
Domestic dominance
Foreign companies have been surprised by Chinese electric models that boast advanced infotainment systems and are often cheaper. Even Elon Musk can’t keep up with the ever-innovative BYD, which sells Tesla Inc. in China.
Part of the problem has to do with how quickly China has turned to new energy vehicles, which includes both electric and plug-in hybrid cars. In recent years, the government has offered substantial incentives and tax breaksand loosened car loan restrictions.
It was a shrewd move by the Chinese government aimed at encouraging domestic companies. In 2018, Chinese manufacturers had the capacity to produce about one million NEVs, while foreign companies could only produce about 150,000, according to researcher AutoForecast Solutions LLC. GM and traditional competitors delayed the development of electric vehicles and were not able to take advantage as domestic manufacturers could.
More electrified models have entered the market to take advantage of incentives and as the government has imposed restrictions on the sale of gasoline-powered vehicles. This year, the Chinese market is approaching semi-electrified models. Domestic manufacturers have the capacity to produce almost 10 million NEVs, while foreign competitors have the capacity for only 1.9 million.
Chinese plan
Now-retired GM president Jack Smith got approval from the Chinese government to sell cars there in 1997. The Communist Party especially wanted a Buick because it was the Emperor’s car of choice. GM revamped its Regal sedan for members of the party and sold Korean-designed cars with smaller engines for the mass market.
At the time, partnering with SAIC seemed smart. It is considered the crown jewel in the Shanghai region, giving GM access to one of the country’s largest markets and winning the favor of politicians.
For China, meanwhile, these types of partnerships offered both a domestic advantage and a way to get technology and quickly learn how to make cars, said Dunne, the former GM executive.
“China’s goal from the beginning was to do joint ventures with the big automakers and then get the technology and do it ourselves,” he said.
China has the capacity to produce nearly 50 million cars a year in a market where consumers will buy 28 million, according to market research by Global Data. The spare annual capacity alone is more than Americans buy in one year.
China is now using low costs to produce low-cost models for the world – posing a risk to (hotlink) Hyundai Motor (/hotlink) Co . and Toyota in Southeast Asia, GM in South America and local manufacturers in Europe.
China’s battery industry also has excess capacity and sells at prices Western companies can’t match. That’s partly because some raw materials are being sold at an “artificially low price,” Kurt Kelty, GM’s vice president of batteries and cells, said in an October interview.
“We know the cost of all materials in China and here,” he said. “It doesn’t make sense the price they sell for and the price it should be. They have huge excess capacity there. Some materials make sense to use there because they have an artificially low price.”
‘It’s not enough’
GM entered the second quarter of this year expecting a return to profitability in China after it slowed production lines to reduce bloated inventories. That didn’t solve the problem.
“It’s clear that the steps we took, while significant, were not enough,” Barra told investors in July after reporting another quarterly market loss. Sales are on track for a seventh straight annual decline.
In the near future, GM will restructure its operations in China to sell more imported SUVs and some expensive electric vehicles, and rely on another joint venture for low-cost models and exports, the people said. Heavy cuts will fall on GM’s mid-market presence.
Executives want to stay in the good graces of the Chinese government and maintain some presence there. One bright spot is the partnership with Wuling Motors Holdings Ltd. — one in which GM is a minority owner. Wuling produces small, inexpensive electric cars and is increasingly becoming a significant exporter. Its sales rose 11% in China in the third quarter.
The U.S. carmaker also hopes ties with SAIC will help it maintain a strong domestic business, one of the people said. However, SAIC has its problems. The company has been slow to respond to changes in the market and the shift to electric vehicles, just like GM, and its sales fell 21% this year through October.
China has more new car brands, and their lower prices and fresh interior designs make them more popular than GM brands, said Sun Can, a Chevrolet dealer in eastern Beijing.
“Chevrolet was quite popular in 2017 and 2018,” she said. “Now the market competition is intense and it is difficult to sell these cars.”
Yan Yu bought a 2021 Buick Verano because it was cheap, and now he is buying another family car. This time he is looking at Tesla or BYD.
“Buick seems to be more popular with the older population,” Yan said.
Barra says GM will soon begin to see better results in China and insists the automaker can still play a role in the market, but is not promising a return to its glory days.
“We see a significant way we can participate” in the Chinese market, Barra told analysts recently. It will be “structurally different,” she added, “but we think there’s room for our brands.”
