Detroit's unlikely success?

Insider view on how GM cracked China market, and its electric future

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30 Sep 2011
Week in China

In a carefully choreographed act, General Motor's board of directors had a high-profile away day last month, gathering in Shanghai for the firm's first ever meeting outside North America.

It was heralded as a symbolic trip, and a signal of China's importance to GM's future.

It already looks like being a more auspicious gesture than at least one earlier effort to impress by the American automaker in China, that time back in 1998.

That year Jack Smith, then GM chairman, arrived in Shanghai for the launch of the Buick Century, the first model to be produced by the carmaker's joint venture with Shanghai Auto (SAIC).

The plan was to have Smith at the wheel alongside Shanghai's mayor as the first Buick rolled off the production line.

Looking to release the handbrake, Smith grasped the hood release by mistake. Up sprang the bonnet on the motionless Buick, leaving chairman and mayor to look out in embarrassed fashion at the ranks of assembled press.

The mishap is recounted in American Wheels, Chinese Roads: The Story of General Motors in China, a broader review of General Motors first steps into the China market.

Published this year by Michael Dunne, an Asia-based automotive expert who once worked for GM himself, the book is a timely look back at how the American automaker found its feet in the Chinese marketplace.

As Dunne recalls early on, when he started as a GM employee, fewer cars were being sold in China than in the state of Michigan. A generation later and the explosive growth in the Chinese market means it has become a crucial arena for all the international automakers.

In fact, GM is now China's largest foreign vehicle manufacturer with around a 13% share of the market. Last year sales grew nearly 30%, although this year they have slowed, and look like coming in closer to an industry average of 5%.

Still, GM's achievement in China has been impressive. "The fact that GM in China could triumph while its parent company was self-destructing is both remarkable and revealing," Dunne writes.

The fact that GM in China could triumph while its parent company was self-destructing is both remarkable and revealing.

His account offers an excellent overview on how the Chinese market developed, especially the battle between three distinct groups for the spoils: the state-owned heavyweights based in the officially-sanctioned car-making cities (the 'Six Detroits', Dunne calls them); the upstart (and often unauthorised) challengers from the semi-private sector in rival cities; and the bewitched (and sometimes bewildered) foreign car firms seeking to break into the market through a tie-up with a local partner.

Commercial ties were rarely smooth for the foreign bosses: "Some days it feels like we're just like concubines," one executive remarks at one point in the book. And once China-based executives did begin to report some commercial success, they were then faced with head office suddenly keen to take fuller control of their Chinese operations, often in an inept manner.

Keeping up with such a fast-moving market would be a challenge for anyone. As Dunne points out, only a little over 10 years ago Chinese consumers still had fewer than 10 different cars to choose from. This year, there were more than 275 options.

And soon there will be at least one more: the Shanghai board meeting was also the occasion for the announcing of another GM joint venture with Shanghai Auto, this time to build an electric vehicle brand.

Here there is also symmetry with earlier experience, with Shanghai Auto wanting to benefit from GM's experience in developing the Chevrolet Volt, a plug-in hybrid already sold in the US.

Back in the 1990s, the Chinese were keener on catching up in more conventional technology, and had engineered a beauty contest between Ford and GM for the right to partner with the Shanghai city government in the new joint venture.

Realising what the Chinese wanted to hear, GM took SAIC executives to see its operations in Brazil, and made sure that locals gave all the presentations.

After each meeting, reports Dunne, the Chinese would ask the presenter his nationality. "I'm Brazilian, of course" was always the reply, delighting the visitors, who saw a blueprint for what they wanted in technology and skills transfer at their Chinese plants.

Yet last month's announcement also made clear that GM will be developing a standalone electric vehicle with SAIC, but critically plans to sell the Chevy Volt separately in China. Clearly, GM continues to resist the pressure for the fuller transfer of technology.

This repeats an earlier pattern, in which GM sought to balance its China ambitions with a cautious attitude vis-a-vis how much the JV should do.

For example, GM's early efforts to build its first small car with Shanghai Auto – the Buick Sail – were awkward ones.

For a start, GM was not set up to build the smaller cars that SAIC wanted to sell in the Chinese marketplace, and certainly not at the price levels that would make them affordable to Chinese consumers.

Instead GM took control of a Daewoo unit in South Korea, using it for the bulk of its product development.

In fact, GM didn't (at first) commit to the joint venture in quite the way that the Chinese had initially hoped, doing its best to keep as much outside the joint venture as possible. Instead of jointly developing a car (and then being forced to share profits with SAIC), GM tried first to sell the joint venture parts for assembly from its plants in Europe and North America. Nor did it want to cede intellectual property rights directly to its partner, keeping the bulk of its R&D effort in South Korea.

Back to the present day, and the drawback for GM in selling the Volt in China purely as an import is that it won't get the sales subsidy offered by the government on 'Made in China' vehicles (a problem, given that the Volt retails for $41,000 in the US).

Instead, GM seems prepared to give up on China revenues if it means keeping full control of the technology for sales in other markets. Nissan is doing something similar: jointly developing an electric car with its Chinese partner, Dongfeng Motor, but opting not to build its new electric Nissan Leaf in China.

Perhaps GM executives will change their minds in the years ahead. And for the moment they will prefer to highlight other efforts: that the company will launch more than 60 new or upgraded (and locally made) models by 2015 as part of a plan to double sales to more than 5 million by then.

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