The Roadblock in GM's Route Through China

The Wall Street Journal, April 20, 2011

Click here to view the original article at wsj.com

By TOM ORLIK And LIAM DENNING

GM's China strategy is going well. It's China's GM strategy that should have the car maker worried.

Figures for the first quarter might not show it, but General Motors has made some smart moves in China. Year-on-year sales growth slowed to 10%, down from 28.8% in the same period last year. Growth slowed particularly sharply in March. Weak demand for minivans—a section of the market where GM leads through its joint venture with Shanghai Automotive Industry Corp. and Liuzhou Wuling Motors—was a contributing factor, hurt by the end of government incentives and constraints on production.

Over a longer time frame, however, GM's Wuling venture has been a roaring success. GM's technology and expertise helped transform Wuling from a small, regional manufacturer in 2001 into a market leader with more than a million unit sales in 2010. Wuling vans are now exported, in small number, to South America and the Middle East.

The aim is to produce vans and sell them under the GM brand in India, taking advantage of the U.S. company's network of dealerships there. Giving GM access to a new market segment using a low-cost Chinese product platform—while at the same time giving Wuling and SAIC access to a U.S. brand—plays to the strengths of all partners, reckons Bill Russo of auto consultancy Synergistics.

Wuling is also GM's route into the market for affordable passenger cars. Cars produced by the partnership and marketed under the Baojun brand, on display at an auto show in Shanghai this week, will target price-conscious consumers in China's second- and third-tier cities.

GM says the joint brand is a way to target buyers at a lower price point without denting its international image for producing high-end vehicles. But there is a catch. Unlike the old JV approach, the joint brand involves intellectual property being held in common with the Chinese partner.

Michael Dunne, an expert on the Chinese auto sector, believes the endgame of that joint ownership won't be good news for GM and other foreign players: "China has made no secret of its desire for national firms to dominate the domestic market; this is part of that process," he says. From 2000 to 2010, Chinese brands' share of the domestic passenger-vehicles market increased from 18% to 32%, according to J.D. Power & Associates.

Japan provides a sobering parallel. Local manufacturers such as Nissan cut their teeth making foreign cars like Britain's Austin A40 series in the mid-1950s. Within a decade, such tie-ups were a thing of the past, and Japan had overtaken Britain in terms of vehicle production.

Eventually, Japan's car makers made big inroads into Western markets. GM's new joint brand will boost Chinese sales, but it will also add horsepower to China's homegrown efforts to eventually target drivers the world over.

Write to Liam Denning at liam.denning@wsj.com