GM’s Big Bets in Asia Pay Off

Chinese customers check out a Buick Regal and Buick Venture van at a local dealership. Both vehicles are produced locally in GM’s Shanghai plant.

Scarcely a day goes by without news of another investment in China by a leading automotive manufacturer or supplier. Over the past year, China has become the hottest market and hottest topic for the global automotive industry.

Compared to other major world markets, which offer little prospect of short-term growth, China’s explosive demand for new vehicles makes it an irresistible attraction for most industry players.

In the first 11 months of 2003, China’s total vehicle output topped 4 million units, nearly half of which were passenger cars. The production total represented a 35 percent increase on the same period in the previous year, but the passenger car figure jumped by a dramatic 84 percent. By the end of 2003, production was expected to exceed 4.35 million units.

Looking ahead, analysts expect China’s market will grow 18 percent by 2012 and by 2025 could surpass the U.S. market in volume. On the downside, doubters point to the following problems: China’s expansion rate cannot be sustained, overcapacity problems are looming, the country’s financial system is flawed and riddled with bad loans, fast expanding product ranges and competition will undermine profits. For major suppliers doing business in China, the added issues are uncompetitive parts costs (caused by inefficient local supplier partners) and potential copyright infringement problems, at least on commodity components.

GM China’s Shanghai plant produces variety of models including the Buick Regal (modified from the US version), the Buick Excelle, a version of Daewoo Lacetti compact sedan, and Buick Sail, which is based on the Opel Corsa sub-compact. Plant has relatively little automation because of availability of low-cost labor.

Engine line produces 3.4 litre V6 for Chinese Regal and also for export to North America for use in Chevrolet Equinox.

Four-cylinder engine is inserted in Buick Excelle body.

The leading OEM pioneer in China has been Volkswagen, which started operations in the mid-80s and initially commanded 80 percent of the passenger car market. However General Motors entered the fray in 1997, partnering with the same company, Shanghai Automotive Industry Corp (SAIC), as VW.

Though GM’s initial investment of $1.3 billion was seen as risky by some industry analysts, it has proven to be one of the company’s best gambles of recent years. After a modest start in 1998, GM sales grew steadily through 2001 to around 60,000 units and then exploded in 2002 to more than 250,000. In the first 10 months of 2003, GM China sales exceeded 305,000 units and the company’s market share has risen from 0.5 percent in 1998 to 8.5 percent. “The opportunities in China are tremendous,” says Phil Murtaugh, GM China president.

“The country’s middle class is growing fast and the economy is booming.”

Murtaugh’s assessment is echoed by GM North America president Gary Cowger, who describes China’s growth as “astounding.” Cowger announced last November that GM would be capitalizing on its strong presence in China by exporting a number of fully and partially assembled Cadillac models from the U.S. In a deal worth a total of $1.3 billion, 4,500 fully assembled Cadillac CTS, SRX, XLR and STS models will be sent to China, along with 13,000 partially assembled CTS and SRX models. The move into China’s luxury market is especially significant as big profits are to be made from a superwealthy elite class of the population. This market segment is a tiny sliver of the overall Chinese population but rivals similar segments in the U.S. or Europe in terms of numbers and wealth.

This fact has not been lost on other luxury automakers and both Mercedes-Benz and BMW are starting local manufacture of various models to cater to the high-end Chinese market. For GM, the model expansion strategy depends on locally produced vehicles and a range of imports. GM started its Shanghai manufacturing plant with a localized version of the Buick Regal and Chevrolet Venture minivan. Both are sold as Buicks, a long favored brand name in China. GM has added a Chinese made version of the Opel Corsa, sold as the Buick Sail, a locally produced version of the Chevrolet Blazer (badged as such) and a minicar sold as the Chevrolet Spark. To cater to niche segments, GM imports various Opel models, including the Agila, Astra, Omega, Vectra and Zafira. GM’s subsidiary Saab is also represented with the 9-5 sedan.

Another important element in GM’s China plans is GM Daewoo, the company’s recently established subsidiary in Korea. Last October, GM Daewoo celebrated its first anniversary as a new company rescued from the ashes of the old Daewoo. One of GM Daewoo’s products, the Lacetti compact sedan, is already part of GM China’s line-up in the form of the Buick Excelle. Looking forward, GM Daewoo expects to play a significant role not just in GM China’s model proliferation plans, but also in GM’s model strategy in many other world markets (including, for example, as supplier of the Chevrolet Aveo in the U.S.).

Among the strengths of GM Daewoo is the depth of its engineering expertise and the company’s ability to develop new vehicle platforms at low cost. GM Daewoo can produce a platform for around $300 million, half the cost of one developed in Germany. Reasons for this advantage include the lower cost of the engineering talent and an inexpensive supplier base. From his perspective, GM Daewoo president Nick Reilly has set the following goals for the company; “to be the most respected Korean auto manufacturer, not necessarily the largest” and “to set a global benchmark for high customer value.”

In Korea, GM Daewoo faces an uphill battle with its highly successful, primary competitor Hyundai, which commands 50 percent of the market. However, Reilly is confident that management restructuring and other moves he is undertaking will make the company much more efficient. Furthermore, Reilly believes a better organized model range, with the addition of a new larger sedan and sport utility vehicle, will help GM Daewoo expand its current 10 percent share of the Korean market. The SUV is particularly important because without one, GM Daewoo cannot compete in a segment that now accounts for 65 percent of the Korean market.

GM Daewoo added a second shift to the Bopyong and Changwon production sites earlier this year to meet rising international demand.

In 2003, GM invested about $450 million in Daewoo (other GM Daewoo shareholders are Suzuki — 14.9 percent, SAIC -10.9 percent and Daewoo creditors — 29.9 percent), and in 2004 a further $1 billion investment is planned. This will focus on new product lines, such as the SUV, a new diesel powertrain program and upgrading engineering and manufacturing facilities. “Being fast to market is one of our advantages,” says Reilly. As an example he points to the Buick Excelle project, which was completed in just 12 months. At least two more Daewoo cars will be going to GM China and overall CKD export volume to China will top 200,000 units.

As well as growing its export business to China, India, Vietnam and Thailand significantly in 2004, GM Daewoo plans to step up its engineering and R&D operations. According to Dr. Ki-joon Yu, vice-president of engineering, staffing levels will increase from 1,600 today to 2,000 by the end of 2004 and give GM Daewoo the capability to handle all its own product portfolio development. This will also make GM Daewoo the third largest engineering center in the GM empire, after Warren, Mich., and Russelsheim, Germany.

“Initially there was much concern that GM Daewoo would be just an assembly operation for GM worldwide,” says Reilly, “but we are a lot more than that.”

Looking at GM’s overall operations in the Asian region, it appears that the company’s moves in both China and Korea already are proving worthwhile and hold the promise of even greater rewards in the future.