Will GM’s profitable run in China be ending soon?

GM plans to build a $250 million research center in Shanghai to develop
energy-efficient vehicles.

LOS ANGELES TIMES

SHANGHAI, China — Even as it struggles at home, General Motors Corp. has had a great run in China, raking in hundreds of millions of dollars in annual profits and recently selling more Buick cars here than in the United States.

But as GM begins its second decade of production in China, analysts, suppliers and dealers are all asking: Is the run coming to an end?

The automaker’s flagship joint venture, Shanghai GM, rose to the top by posting successive years of 25 percent or better annual growth in the number of passenger vehicle sales. But through September of this year, GM’s gains had slid to 14 percent from a year earlier, even though volume of cars sold in China overall rose 27 percent during the nine-month period, according to Automotive Resources Asia, a unit of Westlake Village, Calif.-based J.D. Power & Associates. Volkswagen, Toyota and Honda, GM’s leading rivals here, all outperformed the market average — slicing GM’s market share in China by a notch to 10 percent.

Shanghai GM would have slipped farther were it not for zero-interest loans that it began offering in July and steep price-cutting on its best-selling vehicle, the Buick Excelle.

Kevin Wale, GM’s China head, played down the recent slide. “It’s just a timing issue, of being in between new product launches,” said the Australian native.

The automaker’s total passenger and commercial vehicle sales in China should reach its target of 1 million units this year. And GM isn’t standing still in the world’s fastest-growing market and the second-largest behind the U.S.

Last month, Wale signed a deal in Hefei, about an hour’s flight west of Shanghai, to build a $210 million proving ground on 31⁄2 square miles of woodlands in poor Anhui province.

Last week, Wale and his top boss, GM Chairman Richard Wagoner, were in Beijing to reveal plans for a $250 million Shanghai campus and research center that would develop energy-efficient vehicles for the China market.

The latest investment, part of some $3 billion that GM has allocated for China in the last three years, probably will help the company over the long haul as Beijing seeks to reduce pollution and its reliance on crude oil, which is nearing $100 a barrel — in part because of surging demand from China and other developing nations. China’s central government this week raised retail pump prices by 10 percent (to about $2.60 a gallon for midgrade gas), and a new fuel tax of at least 30 percent could be imposed in March.

GM’s more immediate challenge in China is to keep sales growing, but it won’t be introducing a new lineup of vehicles until late 2008 or 2009, say GM’s suppliers and dealers. And some of the carmaker’s current models are showing signs of wear.

Although GM’s newer Buick Lacrosse and Chevrolet Lova are selling very well, analysts say the automaker doesn’t have enough sharp products on the market to gain on a crowded field of some 50 domestic and foreign joint-venture manufacturers.

“Japanese products are getting very popular because of their design,” said Yale Zhang, a Shanghai-based auto analyst with CSM Worldwide. Their exterior and detailing, he noted, reflect an understanding of shared Asian sensibilities. “More overall ‘zhongyong,’” Zhang said, invoking a term that refers to balance or the golden mean in Confucian thought.

J.D. Power’s 2007 quality report on the Chinese market shows Asian brands holding the top ranking in each new vehicle segment. GM was runner-up in two of seven categories, with the Chevrolet Epica coming in second to the Hyundai Sonata, and the Buick GL8 minivan ranking behind the Honda Odyssey.

“Why haven’t they [GM] brought a new product to fortify their market here?” asked Michael Dunne, the Shanghai-based managing director of J.D. Power’s China operations. “What product can go up against the Toyota, Honda and Nissan — and win?”

Toyota, which is challenging GM as the world’s largest automaker this year, arrived later in China than GM and got off to a surprisingly slow start. But sales have picked up dramatically this year, jumping 62 percent through September, led by Toyota’s new Camry and Corolla. Honda sales rose 32 percent. Toyota and Honda each have about 8 percent of the passenger vehicle market in China.