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GM Can’t Keep Up in China, Once Seen as the Promised Land

Bloomberg Business Week, November 22, 2019

The future for General Motors Co. in China is in the hands of customers like Yang Yanjun, a 46-year-old logistics executive in Shanghai. Yang and his family own two gasoline-powered cars—a Volkswagen and an Audi—and now he’s considering whether to go electric. Strolling through a Buick showroom in eastern Shanghai, he stops to admire one of GM’s newest electric vehicles, a powder-blue Velite 6 that’s wrapped with a giant red bow and costs less than $27,000. “It’s time for a change,” he says. “We’re ready to try something new.”

Mary Barra, GM’s chief executive officer, who of late is managing labor strife at home, needs more such converts to reverse the automaker’s slide in China. The world’s biggest auto market is suffering through a year-and-a-half slump exacerbated by China’s lackluster economy and the trade war with the U.S.

GM’s position is especially weak. While Cadillac has been a bright spot, sales of its Buick and Chevrolet brands have taken a beating, and GM’s overall passenger-vehicle retail sales plunged 18% through October, according to data from China Automotive Information Net, compared with a 4% decline in the overall market. “In China, the business environment remains challenging and volatile,” Barra said in an earnings call in October. “We’re also seeing a lot of pricing pressures.” She promised to cut costs and improve the company’s product mix.

It’s all a far cry from a decade ago, when GM was the top foreign automaker in the market. It formed joint ventures with local partners such as Shanghai Automotive Industry Corp. The venture’s Buick New Century sedans started rolling off the assembly line in 1999, two years after GM and SAIC joined forces, and quickly won over Chinese drivers and passengers, including government officials. During the worst of the Great Recession, when GM was on life support in the U.S., strength in China provided the American parent with a much-needed financial cushion.

Still recovering from its government rescue, GM’s eight-year reign as the top foreign automaker in China ended in 2013 as Volkswagen took on that distinction. More recently, it’s struggled as U.S. auto brands have faced a backlash from Chinese consumers deterred by U.S. President Trump’s trade policies with China, Bloomberg Intelligence analyst Kevin Kim said in a report published on Nov. 4. Shipments from two of SAIC and GM’s passenger-car joint ventures, which exclude imported and commercial vehicles, “nosedived” in the first nine months of 2019, according to the report.

Part of the problem has been stale models. Barra’s global turnaround strategy depends on an ambitious plan to introduce about 20 new or updated models, including EVs and hybrids, this year. The company has a raft of vehicles designed to reverse its fortunes in China and other profit-challenged locales.

Overseeing the China rollout is Matt Tsien, a GM veteran who first started as a 15-year-old intern. He’s now the Shanghai-based head of the China business. He landed in China in 1995 as GM was in the early stages of negotiating an agreement with SAIC. Tsien, then 35, was working at GM subsidiary Delco Electronics when GM tapped him to move to China as chief technology officer and help clinch the deal. He spent two years working out of a Shanghai Holiday Inn. “Nobody imagined at that time that electrification was going to take hold,” Tsien says.

The Shanghai office where he’s now based, originally built to house many of GM’s international operations, is eerily quiet. In 2013, GM moved everyone except the China team to its Singapore office. Some workers in the Shanghai office watch cricket on cafeteria televisions at lunch. Executives have large offices. There’s so much extra space that even an intern sits in a massive beige cubicle. In the bathrooms, a flyer hangs in stalls explaining the importance of return on invested capital, a metric mostly unknown to startups but prized by mature companies expected to efficiently put their assets to work. To generate a 1% increase in ROIC, GM must increase earnings by $500 million or reduce capital usage by $25 billion, the flyer explains.

Tsien, who holds several patents related to systems engineering, says GM will hit its goal of producing 10 new electric-car models in China by next year and an additional 20 by 2023. “We’re purposely being deliberate about our rollout,” he says.

GM will be displaying its first all-electric Chevrolet for the Chinese market, the Chevy Menlo, at an auto show in the southern Chinese city of Guangzhou from Nov. 22 to Dec. 1. The sedan is capable of traveling more than 400 kilometers (249 miles) on a single charge. Other new models include the Cadillac CT5, a sedan launched on Nov. 18, and the XT6, a Cadillac SUV that went on sale in July.

GM needs to refresh its lineup to keep pace with new cars from established rivals such as VW, Mercedes-Benz, and Toyota, as well as local challengers like BYD Co. and Guangzhou Xiaopeng Motors Technology Co. Known as Xpeng, the electric-car startup is backed by Chinese e-commerce powerhouse Alibaba Group Holding Ltd. “[New-energy vehicle] technology opens a window for China to potentially level the playing field with foreign automakers and take global leadership,” says Bill Russo, CEO of consulting firm Automobility Ltd.

There’s also a new Tesla Inc. gigafactory in Shanghai to contend with. Tesla is running trial operations at the factory, its first outside the U.S. Mass production of the Tesla Model 3 is expected to start in December. The company has said it will make 150,000 Model 3s a year in Shanghai after ramping up the first phase of production.

No other country comes close to China in terms of scale and adoption of new-energy vehicles. More electric cars have been sold in Shanghai alone than in all of the U.S., U.K., or Germany. By 2032 sales of electric cars are expected to overtake sales of new combustion-engine vehicles in the country, according to BloombergNEF, Bloomberg LP’s primary research service on energy transition.

GM is trying to keep pace as competitors move ahead with aggressive expansion plans despite the ongoing sales downturn. Volkswagen has introduced 14 new versions of traditional models since 2018, and the German automaker expects to launch 10 electrified versions of existing models in China by the end of next year.

Toyota Motor Corp. is forming a joint venture with Shenzhen-based BYD to make EVs, while Honda Motor Co. is working with Contemporary Amperex Technology Ltd., a leading Chinese maker of lithium-ion batteries. Even GM’s struggling rival, Ford Motor Co., could make its new electric Mustang Mach-E in China, Ford CEO Jim Hackett told Bloomberg News.

Not only is GM being challenged by other automakers, but the overall car industry in China is getting less government support. The government has invested more than $60 billionto nurture the NEV industry in a bid to lower the country’s reliance on foreign energy sources and reduce air pollution. It’s offered generous tax breaks and subsidies to EV makers and funded thousands of public charging stations nationwide. But now, rather than depending as heavily on incentives to purchasers of EVs, China is shifting toward using regulations to encourage the growth of the industry. In June the government slashed buyers’ subsidies from 75,000 yuan ($10,660) for one type of battery-powered car to 25,000 yuan. EV sales since then have dropped for four consecutive months.

The new approach focuses on a credit-trading program scheduled to take full effect in 2021. Under the system, companies will have to ramp up NEV production or buy credits from other automakers to avoid punishment.

“All of this speaks to how serious this country is toward driving electrification,” Tsien says. “Demand certainly has softened in the last couple of years. I expect that it will come back.” —Shelly Banjo, Tian Ying, Bruce Einhorn, and Michael Tighe

BOTTOM LINE – GM needs to refresh its lineup to keep pace with new EVs from foreign and local carmakers in China. The country is the U.S. automaker’s biggest market by sales.
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