86-GM’s China Problem

Here is a story that begins with Cinderella holding her slipper and gazing at her prince.  In a few short years the story puts Cinderella back in the ash heap. How did that happen? Can she be rescued? If so, how and when?

Posted 3/9/09

GM has been a strong performer in the Chinese auto market. But their sales have hit a wall. In 2008, the Chinese automobile market was up 7%, but GM’s automobile sales were down 16%.

GM is losing market share to the usual Japanese suspects, Toyota and Honda, who are aggressively expanding in China. But the company is also losing market share to the more expensive Audi and BMW models.

What is behind this loss of market share? Two reasons seem apparent. First, GM’s problem with potential bankruptcy in the United States has scared away some of the Chinese consumers. But the problem is deeper than that. There is a significant problem in the cars that GM is offering the Chinese consumer.

GM is competing in China with the Buick brand name. Its best seller is a mid-sized sedan called the Excelle. The Buick Excelle is made in Korea. It is also sold in other emerging markets as the Chevrolet Lacetti. Chinese consumers have gradually become aware of the Excelle’s Korean engineering and they don’t think it is as good as American-designed automobiles. In addition, the Japanese in China, as they have in the United States, have set the quality standard with their automobiles. Some Chinese believe GM is not up to that standard.

GM is beginning to slip with the Chinese consumer because of Reliability failures. (See the Perspective, “Failure Shifts More Share Than Success” on StrategyStreet.com.)

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Update 2022:

General Motors has performed respectably in the Chinese market in recent years. General Motors and its joint ventures sold 2.9 vehicles in the Chinese market in 2020.  China is the company’s largest market.  The US was the 2^nd largest with a total of 2.2 million vehicles sold in 2020.

In 2020, China produced about 20 million automobiles and another 5 million commercial vehicles.  China began to deregulate its automotive sector in the mid-1990s but prohibited foreign firms from owning more than 50 percent of stakes in joint ventures. General Motors joined forces with Shanghai-based SAIC in1997. The SAIC Motor Corporation, which is also involved in a partnership with Volkswagen, was the leading auto manufacturer in China with car sales of just over 2.5 million units in 2020. The SAIC-GM joint venture sells vehicles under the Buick, Chevrolet, and Cadillac brands. General Motors also sells commercial vehicles in collaboration with the Changchun-headquartered automotive manufacturing company FAW Group Corporation.

While I am sure that foreign firms entering the Chinese market resent having to give up a significant part of their product ownership in the Chinese market, the arrangement does have some significant benefits. First, the tie-in to a well-known Chinese brand name increases the perceived Reliability of the product by the Chinese consumer. Second, the partnership with Chinese companies well-established in their markets also increases the Convenience benefits for the Chinese consumer. Go HERE and HERE to see more about Reliability and Convenience.

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Update 4/26

This blog is a textbook example of how a very attractive industry falls into overcapacity and Hostility. GM entered the Chinese market at a perfect time. The company led with its Buick brand (Function) in a market with little competition. GM and Buick had an excellent Reliability reputation. Chinese consumers considered its products to be well-designed and of high quality. But 2009 came along and the Chinese government decided to invest heavily in the development of electric vehicles, which it named New Electric Vehicles (NEV). Over the next 10 years, many Chinese companies entered the market, especially at the low end. Eventually, these new competitors were unable to differentiate their products from one another. They began discounting heavily to gain share. Hostility has followed. It won’t end soon.

GM entered the Chinese market in a joint venture with SAIC in 1997. It opened with the Buick brand due to its strong legacy appeal in China. Within three years, the Buick Regal and Excelle became status symbols among government and business buyers. The joint venture also introduced smaller vans and, eventually, a very successful MINIEV. GM became one of China’s top two automakers and the joint venture reached a market share peak of 15% by 2014.

The Chinese government had begun implementation of its NEV program in 2009 and offered substantial subsidies to consumers. The market for Chinese brands took off.  Many new Chinese competitors entered the market. The market grew quickly, rising from about 200,000 passenger electric vehicles in 2015 to over 7 million automobiles in 2023. China became the world’s best-selling plug-in electric automobile producer in the world. By 2026, BYD had become the world’s largest electric automobile manufacturer.

New Chinese manufacturers flooded the Chinese market. They concentrated at the entry level price points in the market. While these new products were entry-level, they offered technology superior to what the GM joint venture was offering. Chinese consumers concluded that GM no longer offered many of the Function benefits they wanted and also criticized the joint venture for concentrating on internal combustion engine products. GM’s market share fell to about 8%. It has recently begun to recover as the joint venture has introduced more electric vehicle technology and products. Over 90% of the Chinese market in 2026 is an NEV product. At the same time, the Chinese market became embroiled in an intense price wars.

We know from the Customer Buying Hierarchy that Price is the last in order of the four components in the Hierarchy, following Function, Reliability and Convenience. (See HERE for a short explanation). The fact that price wars are taking place tells us that there are few important Performance (Function, Reliability and Convenience) differences in consumer eyes from one Chinese competitor to another. That does not mean that there are no differences at all. Differences may exist, but they are not sufficient to allow a competitor or several competitors to gain a significant lead over competition. There are simply too many competitors offering too many copycat products in the Chinese market. Price wars ensue and devastate margins. Profitability is low in the Chinese market today.

There is at least one Chinese competitor earning attractive returns, Seres.  This company competes at the luxury and ultrahigh price end of the market (a Performance Leader company) offering products at 3 to 5 times the levels of most of the Chinese competitors.

So, what might we see in the future? GM and some of its Chinese competitors wanted to use their Chinese bases to export to other markets. The 2026 tariffs have forestalled most of that opportunity. So, competition must resolve itself largely within the Chinese market itself. Hostility ends in one of two distinct ways. (See HERE for a brief explanation.) First, demand increases to absorb the excess capacity in the market and return pricing power back to the manufacturers. Second, four or so competitors gain control of 75% or more of the market’s total unit sales. Each of these four competitors has learned not to price discount against the other competitors. None of the other competitors in the remaining 25% of the market’s total unit sales dares challenge the price leadership of the leading four competitors. Again, control of pricing returns to the manufacturers, usually under the leadership of the leading competitor.

The market evolution I have just described can often take several years to complete. Some competitors must fail. There will be mergers and acquisitions. All competitors will strive to reduce their unit costs in order to survive the industry’s low prices.  Many competitors will cut the wrong costs. Failure rather than success will underlie the vast majority of market share that shifts from one competitor to another. The emergent leaders will usually offer very broad product lines, covering all major Price Points, with superb product quality and follow-on customer service. Despite the industry struggles, its customers end up better served. Nevertheless, few of us would enjoy leading a competitor through this market evolution.

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