General Motors’ business in China is in trouble

General Motors It is losing ground in China, its top sales market in more than a decade and one of the Detroit automaker’s two main profit engines.

The company’s market share in the country, including its joint ventures, fell from about 15% in 2015 to 9.8% last year — the first time it has fallen below 10% since 2004. His income from the service also fell by about 70%. % since peaking in 2014.

The coronavirus pandemic that originated in China is partly to blame. However, the decline began several years before the global health crisis and has become increasingly complex amid rising economic and political tensions between the US and China.

Competition from government-backed domestic automakers is also increasing, fueled by nationalism and generational shifts in consumer attitudes toward the automotive industry and electric vehicles.

Take Will Sundin, a 34-year-old science teacher, who told CNBC he never considered buying a Chinese car when he moved to China. country in 2011 Sundin recently purchased a Nio ET7 electric vehicle as his daily driver in Changsha, the capital of China’s Hunan Province.

“I want something big and comfortable, but I also want something a little faster,” he said. “I like the way it looks.”

Sundin, who moonlights as a car reviewer on YouTube, knows China’s automotive industry well. It bought its Nio model from rival Chinese automakers Xpeng, Lee Auto and IM Motors. He said the ability of the car to replace the battery with a new one instead of recharging it “will move it forward very quickly.”

Not on his watch list? American brands such as GM’s Cadillac and Buick initially led the automaker’s growth in China.

“Cadillac has a good image in China, but it’s expensive,” said Sundin, who previously owned a 2012 Ford Focus. “I think the problem they’re facing is there’s competition, new competition, a lot of new competition in different directions that they didn’t expect.”

That competition is increasingly becoming a problem for GM, which has acknowledged similar problems in its Chinese business. However, the company hasn’t offered much assurance on how to reverse the trend, other than the promise of new electric vehicles and a new business unit called Durant Guild, which will import high-margin high-margin vehicles from the US to China.

While many American brands don’t do well in China, GM’s decline is particularly notable. GM’s domestic operations are much larger than those of its intercity rivals ford engine, For example. It also has a much smaller global reach, after winding down its European operations and shuttering operations elsewhere, focusing mainly on North America, China and, to a lesser extent, South America.

Being overly dependent on just a few markets can be dangerous. But it brought record profits for GM as the company, led by CEO Mary Barra, eliminated underperforming operations. Electric vehicles may be a new opportunity for global growth for GM, but analysts say it will be an uphill battle compared to China’s recovery in the coming years.

“With the changes they’ve made, with the refocusing on North America and China, leaving Europe, it really creates a dangerous scenario when you have some issues, a lot of issues, in the Chinese market right now,” said Jeff Schuster, executive vice president of LMC Automotive at GlobalData. .

In recent quarters, GM has downplayed the role of its China operations, including when CFO Paul Jacobson said during an earnings call in October that China was “not critical” to GM’s financial performance.

In December, Barra said China was an important part of GM’s business, but the company was also focused on other issues, including the government’s now-defunct “zero Covid” policy and recent protests.

“We still see opportunities… of course, we are also monitoring the geopolitical situation. We cannot work in a vacuum,” he said at the Automotive Press Association meeting. “But we continue to see opportunities here and we continue to evaluate the situation, but our plans are to be in a leadership position in EVs.”

A bright spot for GM in China was its joint venture Wuling Hongguang Mini, which was the best-selling EV on the market. Since going on sale in mid-2020, the economy car has sold more than 1 million units.

However, Jacobson said earlier this year that China’s fight against the coronavirus pandemic and rising Covid cases had resulted in a roughly 40% drop in equity earnings for operations in 2022.

GM reports its revenue from China as equity income because the country mandates joint ventures with non-Chinese automakers, except for Tesla, which is given an exemption. GM has 10 joint ventures, two wholly-owned foreign companies and more than 58,000 employees in China. Its brands include Cadillac, Buick, Chevrolet, Wuling and Baojun.

“Right now we’re seeing a lot of Covid cases in China, which is slowing down the consumer. So we expect that to grow a little bit slower, but over time we hope to get back to the level we’re used to,” he told reporters on the Jan. 31 earnings call.

But this is not only due to the pandemic. Equity earnings from GM’s China operations and joint ventures have fallen 67% since a peak of more than $2 billion in 2014 and 2015. That includes a roughly 45% drop from then to 2019, when the coronavirus crippled China’s economy and auto industry. In 2022, GM’s Chinese operations generated $677 million in equity income for GM.

“It’s not Covid. It started before Covid,” said Michael Dunn, CEO of consulting firm ZoZo Go, which focuses on China, electrification and autonomous vehicles. “It also coincides with rising tensions between the United States and China. There’s no question and it can’t be measured, but it’s definitely a factor.”

According to Dunn, president of GM’s Indonesia operations from 2013-15, the decline of GM and other non-domestic automakers coincides with slower growth in the Chinese market, increased competitiveness of Chinese automakers and a shift to heavily government-subsidized all-electric vehicles. agencies.

“In the last five years, they’ve all gone under the hood as mid-market brands. “Chinese consumers are buying more Chinese brands,” he said. “It’s a seismic shift … a shift in consciousness.”

Domestic startups and automakers have helped Beijing realize its goal of increasing the penetration of new energy vehicles – a category that includes electric cars. More than a quarter of the passenger cars sold in China last year were new energy vehicles, with penetration expected to reach 36% this year, according to the China Passenger Car Association.

Local companies have rushed to take a share of the growth in the generally declining car market. startups like Nio Helped promote the idea of ​​electric vehicles as part of a lifestyle and status symbol in China. The rise in the quality of domestic electric vehicles has helped support and reinforce a growing sense of nationalistic pride among Chinese consumers.

According to the China Association of Automobile Manufacturers, Chinese brands have increased their market share by 21% since 2015, accounting for almost half of the cars sold in China last year. By comparison, American brands’ sales in the US were around 45% during that time.

“Of course, the market was elsewhere; a lot of it is based on politics,” Schuster said.

Chinese companies accounted for half of the country’s top 10 carmakers in sales last year, up from just three in 2015, according to LMC Automotive. The most important thing BYD Autoelectric car maker that has since grown from about 445,000 unit sales to about 2 million last year, making it one of the top five best-selling automakers in China.

“I think the No. 1 reason for GM’s downfall is this tendency toward Chinese nationalism,” Dunn said. “It has declared that China wants to dominate the electric vehicles globally and will do everything in its power to cultivate national champions like BYD.”

In addition to GM, America’s other legacy automakers are the descendants of Ford and Chrysler Star — was not so good. Both experienced significant sales declines; however, none have announced plans to withdraw from the market.

In February, Ford appointed Sam Wu, a former Whirlpool executive, as president and CEO of the automaker’s China operations, effective March 1, in October.

Ford’s market share in China has been around 2% since 2019, down from 4.8% in 2015 and 2016, according to the company’s annual filings.

Ford’s problems in China aren’t just overseas. The company announced in February that it would collaborate with Chinese supplier CATL on a new $3.5 billion battery plant for electric cars in Michigan. The deal has been criticized by some Republicans, including Sen. Marco Rubio of Florida, who has asked the Biden administration to renegotiate Ford’s agreement to license CATL technology.

A joint venture between Stellantis and Guangzhou Automobile Group, which makes Jeep vehicles in China, has filed for bankruptcy at the end of 2022 after deciding to end the partnership and import SUVs into the country.

Stellantis CEO Carlos Tavares said the company is pursuing an “asset-lightening” approach aimed at boosting revenue, not necessarily the country’s 7% decline in sales in 2022.

“It’s also important that you understand that our financial position in China has improved significantly,” he told reporters last month, adding that the company was “cleaning up the floor.”

As America-focused automakers regroup, China’s domestic automakers continue to gain ground in the domestic market.

“People in China are proud,” said Nio owner Sundin.

“It’s like ‘American Made’ in the USA and all the patriotism behind it is in China, [it’s] Likewise: “Eventually, we can make a phone or make a car as good or better than foreign car makers.”

– CNBC Evelyn Cheng contributed to this report.