t

Doe$ GM's FuturG Lie in China?

GIVEN THE SHEER SIZE 0F THE U.S. automotive market,

the "old" GM concentrated mainly on its domestic mar-
ket. GM once held more than 50 percent market share
in the United States and was the leader in global car
sales (by units) between I93I and 2007, before filing
for bankruptcy in 2009.1 In its hey day, GM employed
350,000 U.S. workers and was an American icon.
The future for the "new" GM may lie overseas, most
notably in China. Some 65 percent of GM's revenues 5

are now from outside the United States. This is quite a

high level of glob alizatron for a company that once was
focused more or less on the domestic market only. The :ffi$
Chinese market is becoming more and more important
to GM's performance. In 2016, GM sold 3.9 million
vehicles in China alone, which is 39 percent of total
GM cars sold. As shown in Exhibit MC18.1, China's iffi#
share of GM's total sales is on a steady climb, reaching
iWH
40 percent of total revenues in 2017 (Q1).
With a population of 1.4 billion and currently only
: ff

11 vehicles per 100 people-compared with a vehicle

density of 81 per 100 in the United States-China :W$
offers tremendous growth opportunities for the auto-
motive industry. Since China joined the World Trade
Organization (WTO) in 2001, its domestic auto mar-
ket has been growing rapidly and has now overtaken
the United States as the largest in the world. Although
Mary Barra, CEO General Motors, is refocusing GM on the U.S. home
the growth of the Chinese auto market has slowed in market and China, among other developing economies, while exiting
recent years because of the economy's downturn, GM Europe.
CEO Mary Barra remains convinced that China offers @Tomohiro Ohsu m i/Bloomberg/Getty mages
I

significant long-term growth opportunities.

Unlike some of its main rivals, GM entered the Chi-
nese market early. In 1997 , GM formed a joint venture
with Shanghai Automotive Industrial Corp. (SAIC),
one of the "big four" Chinese carmakers. SAIC is one
of the largest companies worldwide and included in the
Fortune Global 100 list (ranked 46th,just behind Ama-
zon.com and before Hewlett-Packaril.z Over 30 years,
GM was able to develop guanxi-social networks and
relationships that facilitate business dealings-with its
Chinese business partners and government officials.
GM's China operation has been cost-competitive
from day one. The company operates about the same
number of assembly plants in China as in the United
States, but sells more vehicles while employing about
half the number of employees. Chinese workers cost
Frank T. Rothaermel prepared this MiniCase from public sources.
He gratefully acknowledges research assistance by Rahul Singh. This MiniCase
is developed for the purpose of class discussion. It is not intended to be used for
any kind of endorsement, source of data or depiction of efficient or inefficient
management. All opinions expressed, all errors and omissions are entirely the
author's. Revised and updated: July 3,2017. @Frank T. Rothaermel.

509
510 : UltllCASE lS Does GM's Future Lie in China?

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s
ffiKpx*ffi*Y Mff$S-$ $
E
GM's Number of Vehicles Sold by Geographical Location (in thousands), 2014-2016
s

4,50 0l

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

2014 2015 2016

China n Jtl6ftft America fulepg geuth America

-
SOURCE: Depiction of data from 2016 GM Annual Report. - -

only a fraction of what U.S. workers do, and GM is not
weighed down by additional health care and pension
obligations.
Although struggling in the United States, GM's
Cadillac luxury brand is in high demand in China,
where owning a Cadillac is considered a status symbol.
GM's best-selling model in China, however, is the Wul-
ing Sunshine, a small, boxy, purely functional micro
van priced between $5,000 and $10,000 depending
on what options the customer chooses. The SAIC-GM
joint venture sold almost 2 mrllion Wuling vehicles in
China in 2014. The Wuling Sunshine may help GM
further penetrate the Chinese market; it also may be an
introductory car for other emerging markets. GM's low-
cost strategy with this vehicle has been so successful
that the firm is planning to expand the Wuling product
line and offer the vehicle globally. GM already sells the
Wuling Sunshine in Brazil under the Buick nameplate.
Among GM's most profitable vehicles sold in China
are such popular SUVs as the Baojun 560 and the Buick
Envision (the latter of which is made in China and then
imported to the United States, where it is also selling
well). Since 2013, Buick's sales in China have risen by
almost 50 percent; rn 2016 alone, GM sold more than
I million Buick vehicles. However, sales of Chevy,
another GM brand, have fallen by some 16 percent.
Despite being offered at a higher price point, GM sold
twice as many Buicks as Chevrolets in China.
Taken together, China and other emerging economies
in Asia, Latin America, and the Middle East arc becom-
ing more and more critical to GM's future performance
as it strives to become a lean and low-cost manufacturer
of profitable small cars (at least for its non-U.S. markets).
To back up its strategic intent, GM has quadrupled its
engineering and design personnel in China and is invest-
ing $250 million to build a cutting-edge R&D center on
its Shanghai campus, home of its international headquar-
ters. Also, GM is spending an estimated $t+ billion to
build five additional manufacturing plants to support
anticipated annual sales of 5 million vehicles.
At the same time that GM is doubling down on
China, it has exited Europe. In 2015, GM stopped
manufacturing cars in Russia, citing unstable business
conditions as the main reason. After years of losing

money and acrimonious parent-subsidiary relation-
ship, GM sold its Opel (Germany) and Vauxhall (United
Kingdom) divisions to Peugeot of France in 2017. In
the same year, Barra also announced that the U.S. auto-
maker will discontinue selling cars in India. This further
retrenchment will allow GM to focus more on China
and BrazrI overseas, and to fend off tech startups such
as Tesla and Uber in the United States, where it made an
equity investment in Lyft, which in turn partnered with
Waymo, Alphabet's self-driving car unit.
For Mary Barra, unfortunately, not everything in
China will be smooth sailing. Given the slowdown in
the Chinese economy, combined with continual deval-
uation of the Chinese currency (the yuan) since 2014,
the competitive intensity in the world's largest auto-
mobile market is becoming more intense. Moreover,
several government-supported domestic car manu-
facturers in China are initiating a cutthroat price war
to gain market share and, with it, scale. For instance,
GM's own joint venture partner SAIC as well as other
domestic companies such as Great Wall Motor Co. are
increasingly competing with GM for market share. As
the quality and technology expertise is rapidly increas-
ing at domestic car manufacturers, many Chinese con-
sumers are increasingly turning to local brands instead
of the pricey foreign models from the United States
and Europe. At the premium end of the Chinese mar-
ket, brands such as Porsche or Audi (both are Volk-
swagen brands) remain the most popular choices. In
contrast, low gas prices in the United States in recent
years have fueled high demand for sport utility vehi-
cles (SUVs) and trucks-an area where GM and Ford
hold strong positions. These types of vehicles are also
the most profitable for the U.S. automakers to sell.
MINICASE l8 Does GM's Future Lie in China? I 5ll
Dr$cu$$r0N SuEsTl0N$
l. How important are non-U.S. sales to GM? What impli-
cations does this have for GM's global and business
sffategy? Think about the integration-responsiveness
framework to inform global sfrategy and different
strategic positions to inform business sfrategy.
2. In 2016, GM held almost 15 percent market share
in China, while Ford held only 3 percent. Why
was GM so successful in China, while some of its
rivals, including Ford, struggled to gain a stronger
position in the world's largest automobile market?
3. What are the challenges GM is currently facing
in the Chinese automobile market? How should
GM's CEO address them? Be specific.
Endnotes
1. Keep in mind that selling a large volume of cars doesn't make a
company profitable, if the cars are sold at a low margin or even at a
loss. In contrast, Ferrari sells only some 7,500 vehicles ayear, but is
highly profitable (not surprising because the sticker price of the entry-
level Ferrari is $200,000).
2. Fortune's Global 500 (2016), http://fortune.com/global500/
saic-motor/, accessed July 3,2017 .
Sources: GM Annual Reports, various years; and Colias, M. (2017, May 18),
"General Motors will stop selling cars in India," The Wall Street Journal;
Bensinger, G., and J. Nicas (2017, May l5), 'Alphabet's Waymo, Lyft to '
collaborate on self-driving cars," The Wall Street Journal; Colias, M., and
J.D. Stoll (2017, Mar. 6), "GM's Opel exit is rare no-confidence vote in
European market," The Wall Steet Journal; Nagesh, G. (2016, Jan.2I),
"GM sells record 9.8 million vehicles in2015," The Wall Street Journal;
"GM, SAIC plan to jointly design new cars," The Wall Street Journal,
July 28, 2015; "GM, Ford flourish out of the limelight," The Wall Street
Journal, July 28, 2015; "Big vehicles power surge in GM's profit," The
Wall Street Journal, July 23,2015; "China stocks take GM, Ford on rough
ride," The Wall Street Journal, July 10, 2015; "GM hopes to shift gears
after recalls," The Wall Street Journal, September 29,2014; and "Can
China save GM?" Forbes, May 10, 2010.