By Trefor Moss
LIUZHOU, China--As Chinese cars improve in quality and challenge
foreign auto makers' dominance in China, Detroit's General Motors
Co. has devised what it believes to be a winning strategy: build a
local car of its own.
Its Baojun brand, built through a joint venture in Liuzhou with
local partner SAIC Motor Corp., has been the fastest-growing auto
maker in China, the world's biggest car market, over the last five
years, and several other foreign car companies are now trying to
emulate it.
As a Chinese car with American technology, Baojun, or "Precious
Steed," has "no comparable competitors," said Yale Zhang, managing
director of Shanghai-based consultancy Automotive Foresight.
GM and SAIC have invested $2.4 billion in the Bajoun plant in
Liuzhou, which can now build 800,000 Baojuns a year. However, GM
owns a non-controlling 44% of the joint venture, an arrangement
some see as risky as the U.S. company shares American technology
with its Chinese partner.
Other foreign auto makers "are consistently taken aback by GM's
apparently generous technology sharing" when it comes to Baojun,
said Michael Dunne, a former GM executive and now president of
Dunne Automotive, a consultancy. "The open approach has engendered
considerable goodwill but it also leaves GM vulnerable to the whims
of its powerful Chinese partner."
GM China President Matt Tsien dismissed those concerns, saying
that devoting technology and expertise to build a Chinese brand was
"in our interests" and the only way to make Baojun a first-rate car
maker. Without a local brand it would have been hard to tap
mass-market growth outside China's wealthiest cities, he said. SAIC
didn't respond to questions.
Once derided as cheap and shoddy, Chinese cars have improved
dramatically over the past few years, with auto-rating firm JD
Power finding in a recent buyer survey that the gap in quality
between mass-market foreign cars and their Chinese equivalents had
virtually disappeared.
While Chinese auto makers have been steadily catching up, some
foreign players have been complacent, overlooking provincial cities
and failing to anticipate consumer demand for affordable SUVs, said
Paul Gao, an auto analyst at McKinsey Co., the consulting firm.
Chinese brands accounted for 38% of passenger car sales in China
in the first nine months of 2017, up from 30% in all of 2012,
according to sales data from LMC Automotive, an auto intelligence
company.
Baojun's market share, up 3.1% in that period, has grown the
most. It had 3.6% market share in the January-September period of
this year.
With China's passenger car market expanding just 2% this year,
tougher competition from local rivals has suddenly become a
pressing concern for foreign manufacturers.
"Domestic Chinese brands are getting stronger," HÃ¥kan
Samuelsson, the chief executive of Volvo Cars, said at the October
launch of Polestar, the Swedish company's new premium electric-car
company, "and being squeezed in the middle is not a position we
want to be in." Volvo's answer, he said, is to double down on the
premium segment, rather than wade into an increasingly fierce
battle for middle-market sales.
Ford Motor Co. said in November that it would start a joint
venture with local auto maker Zotye Automobile Co. to build
electric vehicles under a new Chinese brand. It will target
"younger consumers in lower-tier cities" who wouldn't normally buy
Ford-branded cars, said Peter Fleet, Ford's Asia-Pacific vice
president. Volkswagen AG will also launch a Chinese brand next
year, while Nissan Motor Corp. already operates a Chinese brand,
Venucia, with local partner Dongfeng Motor Co.
In Liuzhou, a gritty industrial city of 1.5 million people in
southern China where Baojun has its manufacturing base, auto sales
are booming. But on these roads, where value for money matters more
than brand cachet, local marques appear to strongly outnumber Fords
and Toyotas.
That is where Baojun comes in. GM launched the brand in 2010 to
compete against Chinese rivals including Geely Auto and Great Wall
Motor Co.'s Haval.
At the Liuzhou plant, where hundreds of workers in blue overalls
bustled around half-built vehicles on the facility's vast
production line last month, director of manufacturing operations
Craig Schmidt said GM know-how has given Baojun a critical
edge.
GM has another joint venture with SAIC, a 50-50 partnership
through which it builds Buicks, Cadillacs and Chevrolets. But
Cadillacs and Chevrolets are often too upscale to compete directly
with local marques. Chevrolet has lost 2.6% market share since
2012.
Buick's market share has held steady at 4.9%, making it the
fourth most popular auto brand in China so far this year, behind
Volkswagen, Honda and Toyota.
Baojun, however, overtook Chevrolet last year and at its current
rate of growth it will surpass Buick to become GM's best-selling
China brand within the next couple of years. Baojun sales increased
from roughly 100,000 in 2013 to over 760,000 last year.
Baojun's offerings, including small hatchbacks, sedans and
minivans, have one common theme: bargain prices. Its new 510
compact SUV starts at around $8,250, far below Chevrolet's newest
China SUV, the Equinox, which retails for about $26,300 and up.
With 41,000 sales in September, the 510 outsold the Equinox eight
to one, and became the third best-selling model in China.
China contributed roughly $2 billion to GM's $9.4 billion global
profits in 2016, most of which came from the U.S. While the company
sells four vehicles in China for every three it sells in the U.S.,
its China profits--which it must share with SAIC--are significantly
lower.
Even though margins in China are so much thinner, investing
resources in Baojun still makes sense, said Mr. Tsien, given the
market's sheer scale.
Auto analysts say the Baojun playbook could have lessons for
foreign auto makers looking to kick-start their China growth.
"China was their cash machine," said Mr. Gao, referring to the
strong Chinese growth to which foreign auto makers have grown
accustomed. "But they can regain their position, if they do some
R&D and come up with affordable products for those low-tier
markets."
Write to Trefor Moss at Trefor.Moss@wsj.com
(END) Dow Jones Newswires
December 03, 2017 07:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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