On May 7th, it was reported that the Chinese market had been a major source of profit and the largest sales market for General Motors. From 2010 to the first quarter of 2023, General Motors had achieved significant sales success in China. However, in the first quarter of 2023, the company suffered a loss of $106 million in this market, marking at least the third quarterly loss in China in the past 15 years. This has raised widespread doubts in the industry about whether General Motors can turn the tide in the Chinese market.
Despite these challenges, General Motors CEO Mary Barra expressed the company's commitment to the Chinese market at the Beijing Auto Show. During a recent earnings call, Barra emphasized confidence in the long-term growth of the Chinese market. General Motors' strategy includes promoting new energy vehicles, such as fully electric and plug-in hybrid cars, to address market changes and consumer demands.
However, General Motors' struggles in China are not isolated. Its main competitors, including Ford and Tesla, are also facing similar challenges. While Tesla has achieved some success in the Chinese electric vehicle market, it has had to resort to price cuts to compete with local brands like BYD. Meanwhile, companies like Ford have shifted towards a "light asset" business model, aiming to adapt to the complex environment and evolving business conditions in the Chinese market by reducing asset investments or utilizing existing assets more efficiently.
Over the past decade, General Motors CEO Mary Barra has been actively adjusting strategies, gradually exiting unprofitable or underperforming markets. However, leaving the Chinese market appears to be more challenging than exiting any other market in this series of strategic adjustments.
China was once seen as the profit growth engine for General Motors and its largest sales market from 2010 to 2023. However, in the first quarter of this year, General Motors incurred a loss of $106 million in the Chinese market, marking its third quarterly loss in China in 15 years and the largest one outside the period of the COVID-19 pandemic.
Prior to this, General Motors' profits and market share in China had been declining. This has led some industry observers to question whether General Motors can turn the tide in the Chinese market, or if exiting the Chinese market has become a more realistic option.
Facing these challenges, Barra recently attended the Beijing Auto Show in person and reiterated General Motors' commitment to expanding in the Chinese market. During General Motors' quarterly earnings call on April 23, she stated, "Long-term, we remain committed to expanding in China. We believe that, mid-term, this is a market that will have significant growth."
In February of this year, Barra made a commitment to investors, saying, "There is nothing that is impossible in ensuring that General Motors has a strong future in China, creating the appropriate profitability and return for our investors."
General Motors CFO Paul Jacobson revealed to investors last week that the company expects its business to return to profitability this year, with performance similar to or slightly lower than the $446 million profit in 2023. He attributed the first-quarter loss to production shutdowns aimed at reducing accumulated vehicle inventory.
Impacted by global geopolitical tensions, shifting consumer sentiments, and intensified domestic competition, General Motors' decline in the Chinese market is indeed surprising. However, such challenges are not unique to General Motors. It is worth noting that for much of Barra's 10-year tenure, General Motors has held a belief that if it is not a leader in a region and does not see the potential to become one, it should not operate there.
A notable case is in 2017 when General Motors sold its European business to the then PSA Group, which has now become the parent company of Chrysler under Stellantis. At the same time, General Motors has gradually ceased some domestic production in the United States or exited markets such as Russia, India, Thailand, and Australia.
These actions have not only narrowed General Motors' business footprint but also made the Chinese and North American markets particularly crucial. Currently, these two markets, along with their financial sectors, contribute the vast majority of General Motors' annual earnings. General Motors' international operations (including markets like South Korea, Brazil, and the Middle East) recorded an adjusted profit of $1.2 billion last year, while it is in the early stages of reintroducing electric vehicles into the European market.
Exiting the Chinese Market?
General Motors' market share in China (including its joint ventures) has seen a significant decline, dropping from around 15% in 2015 to 8.6% last year, marking the first time it has fallen below 9% since 2003. Regulatory filings show that the earnings General Motors derived from these operations have also been on a downward trend, decreasing by 78.5% since reaching a peak in 2014.
Sales of General Motors' brands such as Buick and Chevrolet under its umbrella have declined notably, even surpassing the sales decline of its joint venture Wuling Motors with SAIC. It is worth noting that joint venture models accounted for about 60% of the 2.1 million vehicles General Motors sold in China last year.
Apart from the first quarter of this year, General Motors has experienced two quarterly losses in the Chinese market since 2009, in the first quarter of 2020 and the second quarter of 2022, with the former incurring a $167 million loss due to the pandemic and the latter an $87 million loss. Senior automotive analyst John Murphy from Bank of America Securities raised a sharp question during two consecutive quarterly earnings conference calls: Would General Motors consider exiting the Chinese market? He recently stated, "Is it time to seriously consider strategic options like shutting down or selling off the Chinese operations?"
However, Barra has a different perspective. She mentioned that new products would help the company compete better in the market, including China's so-called "new energy vehicles" such as all-electric cars and plug-in hybrid cars. In response to market demands, General Motors launched several new models in China last week, including the plug-in hybrid version of the popular Buick GL8 minivan and the Chevrolet Equinox crossover.
Barra commented on market changes, saying, "We clearly recognize that as Chinese automakers enhance their capabilities, the market has shifted, and the landscape has changed. But we still believe that General Motors has a place in the luxury car market."
To tackle the intensifying competition in the Chinese market, General Motors is shifting its focus from mainstream models to "luxury" models. The company's plans include selling flagship vehicles like the Hummer EV and other large SUVs directly to consumers through a new division called Durant Guild, established by General Motors in 2022.
However, some industry experts are cautious about General Motors' strategy. Former General Motors executive in Indonesia, Michael Dunne, who is now the China expert and CEO of Dunne Insights consulting firm, believes, "Traditional American automakers' development in China is heading towards an end. Everything Detroit automakers are doing in China is moving in the wrong direction."
The decline of Western automakers in the Chinese market is mainly due to the increasing competition from local manufacturers and a generational shift in consumer perceptions towards the automotive industry and electric vehicles.
Mark Fulthorpe, Executive Director of S&P Global Mobility Automotive, mentioned that due to General Motors' significant stake in the Chinese market, they cannot easily give up like in other markets. He added, "They will strive to consolidate what they have. I believe they will try again. I think they need to work harder."
"The Tesla Effect"
Chinese domestic automakers are not only eating into General Motors' market share but also affecting their competitor Ford. From 2018 to 2022, Ford's sales in China dropped by 32.4%. Dunne pointed out that the American electric vehicle leader Tesla also played a significant role in this trend.
Dunne stated, "I call it the Tesla effect. The company has completely changed Chinese consumers' perception of electric vehicles. Suddenly, Tesla became the Apple of the automotive industry. Furthermore, electric vehicles have become 'trendy and cool' for Chinese consumers."
Tesla started local production in China in 2019. Dunne explained that post-COVID-19, Tesla rapidly increased production and proved to a large number of Chinese consumers that electric vehicles (even non-Tesla models) are a viable choice.
Experts note that despite facing pressure in the Chinese market, Tesla remains more popular than traditional competitors. However, to compete with Chinese automakers like BYD and NIO, Tesla had to significantly reduce prices.
Adam Jonas, a long-term Tesla bull and analyst at Morgan Stanley, believes Tesla and other Western automakers may enter a new phase of reduced capital expenditure and eventual collaboration with China. He stated, "We firmly believe that Western automakers (including Tesla) have realized that China has won the competition for dominance in electric vehicles."
As the electric vehicle market evolves, Tesla is undergoing global restructuring, including a workforce reduction of over 10%. According to Tesla's annual filing with regulators, the company's revenue in China grew by 57% last year to $21.74 billion. However, in the first quarter of this year, Tesla's revenue in China decreased by 6% year-on-year to $4.6 billion.
Tesla CEO Elon Musk mentioned in the recent earnings conference call, "If you compare the decline in our sales in China with that of our competitors, you will find that our decline is relatively small. So, our performance is good."
Musk also revealed that Tesla might expand its driver-assist systems, such as the Full Self-Driving (FSD) system, in China, but a specific timeline has not been disclosed. During Musk's recent visit to China, Tesla made significant progress by introducing advanced driver-assist technology in the country. Additionally, Tesla partnered with Baidu to provide digital mapping services for driver-assist systems.
CEO of JL Warren Capital, Junheng Li, mentioned that while these developments are positive signals for Tesla, the lack of key details makes it difficult to assess the impact of Chinese FSD on the automaker.
"Asset-Light"
Given the ongoing challenges in China's supply chain, U.S. automakers like Stellantis and Ford have shifted towards a so-called "asset-light" business model in the Chinese market. This model aims to achieve sustainable operations by reducing asset investments or utilizing existing assets more efficiently. For Stellantis, after its joint venture with Guangzhou Automobile Group in China filed for bankruptcy at the end of 2022, the company has adjusted its strategy. Following the breakdown of the partnership producing Jeep vehicles in China, Stellantis has opted for a "light-asset" approach, importing such SUVs into China.
Earlier this year, Stellantis CEO Carlos Tavares referred to Chinese automakers as the company's "top" competitors, but he also emphasized that the company will continue to collaborate with Chinese firms.
Most notably, Stellantis acquired a 20% stake in the electric vehicle company Lixiang and jointly established a joint venture to produce electric vehicles. This agreement not only covers proprietary rights for export and sales but also includes the right to manufacture products outside the Greater China region.
Stellantis saw a 44% decrease in car sales in China, dropping from 124,000 units in 2021 to 69,000 units last year, but the company did not disclose its specific financial performance in the Chinese market. However, following adjustments in "China, India, and the Asia-Pacific region" last year, the company's operating profit decreased by around 22% compared to 2022, with revenue decreasing by approximately 1 billion euros (about 1.08 billion US dollars).
On the other hand, Ford Motor Company has taken a different approach, continuing production in China, especially for its luxury brand Lincoln. However, the company is increasingly utilizing Chinese factories to manufacture cars for export to other regions to fully utilize excess capacity.
Ford CFO John Lawler stated at last month's earnings call, "We have indeed put a lot of effort into reducing the risk of this business. We are adopting a light-asset strategy, leveraging assets in China. At the same time, we are exporting low-cost products from China to markets worldwide through partnerships."
Lawler noted that Ford exported 100,000 vehicles from China to South America and other regions last year. A Ford spokesperson confirmed that the company has recently started exporting the Lincoln Nautilus SUV from China to the United States and plans to further increase exports from China.
Ford no longer reports financial performance by region, but from 2017 to 2022, the company incurred losses of approximately $5.5 billion in the Chinese market. Lawler mentioned that all of Ford's traditional businesses, including China, were profitable in the first quarter, excluding commercial sales or electric vehicle operations.
Amid declining business in China and intensifying competition, S&P Global estimates that U.S. automakers exported around 482,000 vehicles from China last year. This figure is more than 3.5 times higher than in 2019 and represents a growth of about 22% from 2022.
Facing this challenge, Michael Dunne, China specialist and CEO of Dunne Insights consultancy, remarked, "It's hard to imagine what would change Chinese consumers' perceptions to make them look favorably upon General Motors or Ford products again, which is currently a key concern for both companies' boards. How do we make Chinese consumers fall in love with these brands again?"
