General Motors (GM) is the world’s largest automaker. The company sold 9 million units worldwide in 2011. GM China, consisting of six joint ventures, represents 13% of the exponentially increasing Chinese market that produced 18 million automobiles last year. The most successful GM Chinese joint ventures are Shanghai GM and SAIC GM Wuling, both selling over 1 million units in 2011. To date, GM China has maintained steady growth in China, an industry with many competitors.
Maintaining the successes of Shanghai GM and SAIC GM Wuling as automobile sales leaders in China will depend on firm’s ability to successfully adjust to the inevitable change of industry structure. The strategy to meet the needs of the future will be based upon maintaining current demand, gaining new customers, and establishing competitive advantage new markets. To maintain their current level of profitability, it is evident that GM China must continue to meet Chinese demand while understanding that the current level of growth will eventually reach its apex.
GM should also be aware that new customers, especially first time buyers, should be targeted existing and emerging markets. Thorough examination of automobile industry trends reveals several areas of interest that appear to be key components of a strategy that will help GM maintain its position as a global leader in the automobile industry. The Chinese automobile industry is growing. GM China is committed to meeting Chinese consumer demand regardless of the cost. In June 2012, Shanghai GM broke ground on a 1 billion dollar production facility in Wuhan, Hubei Province.
Scheduled to be completed in 2014, this 300,000 unit capacity site will become the fourth production facility in mainland China. This new facility is expected to make small and medium cars, SUVs and energy vehicles. It seems obvious that GM believes the Chinese market explosion is only in its infancy. Despite setting several records for annual car sales in 2011, the outlook for 2012 and beyond is tempered. Due to concerns about pollution and traffic, the government is limiting new vehicle registrations in China’s largest cities.
Moreover, government subsidies and tax breaks for car purchases were eliminated due to automobile saturation concerns. If the growing demand in China has reached its apex, GM needs to adjust their sales focus and production volume strategies. Based on historical trends of other car producing nations who encountered similar GDP per capita increases, the saturation of car purchases will not occur until production reaches 50 million cars in 2030. (Figure 1) This means that automakers need to seek out new customers to continue selling cars at a record pace.
If we separate China’s cities into groups defined by the relative value of GDP increase, the data shows that the GDP of China’s smaller cities is growing much faster than GDP in its larger cities (Figure 2) As smaller cities catch up to the GDP growth of larger cities, GM China needs to target these areas for dealer and service network expansions. Customers in these less urban areas are expected to be first time buyers looking for cars in the medium or low end of the price spectrum. Fortunately, SAIC GM Wuling established the Baojun brand in 2010 as alternative to medium priced Buick or Chevrolet cars.
The joint venture sells trucks and vans under the Wuling and cars under the Baojun brand, focusing on the low market segment with sales of 1. 29 million units in 2011. The Baojun brand was established to compete with domestic Chinese brands Chery, Geely and BYD. In an effort to protect their profits, each domestic brand competitor is doubling production by 2015. They understand that they cannot currently compete with larger manufacturers to take advantage of scale economies. Therefore, GM China must ensure that they make lower tier cities a priority market, starting with the Baojun and Wuling brands.
In addition to competing with low cost domestic manufacturers, GM China must continue to differentiate its product in the medium and luxury market segments. As a result of hyper competition, the average car price across all segments has decreased each year since 2002. This causes the firm to continually launch new models to combat diminishing returns. The firm should consider larger provinces as the market for differentiation as their focus because these markets represent 75% of premium car sales. One option is to upgrade OnStar vehicle services to be incorporated with an industry leader in consumer electronic, such as Apple Inc.
Industry insiders believe the company may be seeking a joint venture similar to the Ford-Microsoft voice controlled information and entertainment system, SYNC. SYNC is currently free for the first three years in Ford Chinese models. In 2012, GM unveiled the future of Onstar that includes dashboard with app-like capabilities and voice commands. Its incorporation into models currently in production has not been determined, yet partnering with Apple could provide additions that will have a short term market impact while future designs are in preparation.
GM can also use its R&D center, PATAC, to further design cars specifically for the Chinese consumer. This resource has already been very useful in launching new GM vehicles in China such as, the best-selling car in China, the Buick Excelle. If GM China can meet Chinese demand in the low market segment, it may be able to use expansion in this sector of production to improve their positioning in markets such as India. GM understands that India will be the world’s third largest automobile market in the next 10 years. Currently, Wuling is already exported under the Chevrolet Brand in North Africa, South and Central America.
The Chevrolet brand also has a presence in India with small cars and Baojun brands since 2009. Currently GM India has two plants in Maharastra and Gujarat, the country’s largest car sales provinces. GM India also has an R&D Center in Banglore. However, the company needs to increase its infrastructure in India. Based on GDP per capita analysis, the similar automobile production explosion seen in China will not occur in India in the short term. GM needs to incorporate India into its global value chain, just as it did in China. GM China has R&D, sourcing, manufacturing, sales, marketing and service available in the Chinese market.
Currently, GM India has only R&D, manufacturing and sourcing. Dealer networks, marketing, and service centers are in their early stages of development. GM has not invested heavily in activities downstream because India’s passenger vehicle market is dominated by low market demand and competitors already have large market shares. Seven of the top 10 selling cars in India cost less than 400,000 rupees, approximately 7500 dollars. Increasing Indian production to sell low cost Wuling vehicles under the Chevrolet and Baojun brands should be the first step to resource allocation in India.
This will allow GM India to enter the market with price competitive cars. Using the R&D center to establish the desires of Indian customers, existing models should be tweaked for the market. Indian consumers are extremely price sensitive, therefore these models should be as highly fuel efficient as possible. Ideally, models should have the flexibility to run on multiple fuels types like gas, diesel, and liquefied petroleum gas (LPG). Flexibility could be the differentiating factor relative to rivals already positioned in India. Over time, GM should bring mid and high segment models including SUV’s which are trending upward in India.
Models like the Mahindra Bolero, 12,500 US Dollars, is the in the top ten selling cars in India. Moreover, Maruti-Suzuki has two top selling midsize models both costing over 10,000 US Dollars. GM may be able to use price competition in this segment as middle class Indians incomes continue to grow. Current GM sells more than 50% of its vehicles outside of the United States. It seems that the company should definitely focus on customer segments in emerging markets like rural China and India, instead of shrinking markets like the United States and Europe.
The company has successfully gained competitive advantage in China and can keep their advantage by increasing diversity with their luxury brands and extending their sales and marketing networks into new territories in China. Through low cost vehicles, the company can focus on Chinese buyers who tend to buy cheaper domestic cars. By focusing on the rural Chinese market, GM may have an opportunity to use similar models as it positions itself in India’s growing market. The future of growth is promising for GM markets across the globe, and the utilization of the success the company gained in China should be a blueprint for future global strategy.
References 1) Auto Trends in China - Synergistics Research Corporation 2011 Gerson Lehrman Group Conference Call – Bill Russo 2) Emergence of the Chinese Automobile Sector – Reserve Bank of Australia Bulletin 2011 M. Baker, M, Hyvonen 3) Vehicle Ownership and Income Growth, Worldwide: 1960-2030 NYU Economic Dept. , 2007. Dargay, J. , Gately, D, Sommer, M 4) Shanghai General Motors: The Rise of a Late Comer. Asia Case Research Center, 2005 Tao, Z 5) Revving the growth engine: India’s automotive Industry is on a Fast Track. Booz and Co. , 2009. Seghal, V. , Ericksen, M. , Sachan, S. Figure 1
This figure is an example of the cumulative distribution function that best estimates the relationship between GDP per capita and car market saturation. Each market doesn’t start a zero production, but does follow the exponential trend until saturation is reached. Here the saturation points are the same value but in reality saturation for each country will occur at different values. This is meant to portray that as China approaches 10,000 GDP per capita, we should expect continued growth. India is years away from reaching 10,000 GDP per capita which is why their ascension into market saturation will take longer compared to other nations.
Figure 2 | Average Car Sales Growth 2005-2010| Tier 1| 15. 60%| Tier 2| 23. 90%| Tier 3| 29. 8| Tier 4| 35. 9| First-Tier Cities Four municipalities: Beijing, Chongqing, Shanghai, Tianjin Cities with total retail sales of more than RMB 30bn, annual per capita income of RMB 11,000 and high per capita retail sales as proportion of income: 10 provincial capitals: Changchun (Jilin), Chengdu (Sichuan), Guangzhou (Guangdong), Hangzhou (Zhejiang), Harbin (Heilongjiang), Jinan (Shandong) Nanjing, (Jiangsu), Shenyang (Liaoning), Wuhan (Hubei), Xi’an (Shaanxi) Second-Tier Cities
17 provincial capitals: Changsha (Hunan), Fuzhou (Fujian), Guiyang (Guizhou), Haikou (Hainan), Hefei (Anhui), Hohhot (Inner Mongolia), Kunming (Yunnan), Lanzhou (Gansu), Lhasa (Tibet), Nanchang (Jiangxi), Nanning (Guangxi), Shijiazhuang (Hebei), Taiyuan (Shanxi), Urumqi (Xinjiang), Xining (Qinghai), Yinchuan (Ningxia), Zhengzhou (Henan) 50 prefecture-level cities, including, Ningbo, Suzhou, Wuxi, Wenzhou, Nantong, Dongguan, Zhanjiang 15 more cities with populations of between 500,000 and 2mn Third-Tier Cities Approximately 200 county-level cities Fourth-Tier Cities Approximately 400 capitals of county towns