GM Plans Shift to Small Cars for the Emerging World

GM Plans Shift to Small Cars for the Emerging World

Keith Bradsher for The New York Times

At the Beijing auto show, visitors examined an engine next to a Buick Lacrosse sedan. G.M. in China has had success in selling small cars.

By KEITH BRADSHER

NYT, Published: November 20, 2006

BEIJING, Nov. 19 — General Motors plans a shift toward building and selling more small cars after concluding that most of the growth will come in emerging markets where subcompacts and even smaller cars are most in demand, G.M. executives said this weekend at the Beijing auto show.

China’s vehicle market alone will surpass the United States market in a decade, while other Asian markets, notably India, are growing rapidly, mainly in very small, inexpensive cars, said Nick Reilly, the G.M. group vice president who is president of the company’s Asia Pacific operations.

G.M. has traditionally not been very strong at the bottom of the market, Mr. Reilly conceded, but added that, “We think we’ll have to change the strategy.”

G.M.’s shift will pull down the average price for the cars it sells, Mr. Reilly said. Nonetheless, he said, “We’re laying a plan to compete better at the bottom end.”

Kevin E. Wale, the president of G.M. China, said that while G.M. had paid attention to emerging markets for years, the company had new confidence in its ability to sell very-low-cost cars at a profit. He attributed this confidence to the success of G.M.’s Wuling joint venture in China, which has grown sixfold in sales since G.M. bought a 34 percent stake five years ago and has become the biggest maker in China’s large and fast-growing market for barebones minivans and pickup trucks costing less than $6,000.

“Our experience with Wuling has demonstrated to us we do know how to manage low-cost manufacturing,” Mr. Wale said in a separate interview.

But G.M. faces serious challenges in trying to compete at the lower end of the car market — and particularly in trying to do so profitably. Chinese makers like Geely and Chery and Indian manufacturers like Maruti are strongest in producing no-frills cars and light trucks.

G.M.’s rival, Ford Motor, is pursuing the subcompact market in Asia but has no plans to enter the market for even smaller cars. “It has not been an area of focus for us at this time,” said John G. Parker, Ford’s group vice president for Asia-Pacific and Africa.

But he added, “India is a tough market” for a manufacturer not selling very low-end cars.

Wim van Acker, a managing partner at Roland Berger Strategy Consultants, said that the strength of G.M.’s brands would allow it to charge a premium while competing with low-cost producers in the developing world. Very small cars are a price-sensitive market that does not tolerate large markups, he cautioned.

Unlike G.M. or Ford, Chinese and Indian makers do not have the cost of sustaining large headquarters and engineering operations in a high-cost country like the United States. But G.M. is trying to minimize the number of expatriates it uses here: Raymond Bierzynski, the president of the G.M. joint venture engineering center on the outskirts of Shanghai, said that only 36 of the center’s 1,221 employees are from outside China.

The center has doubled employment in three years, Mr. Bierzynski said, and Mr. Reilly said that G.M. would continue adding 200 to 300 employees a year. Mr. Reilly said that G.M. had found it was significantly less expensive to do engineering work in China than in the United States and Europe, and that the company would be looking for ways to shift more tasks to China — although the Shanghai engineering center is already fully booked with projects for the China market.

Toyota, Honda and Nissan are all strong in producing small cars, having competed in this segment in Japan, where fuel prices are high and gas mileage has long been a more important selling point than in the United States. All three of Japan’s main automakers are expanding rapidly in China, which is likely to increase the pressure on G.M.

Mr. Reilly presented G.M.’s emphasis on small cars as very much a project for developing countries; some designs would come from Daewoo in South Korea, in which G.M. acquired a controlling stake in 2002.

In the United States, the small car market has been hurt by the widespread availability of off-lease or low-mileage midsize cars, vans and sport utility vehicles, which offer more interior room at similar cost, though worse gas mileage. Few used cars, especially reliable ones, are available in fast-growing markets in developing countries.

Through two joint ventures with local partners, G.M. has become the second-largest automaker in China, with 11 percent of the market, trailing Volkswagen at 16 percent.

G.M. has been unexpectedly successful at the bottom of the Chinese market through its 34 percent stake in Wuling, a maker of inexpensive models like the Sunshine minivan, which sells for $5,000 and gets 43 miles to the gallon. With modest investments from G.M., considerable technical assistance and the transfer of a small car model from G.M.’s Daewoo operations in South Korea, Wuling has seen its sales more than double in the last two years and it has emerged as the biggest maker of bottom-end vehicles in China, with a quarter of the market.

G.M. executives from all over the world have been traveling to Wuling’s headquarters in Liuzhou, an obscure city in southernmost China, to learn the secrets of its low-cost production. The biggest answer seems to lie in Wuling’s ability to minimize the investment cost of everything from buildings to tooling to engineering to automation, Mr. Wale, the president of G.M. China, said.

“If they have to do some mechanization,” he said, “they find the very cheapest way.”