SHENYANG, China - Four years after General Motors beat out Ford Motor Co. for the right to make executive sedans in China, it's facing a far tougher go than it expected.
In return for assurances that it would have the segment to itself, the automaker and its local partner agreed to build an estimated $1.5 billion greenfield plant in Shanghai to produce three Buick sedans. But sales of Shanghai GM's lineup are being hammered by competition from Audi A6s and Honda Accords, newly approved by Chinese officials for local production.
Undeterred, GM last week began moving into two new segments: compact family sedans and sport-utilities.
On Friday, Dec. 15, the first Chevrolet Blazer rolled off the line at GM's joint venture with FAW-Jinbei Automotive Corp. in this gritty Manchurian city. Three days earlier, Shanghai General Motors Corp. rolled out its first Buick Sail, a compact sedan based on the Opel Corsa.
Combined, the two vehicles represent an additional investment by GM of more than $250 million in China, pushing its total investment here toward $2 billion.
Again, though, the automaker has bumped into stiff new competition. Between GM's two production debuts, Toyota Motor Corp. and its partners here rolled out a new competing compact sedan based on the Toyota Platz, known in the United States as the Echo.
The competing events sharply underscore the new dynamic of the China market: Carmakers no longer can expect to be awarded sole control over a potentially lucrative segment.
'The competition did a good job. They came to market faster than we expected, with good products,' said Phil Murtaugh, president of GM China. 'It's been really exciting seeing how fast the industry has adapted to consumer demand.'
The Sail is Shanghai GM's push into the so-called family car segment of compacts priced around 100,000 yuan, or about $12,050 at current exchange rates.
'With the economy developing, and people's lifestyles rising, it is important to bring cars to ordinary families,' said Shanghai GM President Chen Hong. He said the Sail is aimed at any family making $6,000 to $12,000 a year.
To be sure, incomes in China are rising, and many families here make that much and more a year. But, statistically, that income target is a stretch for China, where the average disposable income of urban dwellers is $705 a year and that of rural dwellers is $226.
But Yale Zhing, a Beijing-based associate with Automotive Resources Asia Ltd., a consulting company, says a large market has developed for entry-level cars.
'There is a potential customer group whose purchasing power has not been tapped,' he says. 'They've been waiting for the right product.'
Indeed, a survey of 10,000 urban families by the Association of Chinese Consumers found that 32 percent intend to buy a car within five years, according to a story in the Dec. 6 China Daily, a semiofficial organ of the central government. But about 20 percent of those surveyed currently own a car.
'The Sail owner is going to be an individual,' said Mark Lauer, vehicle sales manager for Shanghai GM. 'These are people buying their first car. They are definitely achievers, people looking to get ahead. They have their own house and are looking for the next purchase - a car.'
The Sail's 'growth rate should be quite fast. In one or two years, they can have their capacity fully used,' Zhing said.
Well, maybe. Shanghai GM predicts that sales of the Sail in 2001, based on about eight months of full production, will come to about 30,000. That could be about half of the plant's projected output of 60,000 units next year.
But others are eyeing the segment, too. Others entering, or rumored to be entering, the family-car segment include Toyota, Volkswagen, Hyundai's Kia unit, Ford and perhaps Fiat.
VW, the market leader in China, plans to begin making its Polo in China in 2002. Kia already is making about 7,000 to 9,000 Pride compact sedans in China. It has said it wants to raise output at its three-year-old joint venture in China, but market reaction to the car has been lukewarm.
Indeed, Jiansu Yancheng Yueda-Kia Motors Co. cut the price of its compact Pride sedan by nearly 10 percent the day before Shanghai GM rolled out its Sail, according to an article in the Shanghai Daily.
The Pride, with a 1.4-liter engine, now ranges in price from 74,000 yuan to 103,500 yuan, or between $8,916 and $12,470 at current exchange rates.
Ford is in talks with potential partners to build the Ikon, according to widespread rumors, while Fiat also hopes to bring its Palio to China.
In terms of features and pricing, the most direct competitor is the Citroen Fukang, known as the ZX in Europe. Although price cuts have brought the base, older-version Volkswagen Santana down to the requisite $12,000 level, that is a much more basic vehicle.
'We're introducing a product that's modern by every standard. It has ABS, dual airbags and side door beams standard,' unlike the competition currently in the segment, Shanghai GM's Lauer said.
'The others have good products, such as the Platz and Fukang. But all of the nonproduct features, such as the retail network and the adherence to retail standards, take longer to develop,' he said.
The Sail's main competitor, however, could well be the Toyota Platz-based car built in Tianjin, an industrial city east of Beijing, because of similar timing and volumes.
'Toyota is right on our heels,' GM China's Murtaugh acknowledges. 'VW probably is eight months to a year behind us. (The) Fiat Palio will be here within a year.'
Toyota is aiming for 'volumes pretty similar to Sail volumes,' said Automotive Resources Asia's Zhing. Volume production will begin in the first quarter of 2001, he said.
Before then, limited production will begin using kits from Japan. Michael Dunne, Automotive Resource Asia's president, said Tianjin 'copied Honda's approach. They pushed out the real production date as long as they could, so they can do easy KD kits.'
While the Sail, Platz, and others slug it out in the family-car segment, Jinbei GM's Chevy Blazer and S10 Crew Cab pickup will face more limited competition, in part because fewer makers see much growth in the sport-utility and medium pickup segments.
'The market in China for medium-sized pickups and SUVs is expected to more than double over the next 10 years,' from about 130,000 now, said Yang Bo, vice president of marketing and distribution at Jinbei GM. Of that, about 10 percent to 15 percent are pickups.
But Murtaugh says the segment in China is uncharted territory. 'So that's the risk,' he says.
Jinbei GM anticipates that the central government's official plans to develop China's backward western regions will lead to strong sales there of rugged vehicles such as the Blazer. But that demand probably won't kick in until 2002.
In 2001, Jinbei GM's output mostly will be sold in China's prosperous east coast provinces. By 2004, however, Yang predicted, about 60 percent of sales will be on the east coast and 40 percent in the west, 'with increased demand from younger users.'
Like the Sail, the Blazer will try to outclass its rivals. It boasts higher-quality features, such as galvanized steel throughout, that its less-expensive domestic competitors lack.
For now, the Blazer will compete mainly against imported, pricey Toyota Land Cruisers and Mitsubishi Pajeros, known as the Montero in the U.S. market.
The domestic competition includes a Mitsubishi Pajero built in Hunan province, in volumes of about 10,000 a year, and Beijing Jeep. Mitsubishi's Freeda, built in Fujian province by the Chinese unit of a Taiwanese carmaker, also competes in the sport-utility segment. Sales of the Freed, which was launched last January, have been a relatively successful 5,000 to 7,000 this year, Zhing said.
In addition, Beijing Jeep Corp. will inject $226 million into its operations next year to add the Grand Cherokee to a lineup currently dominated by an aging Cherokee and a stripped-down Chinese iteration known as the BJ2000.
Beyond that, it remains to be seen who else might crash the party.