GM’s business in China is hurting, and not just because of Covid

general motors It is losing ground in China, its largest sales market in more than a decade and one of the two main profit drivers for the Detroit automaker.

The company’s market share in the country, including its joint ventures, has fallen from about 15% in 2015 to 9.8% last year – the first time it has fallen below 10% since 2004. Its profit from operations has also fallen by about 70%. since peaking in 2014.

The coronavirus pandemic, which originated in China, is partly to blame. However, the declines began years before the global health crisis, and they are becoming increasingly complex amid rising economic and political tensions between the United States and China.

There is also growing competition from government-backed domestic automakers fueled by nationalism and a generational shift in consumers’ perceptions of the auto and electric vehicle industry.

Take Will Sundin, the 34-year-old science teacher who told CNBC he never envisioned buying a Chinese-branded car when he moved to country in 2011. Recently, Sundin bought a Nio ET7 electric car as a daily driver in Changsha, the capital of China’s Hunan Province.

“I wanted something big and comfy, but I also wanted something a bit fast,” he said. “I like the way it looks.”

Sundin, who works as a car reviewer on YouTube, knows the Chinese auto industry very well. He bought his Nio models from competing Chinese automakers XpengAnd Lee Otto and IM Motors. The car’s ability to replace the battery with a new one, rather than recharge, “makes it age very quickly,” he said.

Not on his consideration list? American brands such as General Motors’ Cadillac and Buick, which initially led the growth of China’s auto industry.

“Cadillac has a good image in China, but it’s very expensive,” said Sundin, who owned a 2012 Ford Focus. “I think the problem they have is they have competition, new competition, a lot of new competition, from different directions that they didn’t anticipate.”

That competition has become an increasing problem for GM, which has acknowledged such problems with its China business. However, the company hasn’t offered much assurance on how to reverse the trend other than promising new electric cars and a new business unit called The Durant Guild that will import expensive cars at high profit margins from the US into China.

While many American brands are not doing well in China, General Motors’ decline is particularly noticeable. GM’s operations in the country are much larger than those of its crosstown rival ford motor, For example. It also has a much smaller footprint globally after shedding its European operations and closing operations elsewhere to focus largely on North America, China and, to a lesser extent, South America.

Excessive reliance on a few markets can be risky. But it led to record profits for General Motors, as the company under CEO Mary Barra shed underperforming operations. Electric vehicles may be a new opportunity for General Motors to grow globally, but experts say it will be an uphill battle compared to China’s recovery in the coming years.

“With the changes they’ve made, with the refocus on North America and China, pulling out of Europe, basically, creates a very risky scenario now that you have some multiple issues and issues going on in the Chinese market,” said Jeff Schuster, executive vice president of LMC Automotive. , a GlobalData company.

GM has downplayed the role of its China operations in recent quarters, including CFO Paul Jacobson who said China is “not critical” to GM’s financial performance when he discussed earnings in October.

China is an important part of GM’s business, Barra said in December, but the company is also paying attention to other issues, which included the government’s now-defunct “zero Covid” policy and recent protests.

“We still see opportunity there… We’re obviously watching the geopolitical situation. We can’t operate in a vacuum,” she said during the Mechanism Press Association meeting. “But we still see the opportunity there and we will continue to assess the situation, but our plans are to be in a leadership position in electric vehicles.”

A bright spot for GM in China was the Wuling Hongguang Mini, made by a joint venture, which is the best-selling electric vehicle on the market. Since it went on sale in mid-2020, the economy car has sold more than 1 million units.

However, Jacobson said earlier this year that China’s handling of the coronavirus pandemic and rising Covid cases represented a roughly 40% drop in equity income for operations in 2022.

GM reports its earnings from China as equity income because the country mandates joint ventures for non-Chinese automakers — other than Tesla, which has been granted an exemption. GM has 10 joint ventures, 2 wholly owned foreign companies and more than 58,000 employees in China. Its brands include Cadillac, Buick, Chevrolet, Wuling, and Baojun.

“We’re seeing a lot of Covid cases in China right now that’s slowing down the consumer. So we expect there to be a little bit of a slow backlog but hopefully it will get back to the levels we are used to over time,” he told reporters on January 3rd. 31 during an earnings call.

But it’s not just about the pandemic. Equity income from GM’s Chinese operations and joint ventures has fallen 67% since its peak of more than $2 billion in 2014 and 2015. That includes a decline of nearly 45% from then to 2019 — before the coronavirus crippled China’s economy and production. the cars. In 2022, GM’s China operations generated equity income of $677 million for GM.

“This is not Covid. This started long before Covid,” says Michael Dunn, CEO of ZoZo Go, a consulting firm focused on China, electrification and self-driving vehicles. It also coincides with escalating tensions between the United States and China. There is no doubt, and it is impossible to measure, but it is certainly a factor.”

The decline of GM and other non-domestic automakers comes along with slowing market growth in China, said Dunn, GM’s Indonesia chief of operations from 2013 to 2015, and Chinese automakers are becoming more competitive and shifting to fully electric vehicles. – which has been greatly supported by government agencies.

“They’ve all really taken it on the chin in the past five years as mid-market brands. Chinese consumers are increasingly buying Chinese brands,” he said. “This is a seismic shift…the mentality has changed.”

Start-ups and local automakers have helped Beijing achieve its goal of boosting the penetration of new energy vehicles — a category that includes electric vehicles. More than a quarter of passenger cars sold in China last year were new energy vehicles, according to the China Passenger Car Association, which expects penetration to reach 36% this year.

Local companies rushed to grab a piece of this growth in the auto market, which was generally declining. startup like New Help promote the idea of ​​electric cars as part of an aspirational lifestyle and status symbol in China. The increasing quality of home-made electric vehicles has helped underpin – and capitalize on – growing national pride among consumers in China.

Chinese brands have grown market share by 21% since 2015 to nearly half of all passenger cars sold in China last year, according to the China Association of Automobile Manufacturers. For comparison, US brand sales in the US over that period were about 45%.

“Obviously, the market was in a different place; a lot of it is driven by politics,” Schuster said.

LMC Automotive reports that Chinese companies accounted for half of the top 10 automakers in sales in the country last year, up from just three in 2015. The most notable is BYD Autoan electric automaker that has jumped from sales of nearly 445,000 units since then to nearly 2 million last year, making it one of the top five automakers by sales in China.

“I think the number one reason for GM’s decline is this tendency toward Chinese nationalism,” Dunn said. “This takes the form of China having declared that it wants to be the global dominant in electric vehicles and that it is doing all it can to develop national champions like BYD.”

In addition to General Motors, other American automakers are descendants of Ford and Chrysler stellants – She wasn’t much better. Both suffered significant sales declines. However, neither of them reported any plans to exit the market.

In February, Ford named Sam Wu, a former Whirlpool executive who joined the automaker in October, as president and CEO of its China operations, effective March 1.

Ford’s market share in China has been about 2% since 2019, down from 4.8% in 2015 and 2016, according to the company’s annual filings.

Ford’s problems in China are not just abroad. The company said in February that it would collaborate with Chinese supplier CATL on a new $3.5 billion battery plant for electric vehicles in Michigan. The deal has drawn criticism from some Republicans, including the senator. Marco Rubio of Florida, who asked the Biden administration to review Ford’s deal to license technology from CATL.

The joint venture between Stellantis and the Guangzhou Automobile Group to produce jeeps in China filed for bankruptcy in late 2022 after the decision to dissolve the partnership and import SUVs into the country.

Stellantis CEO Carlos Tavares said the company is taking an “asset-light” approach in the country, focusing on increasing profits and not necessarily sales, which are down 7% in 2022.

“It’s also important to realize that our financial conditions in China are improving dramatically,” he told reporters during a call last month, adding that the company is “cleaning up.”

While America-focused automakers regroup, domestic automakers in China continue to make gains in their home market.

“People in China are proud,” said Nio owner Sundin.

“The same way ‘American Made’ is in the US and all the patriotism behind it, in China, [it’s] Same thing: “Finally, we can make a phone or we can make a car as good or better than foreign automakers.”

CNBC channel Evelyn Cheng Contribute to this report.