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GM's China bonanza

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TOM WALSH: GM's China bonanza
In 2003, GM and its Chinese partners made $2267 per car sold in China. In North America, GM made about $145 per vehicle.
March 30, 2004


China is no longer merely a market of great potential.

It's now the real McCoy, where global companies with the right partners and strategies can and do reap huge profits.

The proof is on page 37 of General Motors Corp.'s 2003 report to the federal government called a 10-K under the heading "Investment in Nonconsolidated Affiliates." Right there, for the first time ever, GM publicly revealed how much profit it is raking in from its vehicle-making ventures in China.

The number was a big one: $437 million last year. And that's only half of the profit from GM's four joint-venture plants in China, which sold 386,710 vehicles. The other half of the profits went to the Detroit automaker's Chinese partners.

For some perspective, look at the numbers this way:

Figure that GM and its Chinese partners had a combined net profit of nearly $875 million, or about $2,267 per vehicle sold in China.

In North America, GM's net profit last year was only $811 million on sales of 5.6 million cars and trucks in the United States, Canada and Mexico, or about $145 per vehicle.
That means GM China was nearly 15 times more profitable, per vehicle sold, than GM North America.

"GM is making money hand over fist in China, selling cars as fast as they can make them, at very attractive prices," says Kenneth Lieberthal, a University of Michigan professor and China expert who was senior director for Asian affairs on the National Security Council under President Bill Clinton.

"All of the other car markets of the world are either mature or they're poor. The only market growing like six-guns is China," says Lieberthal. China is the world's third-largest auto market with sales of 4.5 million cars and trucks last year, up from 3.4 million in 2003. And China's market is still in its infancy, with less than 5 percent of the population able to afford even a tiny car. GM Chairman and CEO Rick Wagoner has predicted China will overtake Japan as the world's second-largest car market within five years.

Look further into the future, say three or four decades, and the world's three dominant economies -- of roughly equal size -- may well be China, India and the United States. "And nobody else will matter much by comparison, due to demographic trends," Lieberthal says, noting that population growth has virtually stopped in Japan and western Europe.

That scenario depends on both the Chinese and Indian economies growing 7 percent or more per year for a couple decades, which Lieberthal concedes is "a big if, a 10-foot-tall if." China and India are by far the world's most populous nations, with 1.3 billion and 1 billion people, respectively.

"The world is changing rapidly," Lieberthal says, "but this need not disadvantage the USA."

New partnerships
In other words, U.S. companies and the U.S. government must position themselves as partners in the growth of China and India.

GM did that in China during the 1990s, linking with a strong partner, Shanghai Automotive Industries Corp. (SAIC), to build Buick Regals and other vehicles. GM also linked with Jinbei, another Chinese firm, to build SUVs, but that venture has struggled.

The GM-SAIC ventures have turned handsome profits the past two years because China's gung ho economy has produced a crop of newly wealthy entrepreneurs and professionals at a time when China's domestic auto market is still heavily protected by tariffs, or import taxes.

Until now, importers of cars and trucks have had to pay stiff taxes that virtually double the purchase price of vehicle imports. The tariff is 80 percent on cars with 3.0-liter displacement or less, 100 percent on vehicles with larger, more powerful engines.

Under terms of China's 2001 entry into the World Trade Organization, China must lower vehicle tariffs to 25 percent by 2006.

Meanwhile, established automakers in China enjoy the sweet confluence of surging demand for cars and heavy tariffs that discourage competition from imports. Even though capacity is rising in China -- Toyota, Mercedes-Benz, Ford Motor Co. and Nissan announced plans last year to expand there -- the established market leaders still enjoy the power to price products at very profitable levels.

GM, for example, is selling Buick Regal models in China for more than $40,000 that are less powerful than a 3.8-liter, 4-door Regal sedan that costs about $24,000 in the United States.

"It's a market where everyone can win, at least for awhile," Lieberthal says.

Relationship problems
The success of GM and others in the early growth spurt of China's auto market doesn't mean that everything in the U.S.-China economic relationship is rosy. Piracy of technology and other intellectual property is a nagging problem with China, and there are concerns that China may be dragging its feet in meeting WTO commitments to lower trade barriers to imports.

China has also become something of a whipping boy in the U.S. debate about job loss to nations with super-low wages. That's a somewhat misguided conclusion, springing from the recent growth of China's trade surplus with the United States to $124 billion last year.

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