Automaker Gaining Speed in China

It appears that General Motors' (NYSE: GM) foray into China is beginning to show signs of positive results. The world's leading automaker reported record results for the first half of the year. GM sold 259,653 vehicles in China in the first six months, an increase of 57.6% from the first half of last year.

Although vehicle sales in China are beginning to show signs of a slowdown, it remains the world's fastest-growing vehicle market and, therefore, remains vital to the success of GM. And let's not forget, slowdown is merely a relative term. Should GM really be concerned with the fact that passenger car sales were up by only 37.9% for the first five months compared with the 75% increase for 2003?

As Seth Jayson pointed out, U.S. automakers crave market share, and it's not limited to American borders. U.S. manufacturers strive to be the top sellers in every market in which they compete. GM's business strategy in China is no exception. Despite impressive sales through the first four months of the year, in mid-May, GM decided to slash prices on two of its core models by up to 11%. GM got exactly the results it was looking for.

Spurred by the reduced costs, GM in June outsold longtime leader Volkswagen's Chinese unit for the first time. For the first five months of 2004, GM accounted for 11.7% of the Chinese auto market, compared with Volkswagen's 30% share. Despite the solid lead, Volkswagen will not sit idly by, and GM's price reductions are likely to spark a fierce price war with a plethora of cost-cutting maneuvers for the foreseeable future.

Typically, profit margins are one of the main drivers for companies to conduct business and, therefore, for investors to purchase shares in those companies. GM's profits, which are being sacrificed in favor of market share, may be a concern for investors. However, I think this is one case where market share may be more important -- for the near future, anyway.

GM is the No. 1 automaker in the world and is in the very early stages of gaining access into what could be the largest automobile market in the world. Also, GM's lone strategy is not to simply lower vehicle pricing. GM will also continue to offer new models to the Chinese public in an effort to maintain the broadest portfolio of vehicles in China. Additionally, the company has made investments, which will exceed $3 billion over the next three years, in an effort to improve and grow its business in China.

Each of these factors points to a successful future in the region. Give GM a chance to get developed in the market, and the earnings should follow.

What do you think of GM's efforts in China? Give your opinion on the Fool's General Motors discussion board.

Fool contributor Mike Cianciolo doesn't own shares in General Motors.