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Why China Won't Save This GM Brand

The Opel Insignia Sports Tourer is one of three new Opels set to go on sale in China this year. Photo credit: General Motors

General Motors (NYSE: GM  ) has a huge presence in China. GM leads China's overall auto market in market share, and its Buicks and Chevys – and Wuling commercial vans – are common sights on many Chinese city streets.

GM isn't resting on its laurels, though, not with global archrival Volkswagen (NASDAQOTH: VLKAY  ) close behind. GM is already planning several new factories in China, including a billion-dollar mega-plant in the giant central city of Chongqing – the "Chicago of China", where Ford (NYSE: F  ) already has a huge presence – that will build 400,000 vehicles a year.

GM is also planning a big push in China for its Cadillac luxury brand, part of a global effort to close the company's profitability gap with VW and Toyota (NYSE: TM  ) . And the company is planning to bring more of its SUVs to the region, to capitalize on fast-growing demand.

But one part of GM, perhaps the part that needs to increase sales most urgently, is likely to have only a tiny role in GM's China growth story.

Why struggling Opel is mostly left out in China
GM's German subsidiary Opel isn't completely absent from China. In fact, Opel has three models on display at this week's Shanghai Auto Show that will go on sale in China this year, including the Insignia Sports Tourer wagon shown above.

The German firm desperately needs a sales boost. Sales in Europe have fallen sharply due to steep austerity-induced recessions in many European nations. Opel – which has a solid lineup of premium vehicles, and factories running well below capacity – would seem especially well-suited for a big push into China's fast-growing auto market.

But there's one problem with that strategy: While GM is committed to investing in Opel's future, outside of Europe, Opel has to compete with the rest of GM. Opel is just one part of GM's complex global footprint. It makes some nice cars, but they already show up in other parts of the world – under other GM brand names.

For instance, Opel also makes a premium compact car called the Astra. It's showing the coupe version in Shanghai this week. But Chinese consumers already know the Astra well: A version of it is one of China's best-selling cars – but it's built locally by the Shanghai GM joint venture and wears a Buick badge. (Here in the U.S., we know it as the Buick Verano.)

Likewise, the sedan version of that station wagon shown above, the Opel Insignia, is (with a few minor changes) also the car that we – and Chinese consumers – already know as the Buick Regal.

Put simply, Opel essentially has to compete with itself to get traction in China. But that's only the beginning of Opel's problems in the region.

Imports are at a big disadvantage in China
Why are companies like Ford and GM and Volkswagen pouring billions into new factories in China, when they have factories in other parts of the world (like Europe) running below capacity?

It's because China has steep tariffs on imported cars that add about 25% to the price. For any sort of mass-market vehicle, it's a much better bet to build locally – even if that means splitting profits with a Chinese joint-venture partner.

GM's primary joint venture in China, Shanghai GM, is a massive enterprise. Its partner is SAIC, a big established Chinese automaker that is closely connected to Shanghai's city government. SAIC has been a good partner for GM – both parties have made big bucks from the venture – and it's in GM's interest to continue to nurture that relationship.

Even if the price disadvantage could be worked around, it's not in GM's long-term interest to import Opels that would steal sales from Shanghai GM's Buick lineup.

So why is Opel there at all? Because German officials are (rightly) wary about GM's intentions for Opel, which is a major employer in the country, and GM needs to show them that it is doing something to help Opel sell more cars.

Long story short, Opel is stuck. While it might have success finding new markets in places like Russia, the reality is that the world's largest new-car market is not going to do much for the German firm. And that means that GM will have to work even harder to turn around its money-losing subsidiary.

Is it really time to buy GM stock?
Few companies lead to such strong feelings as General Motors. But ignoring emotions to make good investing decisions is hard. The Motley Fool's premium GM research service can help, by telling you the truth about GM's growth potential in coming years. (Hint: It's even bigger than you think. But it's not a sure thing, and we'll help you understand why.) It might help give you the courage to be greedy while others are still fearful, as well as a better understanding of the real risks facing General Motors. Just click here to get started now.

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