The Shanghai Auto Show opened last Friday. It's one of China's biggest – and given the size of China's auto market, that means it's now one of the world's major-league shows, on par with the big annual shindigs in places like Detroit and Geneva.
All of the automakers doing business in China – which includes most of the world's big names – have a major presence in Shanghai this week. China market leader General Motors (NYSE:GM) is no exception. The General is showing over 50 different models in Shanghai, including an all-new Buick Riviera concept car that got considerable attention over the weekend – and the Cadillac Escalade ESV shown above, which is coming to China this year.
But the real news at these auto shows often comes from the auto company executives who attend. That was true of GM this past weekend, as executives gave more details about GM's upcoming plans to expand in China.
A big push in the works for Cadillac in China
Much of the news has to do with GM's plans for Cadillac. Cadillac hasn't gotten much traction in China yet, but GM is working hard to change that.
GM China chief Bob Socia said that the brand will introduce one new locally made model every year between now and 2016, eventually rolling out its complete global lineup to affluent Chinese consumers. GM also plans to build four new factories in China over the next three years, Socia said.
That's significant, because GM's challenge in China is this: The company has the largest market share of any automaker, but some rivals, particularly second-place Volkswagen (OTC:VWAGY), make a lot more money in the country.
That irks GM CEO Dan Akerson, who would very much like GM's profits (in China and elsewhere) to be in VW's league. GM sold more vehicles around the world than VW last year, but VW made almost twice as much money before taxes. Even (much smaller) Ford (NYSE:F) had bigger profits than GM in 2012. How did that happen?
The answer has a lot to do with the mix of products sold by both, in China and elsewhere. About half of GM's total sales in China come from Wulings, inexpensive commercial vans produced by a joint venture in which GM has about a one-third stake. They're popular products; it's a good business.
But the profit margins on the little vans are thin – and GM only gets about a third of them (though it has the right to count all of Wuling's sales as its own). So while GM's sales numbers may be big, its profits have been modest.
Meanwhile, VW has a bigger share of the retail new-car market than GM, and it has a much bigger share of the most profitable part of that market: luxury cars. VW's Audi brand is the ride of choice of China's elite, especially in big cities. Audi had almost 30% of China's luxury-car market last year. Its longtime German rivals, BMW (OTC:BAMXF) and Mercedes-Benz were not far behind.
Akerson would dearly love a bigger slice of that pie. That's a big part of why GM is gearing up for a big push with Cadillac.
Not just new models, but an expansion into new territory
GM's strategy for Cadillac in China doesn't just rely on new models, though that's significant. The company's local joint venture, Shanghai GM, is planning to open a slew of new Cadillac dealerships – many outside of the biggest Chinese cities that have so far driven the country's luxury-car market.
Shanghai GM's Cadillac chief, Kevin Chen, told Bloomberg that while the market for luxury cars in China's biggest cities is substantial, it's also getting saturated. He sees an opportunity for Cadillac to find sales growth in smaller cities, where affluent consumers' tastes haven't yet jelled around the German brands.
GM sold just 30,000 Cadillacs in China last year, way behind the 400,000-plus sold by Audi. The company won't close that gap right away. But it does expect to get to 100,000 annual sales by 2015, and aims to have 10% of the market in time.
GM will need strong products and careful marketing to get there. It has already started the marketing push, with help from actor Brad Pitt. But if the company succeeds, its profits in China should improve significantly by mid-decade.