Please ensure Javascript is enabled for purposes of website accessibility

Why China Won't Save This GM Brand

By John Rosevear - Apr 22, 2013 at 6:31PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

GM's German subsidiary Opel desperately needs a sales boost. So why isn't it exporting more of its well-regarded cars to China's fast-growing auto market?

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 (GM 0.81%) 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 (VWAGY 0.72%) 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 (F 0.55%) 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 (TM 0.26%). 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Motors Company Stock Quote
General Motors Company
GM
$36.12 (0.81%) $0.29
Ford Motor Company Stock Quote
Ford Motor Company
F
$12.85 (0.55%) $0.07
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
TM
$155.89 (0.26%) $0.41
Volkswagen Aktiengesellschaft Stock Quote
Volkswagen Aktiengesellschaft
VWAGY
$19.70 (0.72%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
327%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.