General Motors (NYSE:GM) said on Tuesday that it had won approval to build a big new factory in China – one that will build Cadillacs.
The new factory, one of several that GM and its Chinese joint-venture partners plan to build in China in coming years, will be located near Shanghai, and will have the ability to build 150,000 vehicles a year.
The factory and its tooling is expected to cost $1.3 billion, part of the $11 billion that GM has said it plans to invest in China between now and the end of 2016.
Those investments have drawn some criticism. For those concerned that GM is spending too much of its money overseas, there are some big things you need to know about this new factory.
This factory won't cost Americans a dime
This news comes as GM is taking some heat for its massive investments in China, heat that is motivated by partisan resentment lingering from GM's taxpayer-funded 2009 bailout.
A lot of that resentment is understandable. But in this case, it's important to make some things clear, starting with this: This factory won't cost Americans a dime.
It's not being paid for out of GM's U.S. earnings, and it's definitely not being paid for out of money that was provided by the U.S. government to bail out GM in 2009.
As with all of GM's Chinese investments, the new factory will be funded out of revenue from GM's Chinese joint ventures. In this case, it's Shanghai GM – a joint venture between GM and Chinese auto giant SAIC – that will be making the investment.
Shanghai GM has been a huge success for General Motors, accounting for about half of its sales in China – and sending hundreds of millions of dollars' worth of profits home to the U.S. every quarter. Profits from Shanghai GM and the General's other joint ventures in China totaled $550 million in the first quarter of 2013.
GM's profits in China would be even bigger, but the company and its partners are investing heavily in new factories and other infrastructure. Nearly all observers expect auto sales in China to grow significantly in coming years, and GM – which is the top-selling automaker in China right now – is determined to get as much of that business as it can.
Part of a big global push for the Cadillac brand
GM didn't say exactly what this new factory will build, but they did say that it would build Cadillacs. Right now, Cadillac has only a small presence in China, where Volkswagen's (NASDAQOTH:VWAGY) Audi brand is the undisputed luxury leader.
Audi had about 29% of the Chinese luxury-car market last year. Together with German archrivals BMW (NASDAQOTH:BAMXF) and Mercedes-Benz (NASDAQOTH:DDAIF), German brands account for about three-quarters of China's luxury-vehicle sales.
Luxury-car sales are very profitable for large automakers. Audi earns about half of VW's total global profits. Cadillac's share of GM's is much smaller, but CEO Dan Akerson is determined to increase that.
Akerson has launched a multi-year push to improve Cadillac's cars and image to the point where it is competitive with the German luxury brands all over the world. Part of that plan involves China: Akerson wants to triple Cadillac's sales in China by 2015, to 100,000 vehicles a year, and aims to capture 10% of China's luxury-car market by 2020.
That's where this new factory comes in. Imported cars are hit with steep taxes in China, so being competitive means building locally. GM already builds some Cadillacs in China, including its best-selling SRX crossover and the big XTS sedan, shown above, which was just launched in China earlier this year.
I expect that this new factory will be configured to build GM's rear-wheel-drive Cadillacs, the compact ATS sedan and the upcoming new mid-sized CTS sedan. GM has also hinted at a big "flagship" Cadillac sedan that would rival the Germans' top of the line models; if that car goes into production, it could be built in this new factory as well.
Those Chinese Cadillacs are unlikely to be sold here
One more thing to be clear about: While it's possible that some of the Cadillacs produced in China will be exported, it's very unlikely that they would ever be sent to the U.S. GM currently builds the ATS and CTS at a very modern factory in Lansing, Michigan. Those are the cars sold to Americans, and that's unlikely to change any time soon.