Automotive Industry in ChinaGeneral Motors

Andrew Marx Andrew Johnston

ContentsIntro & Background

Entry into China

Competitive View

KSF’s & Industry Trends

Chinese Market Features - Impact on GM

Challenges

What we want you to Remember

Vision of General Motors

"GM’s vision is to be the world leader in transportation products and related services. We will earn our customers’ enthusiasm through continuous improvement driven by the integrity, teamwork, and innovationof GM people."

Company Introduction

• One of the world's largest automakers was founded in 1908. • Global headquarters in Detroit• 208,000 employees in 157 countries  and produces cars and trucks in 31

countries• GM Brands: Buick, Cadillac, Chevrolet, GMC, Daewoo, Holden,

Jiefang(FAW), Opel, Vauxhall and Wuling(SGMW). • Vehicles Manufactured Locally through Shanghai GM (JV with SAIC)• The Shanghai GM plant December 15 1998 (Buick first)• JV with SAIC and Wuling (microvans and 34 percent owned by GM)• In August 2009 JV with FAW to produce LDCV, and produces Jiefang• GM increased its sales in China by 68 percent to 230,048 vehicles in March

2010, outsold its U.S. sales of 188,546 by 22 percent. • GM Research and Technology Centre in Shanghai with SAIC, Green

innovation• The last emperor of China owned a Buick (Strong Brand Recognition)

ContentsIntro & Background

Entry into China

Competitive View

KSF’s & Industry Trends

Chinese Market Features - Impact on GM

Challenges

What we want you to Remember

Why JV as Entry Strategy?

• Required by Government

• GM Shanghai formed through JV with SAIC in 1997

• SAIC Motor Corp. Ltd. is the largest listed vehicle company in the Chinese A-share stock market.

• The main business SAIC include R&D, production and sales of vehicles (including passenger and

commercial vehicles) and components closely related with vehicle development (including power-

trains, chassis, electronics and electric parts)

• SAIC player in automotive finance business

• In 2009, SAIC Motor sold more than 2.72 million vehicles, continuing its leading position among major

automotive groups in China. GM sold 1 001 360.

• JV makes good business sense (Cultural divide, access to market, technology sharing and innovation)

• Very successful due to mutually beneficial relationship NB!

Recent Developments

• General Motors (GM) SAIC announced a joint powertrain development program. Small displacement (1.0-1.5-liter) engines and a matching dual-clutch automatic transmission

• Splitting development costs • Produce an engine/tranny combination that is 20 percent more

efficient • The new powerplants will be both direct injected and

turbocharged to create a 10 percent boost in fuel economy• Partnership builds on long history of innovation and collaboration • Small displacement gasoline engine family targets heart of market

ContentsIntro & Background

Entry into China

Competitive View

KSF’s & Industry Trends

Chinese Market Features - Impact on GM

Challenges

What we want you to Remember

Top 10 Competitors in China

Manufacturer Sales1. General Motors 1001360

2. Shanghai VW 876 180

3. Chery 605 260

4. BYD 601 500

5. Beijing Hyundai 541 430

6. FAW VW 526 660

7. Dongfeng Nissan 494 090

8. FAW Toyota 453 280

9. Geely 390 630

10. Guangqi Honda 379 450

17%

15%

10%

10%

9%9%

8%

8%

7% 6%

General MotorsShanghai VWCheryBYDBeijing HyundaiFAW VWDongfeng NissanFAW TOGeelyGuangoi Honda

Sales in ‘09 in China

In 2010 GM has sold 1,976,913 units, selling 200 000 units in the month of October alone

Market Information7%

6%4%

4%

4%

4%

4%3%

3%3%

57%

1. Shanghai GM 2. Shanghai VW 3. Chery 4. BYD 5. Beijing Hyundai 6. FAW VW 7. Dongfeng Nissan 8. FAW Toyota 9. Geely 10. Guangqi Honda Other 42

41%

27%

21%

6%

5%

Small CarsBasic' CarsMid-Size SedansMPV'sSUV's

Car Type model Mix

Market Share

2009 GM Owned 46% share of Small cars

Products in the Chinese Market

JV with FAW: Jiefang

The Jiefang brand from FAW-GM, GM’s light commercial vehicle joint venture, is showing its newest product

Strategic Differentiation

Suppliers

• Suppliers of Vital importance (Quality and Cost)• Relationships are key• Conflicting Interests• JV comes in handy (SAIC produces parts, and well

connected in industry)• Quality and low cost parts result in cheaper better cars• Proximity is key (lower distribution costs)• Reliable• Low bargaining Power

Research & Product

Design

Manufactu-ring of Parts

Assembling &

Operations

Supply chain

mangage-ment

Marketing & Sales

Customer Service

Dealer & Supplier relations Management

Human Resources Management

Administration & Infrustructure (Accounting) Function

Internal Value Chain AnalysisProfit m

argin

FutureFuture

Profit margin

Primary Activities

Secondary Activities

ContentsIntro & Background

Entry into China

Competitive View

KSF’s & Industry Trends

Chinese Market Features - Impact on GM

Challenges

What we want you to Remember

Key Success FactorsIndustry Success Factors Importance Rating GM’S Score Competitive

Advantage

Low Operating and Production Costs 8 8 MEDIUM

R&D 7 10 MEDIUM

Economies of Scale 10 7 MEDIUM

Guangxi - Employee relationships, satisfaction, retention, productivity

8 9 MEDIUM

Good Dealer Network 10 10 YES

Brand Recognition and Reputation 8 8 MEDIUM

Fuel efficiency 10 10 MEDIUM

Understanding Customer needs 10 10 YES

Broad Product Range 6 10 YES

Quality and Reliability 10 10 MEDIUM

Partnerships and JV’s 10 10 YES

Understanding of Local Culture 10 10 YES

Understanding regulatory and legal environment 10 10 YES

Global Reach and Experience 5 10 YES

Clear Focus and Strategy 10 10 YES

Reliable Suppliers 10 10 YES

GM Key Success FactorsJV

• Four popular models from GM’s Shanghai GM and SAIC-GM-Wuling joint ventures finished in the top three of their respective segments in the J.D. Power Asia Pacific 2010 China Initial Quality Study, which was published on October 29.Product Range

• The Chevrolet New Sail ranked second in the Premium Compact Segment.• The Chevrolet Spark ranked second in the Compact Segment.• The Wuling Sunshine ranked second in the Mini Van Segment.• The Buick LaCrosse ranked third in the Upper Premium Midsize Segment.

Strategy and Focus• “GM's performance demonstrates our capability to design and build best-

in-segment quality,” said Kevin Wale, President and Managing Director of the GM China Group. “This is part of our commitment to offer the highest level of value to our customers across China.”

Important Trends and Facts• Depleting Natural resources

• Increased environmental and alternative energy focus

• Strong competition on Innovation and quality (trying to outdo each other)

• “Copy and Improve”

• 2005 Market 10 million to grow to estimated 75 million in 2015

• Increased competition due to market size, everyone is going to want a bigger share

• Overall slow-down in vehicle sales

• Tax and subsidies for small vehicles to end resulting in sales increasing during December, and slowing during first quarter of

2011

• Rising oil prices, call for better fuel efficiency

• Growing Middle Class

• Expanding highway and road Network

• Small cars = 2/3 of total cars sold, GM = 46% share

• Vehicle Penetration = 5/1000

• In 2007 8.5 million Chinese people bought cars (5,5 mil were private, and 3 were for commercial purposes)

• 52 Carmakers in China, Government focus on Concentration (International companies 85% market share)

• Foreign companies (not china based) are buying parts from china increasingly

• SAIC bought $500 000 000 worth of shares in GM

• Growth of Vehicle Market 46% from 08-09 (due to poor sales in 2008 – recession)

• Population in China 1 330 141 295

Green

• Concerns about pollution and fossil fuels deepen• Centre for advanced auto research that will be part of a $250

million corporate campus GM is building in Shanghai.• Collaboration with SAIC, Government and academic institutions

about ways the country can reduce its reliance on fossil fuels• Chevrolet Volt (Best available electric vehicle)• With auto sales this year up about 25% over last year's pace,

the government and consumers increasingly are worried about environmental damage. And China is only at the early stages of its adoption of the automobile.

ContentsIntro & Background

Entry into China

Competitive View

KSF’s & Industry Trends

Chinese Market Features - Impact on GM

Challenges

What we want you to Remember

Evolution of the Chinese Auto industry

• Before the communist party came to power in 1949 there had been eight years of war against Japan. Virtually no motor industry to speak of at the time.

• 1971 China rejoined the UN and fears of war began to subside• 1976 Chairman Mao died• 1978 at the at the Third Plenium of the Chinese Communist party, Deng

Xiaoping was endorsed as the de facto leader• 1979 opened up to the rest of the world, focus shifted from Politics to

Economics• 1994 selected automobile industry as one of the ‘pillar industries’ to drive the

national economy

Stage Description

1994 - 1996 ‘Foundation stage’ – vehicles need to be made with 60 – 80% local content

1997 - 2000 ‘ Attacking difficulties’ – target outputs, development of 3 large scale producers and basic R & D capabilities developed

2000 - 2010 ‘Rapidly Developing’ – Industry to be self sufficient and internationally competitive. Target output of 6 million vehicles by 2010

GM Growth

Company Life-Cycle CHINA

USA

Porters 5 forcesThreat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Intensity of Rivalry among Competitors

Growth Industry Switching costs not very high

Buyers have many options

There are many substitutes

The price, quality, durability

Has reached economies of scale

Many Suppliers needed in production

Low switching cost for buyer if not satisfied

Public transport, walking and bike riding

Lack of differentiation in products

High capital needs for R&D and manufacturing Overheads

There are many separate components, thus can source from many suppliers

Buyers create the industries revenue, sales is predominant revenue stream

Dependant on your geographic location, in China public transport relatively good

Lots of innovation in the market, low cost is primary factor of differentiation

Access to Distribution Channel limited

Power lies primarily with the producer

52 producers with a total car unit sales of 13million

Bike culture is huge due to low cost and efficiency

Margins are low as big growth market, lots of opportunity

Key : High - Medium - Low

6 3 8 109

Geographic Distribution of Producers

Distribution of Local Suppliers

Purchasing Power of the customer

• Driven by the car price relative to the household disposable income and ability to finance or lease vehicles through financial service providers

• Growing incomes of China, especially the emerging urban middle class

• Far greater selection of vehicles in the market, stimulating interest and demand

• Trend towards smaller sedan type vehicles

Demographics• Population• 1,330,141,295 (July 2010 est.)• Age structure• 0-14 years: 19.8% (male 140,877,745/female 124,290,090)

15-64 years: 72.1% (male 495,724,889/female 469,182,087) 65 years and over: 8.1% (male 51,774,115/female 56,764,042) (2010 est.)

• Population growth rate• 0.494% (2010 est.)• Birth rate• 12.17 births/1,000 population (2010 est.)• Life expectancy at birth• total population: 74.51 years

male: 72.54 years female: 76.77 years (2010 est.)

SWOTStrength Weaknesses Opportunities Threats

General Motors today has manufacturing operations in 32 countries and its vehicles are sold in 192 countries

Loose sales and revenue in certain market places due to very differentiated market approach. Large range and offering

Exposure to both developing and developed Nations gives them volume and growth potential

Price wars in the market erode market share and revenues putting pressure on production and labour costs

JV with SAIC has been mutually beneficial and genuinely a win-win situation for both parties

60% of all sales are small vehicle sales with small margins, neglecting other high margin markets

Industry is in growing rapidly and are well established in the market

Lack of control of legislation and unpredictable changes by the Chinese Gov

Large operations worldwide encourage economies of scale and less cost per unit on R & D spend

Resource needs are so great that they must import all of their steel and other components

Opportunity to acquire smaller companies in the industry to increase their market share and economies of scale

New entrants into the market, it is growing rapidly and an attractive prospect for all vehicle companies world wide

Break down of Production costs of GM

Key : High - Medium - Low

ContentsIntro & Background

Entry into China

Competitive View

KSF’s & Industry Trends

Chinese Market Features - Impact on GM

Challenges

What we want you to Remember

Challenges

• Tax and Subsidy Policy Changing• 60% of sales resulting from SMGW (Wuling)• Pending Price war (Many competitors and ever decreasing

prices, quality no more differentiating factor)• Broad Range of vehicles (may not be able to be competitive in

price war)• Meeting Demand (Balance growth)• Margin on small cars THIN!• Maintaining Sales Growth (55% higher in 2009 than 2008)• Aggressive expansion by competitors• Innovation theft

Intellectual Property

•The Gm Spark was released 6months later at a price of $1500 more than the Chery QQ•Due to more expensive assembling cost, higher price and later release the Chery QQ outsold the GM Spark by 6 – 1.•Incident was of particular interest as the JV partner of GM in China, SAIC, also hold a 20% stake in Chery•QQ filed a patent in China a year prior while GM never filled a patent for their design in China and therefore had no claim in court•Chery denied having copied the GM design, claiming they had developed the QQ independently “with a little inspiration from the GM Spark”•China's SAIC buys $500M in GM stock – 18th of November 2010

ContentsIntro & Background

Entry into China

Competitive View

KSF’s & Industry Trends

Chinese Market Features - Impact on GM

Challenges

What we want you to Remember