China Slams the Brakes on GM's Accelerating Car Sales


At many times over the last few decades, it has seemed like General Motors (GM) couldn't do anything right. The cars weren't competitive, the company's finances were a mess, and it often appeared as if GM's leaders were doing everything but mounting a credible challenge to the import brands that were eating its lunch.

We know where that all led: bankruptcy and the infamous taxpayer-funded bailout.

But lost in all that failure was a surprising success story: General Motors had become the No. 1 automaker in the world's largest auto market -- China.

GM's effort in China was one of its few bright spots in the last decade, and it has become a cornerstone of the new GM's global strategy. GM is still the leading automaker in China, and its market share continues to grow.

However, new government rules could put a damper on the General's success.

Taking Over Chinese Roads

Despite complex laws designed to favor local Chinese interests, GM has made itself a big player in China, which has grown to become the largest automotive market in the world. GM -- working together with Chinese joint-venture partners, as required by Chinese law -- has seen big success for its familiar Buick and Chevrolet brands, as well as with a hot-selling line of inexpensive commercial vans sold under the local Wuling brand.

Both China-only products like the Buick Excelle and familiar cars like the Chevy Cruze compact are regularly at the top of China's best-seller lists. In fact, GM and its joint-venture partners sold more vehicles in China last year than GM did here in the U.S.

GM is hardly the only Western success story in China, of course. Archrival Volkswagen's (VLKAY) sales are a close second to GM's, and global giants like Toyota (TM) and Honda (HMC) have strong presences as well. A latecomer to the party, Ford (F), has invested more than $5 billion in local factories in an effort to catch up -- and it's off to a good start: Sales of its just-introduced Focus have been brisk.

But GM is the biggest player, and its market share has been growing recently as its sales growth has outpaced that of the overall market. And that means that new restrictions on auto sales in key Chinese cities could hit GM harder than others.

Government Stalls the Engine

Anyone who watches China knows that its government can take a heavy-handed approach to addressing perceived problems, and its solutions to the smog and gridlock in its biggest cities have been no exception.

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Shanghai's city government limits the number of new-vehicle registrations to 20,000 per month. License plates are sold at auction, and the prices typically run well into the thousands of dollars.

Early last year, Beijing's city government adopted a similar rule. And more recently, the huge (population near 14 million) southern city of Guangzhou imposed an even sharper limit literally overnight: Late on June 30, the government announced that new-car sales would be limited to just 10,000 a month, starting July 1.

Sales in Guangzhou had been running at about three times that rate, and dealers stayed open until well past midnight to accommodate the sudden rush of orders, according to a Bloomberg report. But Guangzhou's abrupt move raised a larger question: Would other Chinese cities adopt similar limits?

The growth of China's auto market has already fallen sharply. The 50%-plus growth rates that were routine until a couple of years ago are a fading memory now, with the market up just 2.9% through the first half of 2012. More limits on sales in cities could trim that growth rate further -- or, worse, send it into reverse.

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Can GM Survive the Downshift?

GM said in a statement that it expects its growth in China to "remain steady in the second half" of 2012, driven by sales growth in interior provinces. The company has been investing heavily in new dealerships in China, hoping to find growth in areas outside of cities where car ownership is still less common.

That's good, because China is extremely important to GM's bottom line: While it splits profits with its joint-venture partners, GM still books well more than $1 billion a year from its Chinese operations.

That strategy may work out for GM. But as rivals like Ford continue to ramp up their Chinese presence, it's clear that growth in China is going to be a lot harder for GM to find in the future.

At the time of publication, Fool contributor John Rosevear owned shares of General Motors and Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford.

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