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In China, Sail and Cruze help Chevy sales soar


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In China, Sail and Cruze help Chevy sales soar



SHANGHAI, China -- The China map on Kevin Wale's conference room wall is filled with dozens of colored pins representing places he's been.

Wale, president of GM's China operations, pointed to the provinces west of Shanghai, the places the Detroit automaker hopes to conquer next as the battle for the growing middle class intensifies with domestic automakers.

"China's not a country. It's countries within countries," he said, pointing to provinces near Shanghai with populations the size of stand-alone nations. "These are massive populations."

While Shanghai and Beijing are becoming common names in the U.S., there are about 100 cities in China with 1 million residents or more. And the number of those 1-million-plus cities is expected to double in the next 15 years.

Those second- and third-tier cities are expected to be the next battlegrounds for auto sales in China, experts said.

"You're not going to get tremendous growth out of Shanghai and Beijing; those are pretty much saturated," said Tim Dunne, an expert on China at J.D. Power and Associates.

GM launched its Chevrolet brand five years ago in China in hopes of appealing to ever-growing middle-class shoppers intent on buying not only their first car but their second as well. The company has opened 200 Chevy stores within the past 18 months and said it expects to open 100 more this year.

Wale -- who expects GM to sell more than 2 million vehicles in China this year, four years ahead of schedule -- told the Free Press in an interview this spring that sales of 3 million a year could be achieved prior to a stated 2015 goal, depending upon market conditions.

GM China, the fastest-growing part of the company, outsold the U.S. sector during the first quarter of 2010 by about 150,000 vehicles. Asked whether GM China would outsell the U.S. for the first time this year, Wale demurred. "It will be close this year."

Designs on middle class

The Sail was designed by Shanghai GM in China for Chinese and emerging-market drivers.

The base model began selling for $8,400 in January, priced to compete with successful small cars from domestic automakers already in the market.

The results so far? In its first month, sales of the Sail and Cruze helped triple Chevrolet's monthly sales compared with a year ago.

Walepredicts GM could sell more than 100,000 of the new cars this year.

"That's targeting the right market"-- areas west of Shanghai, Wale told the Free Press in an interview from the automaker's new International Operations headquarters in Shanghai. "They're looking for more-affordable cars."

He expects the Chevy brand, which sold 332,000 vehicles last year in China, will hit half-a-million sales this year or next. That's after starting up just five years ago.

Sales still exploding

Last year, vehicle sales in China (about 13 million) overtook the U.S. (10.4 million) for the first time.

Sales of cars from GM -- and its joint ventures in China -- jumped 66% last year to 1.8 million cars and trucks, giving the automaker a 13.4% market share. That helped GM's International Operations, which was the only profitable division in the company following bankruptcy through the end of last year. For the first three months of this year, GMIO, as it is called, is neck-and-neck with North American operations on an operating-income basis.

The Sail is part of GM's efforts to expand its vehicle lineup and better compete in China's up-and-coming second- and third-tier cities, which have massive populations, increasing income levels and greater desire for personal transportation.

"People tend to regard the tier-two and tier-three cities as backward, which is not true. They're just large cities with lots of modern elements that just don't have as much development as Shanghai and Beijing," Wale said. "But if you go out there, there will be a good road system, there will be good hotels, there will be shopping areas. ... They are much more sophisticated than the average person gives them credit for."

While some are concerned the country's economy is being propelled by government spending and question if the growth is sustainable, Wale is optimistic, in part because of what's expected to occur in the country in coming years. According to Wale:

• Over the past 20 years, 300 million people have been lifted out of poverty in China.

• In 15 years, the number of cities in China with populations of 1 million or more is expected to be 221. There are currently about 100.

• By 2030, 1 billion people are expected to live within urban areas.

The next frontier

Experts agree that the next battle for market growth is in the second- and third-tier markets.

Take a city such as Wuxi, which is west of Shanghai. Its population in 2007 was 2.3 million, a figure that's probably closer to 5 million today, according to reports.

"Nobody has even heard of it. ... And it would be the third-largest city in the U.S. And they have many, many cities like that," said Tim Dunne, an expert on China at J.D. Power and Associates.

China expects to grow its income per capita to $6,000 in 2015 from $950 in 2000 in terms of gross domestic product, according to Yin Xingmin, a well-respected professor and deputy director of the China Center for Economic Studies at Fudan University.

He predicts the country will be producing 22 million vehicles annually within five years, or about 26% of the global auto manufacturing.

"The government has been doing a lot in the past years to push more and more disposable income into the provinces. ... As those incomes in those regions increase, we see the opportunities for the automakers also increasing," said Rick Hanna, the global automotive leader at PricewaterhouseCoopers.

Consumer patterns in those inland cities are different than in the costal cities where automobiles are often seen as status symbols and purchased for prestige. Inland, it's about personal transportation, experts said.

"The income is lower. They are much more price-sensitive, which is why we're seeing the market share of the Chinese companies grow faster inland than on the coast, where the foreign brands carry much more prestige," Hanna said.

2009 was a good year

The past year has been good for China's domestic automakers. Chinese automaker BYD saw sales grow 161% last year to 445,000, giving it a market share of 5.1%, according to J.D. Power data. Chery, which has a 5% market share, saw its sales increase by 31% to 439,635.

China has the most auto brands in the world with more than 235 models of cars and trucks in the marketplace.

It's all a recipe for creating lower new car prices.

The average transaction price of a new vehicle has dropped as much as 39% in some segments compared with a decade ago, according to J.D. Power data.

"The growth is going to come in these emerging cities. While they are wealthier than they were before but they're still not as wealthy as the big cities," J.D. Power's Dunne said. "There is going to be continued pressure."

That downward pressure on pricing is occurring in a market that's already lower than in the U.S.

The average transaction price of a passenger vehicle in China was $17,500 last year -- $10,000 less than in the U.S., according to J.D. Power data.

The difference, calculated by Dunne, translates into roughly $100 billion more money changing hands in the U.S. new car market than in China.

As Chinese automakers become more sophisticated, they will create increased pricing competition against foreign automakers, Yin of Fudan University said. He pointed to the consumer electronics industry in China, which was once dominated by outsiders, who have since been driven out.

"Every year, the Chinese brand name cut the price down and down and down so the Japanese brand names left. They could not cut their prices down because of their high labor costs," he said during an interview this spring.

Nevertheless, Wale is optimistic about China.

He expects to add 100 Chevrolet dealers to its network of 300 stores this year. GM already has 400 Buick dealers.

"There is nothing different about the auto industry in China except it happens five times faster -- every day," Wale said.



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