Signaling its confidence in the booming Chinese economy, General Motors (GM) said Monday that it plans to spend $3 billion in China over the next three years in a challenge to rival Volkswagen for dominance of the world's fastest-growing auto market.
GM, the world's biggest automaker, said it will build new plants to more than double its manufacturing capacity, introduce new vehicles and set up an auto financing venture with its Chinese partner, Shanghai Automotive Industry Corp.
"Success in China is crucial to GM's global success," said Phil Murtaugh, chairman and chief executive of General Motors China Group.
GM has invested more than $2 billion since 1998 in joint ventures that now make domestic brands as well as Buick sedans, Chevrolet Blazer SUVs, minivans and other models. It claims about an 8% share of China's vehicle market.
GM joins other automakers pouring billions of dollars into Chinese ventures as they try to keep up with demand from newly affluent Chinese consumers: Total vehicle sales soared 75% last year.
"The problem for foreign automakers is a lack of capacity. They're struggling to keep up with demand," says Yale Zheng, an auto industry analyst at CSM Asia Corp. "For GM, it's a good plan."
GM still trails Volkswagen, which entered the China market in 1984 and is the country's leading foreign brand, with a 38% market share. Shanghai's taxi fleet is almost entirely Volkswagen Santana sedans, though Buicks are making up a growing share of vehicles on the city's jam-packed streets.
Last year, VW announced plans to invest $7.4 billion more in the Chinese market.
Japan's Nissan has a $2 billion Chinese joint venture, while DaimlerChrysler signed a $1.2 billion deal last year with a Chinese partner.
Honda of Japan and France's Peugeot have also announced high-profile investments.
For a giant like GM, the China investment is not huge. The company is spending $1.1 billion on its new factory in Delta Township, Mich. It spent $7.2 billion buying from minority suppliers in 2003, according to its Web site.
But it does represent a commitment to "growing with the market," as Murtaugh put it.
China's economy is expected to grow at an annual rate of 9.8% in the first half this year and sales of autos with foreign brands have remained strong.
But the flood of investment by both global and local automakers has been raising worries that the market may soon face a glut of cars. Automakers are already contending with falling sticker prices as competition heats up between foreign manufacturers and the many small but ambitious Chinese competitors appealing to buyers with lower-priced models.
"Overcapacity is not evenly distributed," said Zheng, of CSM Asia. "It's the smaller, weaker producers that will suffer. GM and other big automakers don't have a problem with overcapacity."
Total sales of cars made in China reached nearly 2 million vehicles last year. But growth slowed to a 44.5% annual rate in the first quarter, with 567,000 vehicles sold.
GM's announcement Monday said the company will expand the number of vehicles it can build in China to 1.3 million by 2007, up from 530,000 this year.
The money for the $3 billion in new investment will come from GM's ventures in China. Last year, GM posted $437 million in net profits from its China operations.
GM says it plans to introduce nearly 20 new and upgraded products, including luxury vehicles, in the next three years, most made in China. Among those will be several Cadillac models, components of which will be imported from North America and assembled at Shanghai GM.
The company says it expects such initiatives to open up jobs and business opportunities in North America and China.
GM and Shanghai Automotive Industries also plan to build an advanced lab to test vehicle prototypes. The government recently announced a set of policies for the market that encourages more research and development by both foreign and domestic investors.
In the first quarter of this year, GM and its partners sold roughly 178,000 vehicles in mainland China, a 56% jump from the same period in 2003.
GM said Monday it plans to increase the capacity of its Buick joint venture in Shanghai to 450,000 units a year in 2005, from the current 200,000 units.
GM's mini-car and minivan joint venture with Shanghai Automotive and Wuling Automotive is expanding its manufacturing capacity to 336,000 units a year in 2006 from 200,000 units a year.