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Wall Street Journal / Tech - Game

How GM Helped Power the Fastest-Growing Auto Maker in China

General Motors’s Chinese joint venture, Baojun, is taking more market share in the world’s biggest car market but the U.S. company’s minority stake leaves it vulnerable to a powerful local company.
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Trefor Moss

LIUZHOU, China—As Chinese cars improve in quality and challenge foreign auto makers’ dominance in China, Detroit’s General Motors Co. has devised what it believes to be a winning strategy: build a local car of its own.

Its Baojun brand, built through a joint venture in Liuzhou with local partner SAIC Motor Corp. , has been the fastest-growing auto maker in China, the world’s biggest car market, over the last five years, and several other foreign car companies are now trying to emulate it.

As a Chinese car with American technology, Baojun, or “Precious Steed,” has “no comparable competitors,” said Yale Zhang, managing director of Shanghai-based consultancy Automotive Foresight.

GM and SAIC have invested $2.4 billion in the Baojun plant in Liuzhou, which can now build 800,000 Baojuns a year. However, GM owns a non-controlling 44% of the joint venture, an arrangement some see as risky as the U.S. company shares American technology with its Chinese partner.

Other foreign auto makers “are consistently taken aback by GM’s apparently generous technology sharing” when it comes to Baojun, said Michael Dunne, a former GM executive and now president of Dunne Automotive, a consultancy. “The open approach has engendered considerable goodwill but it also leaves GM vulnerable to the whims of its powerful Chinese partner.”

GM China President Matt Tsien dismissed those concerns, saying that devoting technology and expertise to build a Chinese brand was “in our interests” and the only way to make Baojun a first-rate car maker. Without a local brand it would have been hard to tap mass-market growth outside China’s wealthiest cities, he said. SAIC didn’t respond to questions.

Once derided as cheap and shoddy, Chinese cars have improved dramatically over the past few years, with auto-rating firm JD Power finding in a recent buyer survey that the gap in quality between mass-market foreign cars and their Chinese equivalents had virtually disappeared.

While Chinese auto makers have been steadily catching up, some foreign players have been complacent, overlooking provincial cities and failing to anticipate consumer demand for affordable SUVs, said Paul Gao, an auto analyst at McKinsey Co., the consulting firm.

Chinese brands accounted for 38% of passenger car sales in China in the first nine months of 2017, up from 30% in all of 2012, according to sales data from LMC Automotive, an auto intelligence company.

Baojun’s market share has grown the most. It had 3.6% market share in the January-September period of this year.

With China’s passenger car market expanding just 2% this year, tougher competition from local rivals has suddenly become a pressing concern for foreign manufacturers.

“Domestic Chinese brands are getting stronger,” Håkan Samuelsson, the chief executive of Volvo Cars, said at the October launch of Polestar, the Swedish company’s new premium electric-car company, “and being squeezed in the middle is not a position we want to be in.” Volvo’s answer, he said, is to double down on the premium segment, rather than wade into an increasingly fierce battle for middle-market sales.

Ford Motor Co. said in November that it would start a joint venture with local auto maker Zotye Automobile Co. to build electric vehicles under a new Chinese brand. It will target “younger consumers in lower-tier cities” who wouldn’t normally buy Ford-branded cars, said Peter Fleet, Ford’s Asia-Pacific vice president. Volkswagen AG will also launch a Chinese brand next year, while Nissan Motor Corp. already operates a Chinese brand, Venucia, with local partner Dongfeng Motor Co.

In Liuzhou, a gritty industrial city of 1.5 million people in southern China where Baojun has its manufacturing base, auto sales are booming. But on these roads, where value for money matters more than brand cachet, local marques appear to strongly outnumber Fords and Toyotas.

That is where Baojun comes in. GM launched the brand in 2010 to compete against Chinese rivals including Geely Auto and Great Wall Motor Co.’s Haval.

At the Liuzhou plant, where hundreds of workers in blue overalls bustled around half-built vehicles on the facility’s vast production line last month, director of manufacturing operations Craig Schmidt said GM know-how has given Baojun a critical edge.

GM has another joint venture with SAIC, a 50-50 partnership through which it builds Buicks, Cadillacs and Chevrolets. But Cadillacs and Chevrolets are often too upscale to compete directly with local marques. Chevrolet has lost 2.6% market share since 2012.

Buick’s market share has held steady at 4.9%, making it the fourth most popular auto brand in China so far this year, behind Volkswagen, Honda and Toyota.

Baojun, however, overtook Chevrolet last year and at its current rate of growth it will surpass Buick to become GM’s best-selling China brand within the next couple of years. Baojun sales increased from roughly 100,000 in 2013 to over 760,000 last year.

A lot in Liuzhou, China, has vehicles made by GM’s Chinese joint venture, Baojun, which is on pace to be the U.S. automaker’s biggest seller in the country.Photo: ZUMAPRESS.com

Baojun’s offerings, including small hatchbacks, sedans and minivans, have one common theme: bargain prices. Its new 510 compact SUV starts at around $8,250, far below Chevrolet’s newest China SUV, the Equinox, which retails for about $26,300 and up. With 41,000 sales in September, the 510 outsold the Equinox eight to one, and became the third best-selling model in China.

China contributed roughly $2 billion to GM’s $9.4 billion global profits in 2016, most of which came from the U.S. While the company sells four vehicles in China for every three it sells in the U.S., its China profits—which it must share with SAIC—are significantly lower.

Even though margins in China are so much thinner, investing resources in Baojun still makes sense, said Mr. Tsien, given the market’s sheer scale.

Auto analysts say the Baojun playbook could have lessons for foreign auto makers looking to kick-start their China growth.

“China was their cash machine,” said Mr. Gao, referring to the strong Chinese growth to which foreign auto makers have grown accustomed. “But they can regain their position, if they do some R&D and come up with affordable products for those low-tier markets.”

Corrections & Amplifications
Baojun’s market share grew by 3.1 percentage points from 2012 to January-September 2017. An earlier version of this article incorrectly said it grew by 3.1%.

Write to Trefor Moss at Trefor.Moss@wsj.com

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