SHANGHAI, China – General Motors (www.gm.com) has decided to invest US$3 billion more in China's auto industry - a sector that's sprouting up like a young Yao Ming, the NBA's towering, seven-foot, six-inch (225-centimeter) Sino star.
        GM's huge commitment, however, comes with some new risks in China's massive market. For one, the central government is trying to hose down China's hyper-hot economy. In addition, the nation's auto sales have slowed slightly from the torrid clip of previous years.
        Nonetheless, GM China Group Chairman and Chief Executive Phil Murtaugh sounded unflinchingly bullish in announcing the aggressive expansion.

GM's 2003 Chinese sales of 386,710 vehicles produced $437 million in net profits last year - which equaled 54 percent of GM's North American net profits. [Pictured: production line at the Shanghai GM plant (above) and GM vehicles at a dealer's lot.]

        "The new investment demonstrates our respect for China, its people and the healthy development of its automotive industry," Murtaugh said at the company's national headquarters in Shanghai, where a significant part of the billion-dollar outlay will play out. "Success in China is crucial to GM's global success," he added.

Obviously, the world's largest automaker isn't alone in that. China is a crucial component in shaping the global fortunes of a mass of major automakers. The country in the next two years may pass Japan to become the world's second-largest automotive market. And Murtaugh projected that China will pass the U.S. as the world's No. 1 auto market by around 2025.
        No surprise, then, that GM, Ford Motor Co., Volkswagen and Toyota Motor Corp. in the past eight months alone have disclosed plans to invest some $10 billion in bulking up Chinese sales.
        GM has already established itself as a major Chinese player, having invested $2 billion since it began manufacturing in the country in 1998. "GM currently has the broadest product lineup and the second-highest market share among global automakers in China," said Murtaugh.
        The automaker's Sino lineup will further broaden with its latest investment. Over the next three years, GM will introduce about 20 new vehicles and powertrains in the Chinese market, Murtaugh explained. And most will be locally manufactured.
        That expansion blitz will up GM's vehicle assembly capacity in China to 1.3 million units a year by 2007, adding thousands of new jobs. That's more than twice the company's current 530,000-unit volume.
        "Together, these investments will enable us to maintain our leadership position by growing with the market," said Murtaugh.

With the expansion, the $1.52-billion, 2.56-million-sq.-ft. (230,000-sq.-m.) Shanghai GM plant (pictured) will become the first plant outside the U.S. to produce Cadillacs.

        Even so, GM's hefty expansion will only grow its capacity to within shouting distance of VW. China's No. 1 foreign automaker, VW holds a 38-percent market share. And the German firm last year announced plans to invest another $7.4 billion in Sino production, doubling its annual capacity to 1.6 million units.

Still, GM's success in China is clear. That's why, as Murtaugh explained, the U.S. automaker is using profits from its existing Sino joint-venture operations to bankroll its new expansion.
        GM's 2003 Chinese sales of 386,710 vehicles gave it about an 8-percent share of the nation's market. That was strong enough to give the company's Chinese operations $437 million in net profits last year - which equaled 54 percent of GM's North American net profits.

The SAIC-GM-Wuling joint-venture plant (pictured) in Liuzhou, Guangxi Zhuang Autonomous Region, will increase its manufacturing capacity to 336,000 vehicles a year from 200,000, and will add a new engine plant with an annual capacity of 300,000 engines.

        The automaker's multi-pronged expansion aims for much more, Murtaugh explained. GM's new Chinese program, he said, will include:
        • An expansion of vehicle and engine production at Shanghai GM, the 50-50 joint venture that GM established in 1997 with Shanghai Automotive Industry Corp. (SAIC at www.saicgroup.com), China's largest domestic manufacturer of sedans: Shanghai GM's $1.52-billion, 2.56-million-sq.-ft. (230,000-sq.-m.) complex consists of vehicle, engine, transmission, stamping and assembly operations. GM's flagship joint venture - which currently makes Buick Excelles, Regals and Sails - will next year increase annual vehicle capacity to 450,000 from 200,000 units.
        With the expansion, Shanghai GM will also become the first non-U.S. plant to make Cadillacs. The automaker plans to introduce the Cadillac CTS luxury sedan in the Chinese market this fall. Later this year, the Cadillac SRX luxury sport sedan will enter the market, followed by the Cadillac XLR luxury roadster available in early 2005. At first, however, all three models will be imported from North America. And U.S.-made parts will continue to be used in the Cadillacs that are made in China, GM said.
        • A new engine manufacturing plant in Yantai, Shandong: The facility will be part of Shanghai GM Dong Yue Automotive Powertrain Company Limited, a new joint venture between GM China, SAIC and Shanghai GM. The plant is scheduled to begin production in the second half of 2005.
        • An expansion and another new engine plant in Liuzhou, Guangxi Zhuang Autonomous Region: The Liuzhou operation - part of SAIC-GM-Wuling, GM's mini-vehicle joint venture with SAIC and Wuling Automotive (www.wuling.com) - will increase manufacturing capacity in 2006 to 336,000 vehicles a year from 200,000. The new engine plant will have an annual capacity of 300,000 engines.

The expansion of the Pan Asia Technical Automotive Center (pictured) will create "the most advanced and complete engineering and design center in China," maintained Murtaugh.

        Still more plants could be in the works. GM and its joint-venture partners "are studying locations for building additional new vehicle manufacturing capacity," the U.S. automaker said in a statement.

Two other major elements are part of GM's latest Chinese growth surge.
        One of them will add new facilities at the Pan Asia Technical Automotive Center (PATAC), the automaker's Shanghai-based design and engineering center. PATAC's additions will include what GM is billing as China's most advanced prototype laboratory; a virtual reality design studio; a noise, vibration and harshness test lab; and a kinetics and compliance lab.
        The expansion at PATAC, a joint venture with SAIC, will be completed within two years, GM said.
        The enlarged operation will become "the most advanced and complete engineering and design center in China," Murtaugh maintained. "PATAC is playing a unique role in enabling us to leverage GM's global technology and product leadership and tailor it to meet local customer needs, . . . a key to succeeding in the highly competitive China market."
        In addition, the automaker's Chinese expansion program will create GMAC-SAIC Auto Finance Company (AFC). Another partnership with SAIC, the new company will be China's first foreign automotive financing joint venture. GMAC-SAIC AFC will be based in Shanghai.

As GM well knows, its expansion comes as Chinese auto sales are slacking off a bit.
        2003 saw a whopping 75-percent increase in total sales in China. Fueled by the nation's expanding ranks of newly affluent buyers, nearly 2 million vehicles were sold last year.
        In 2004's first quarter, however, growth dropped substantially. Total Chinese sales of 567,000 vehicles during that period marked a more modest 44.5-percent increase.
        GM's Chinese growth also comes as the nation's top officials are taking steps to avert drastic price inflation. China's fast-growing economy is expected to expand by more than 10 percent in 2004. The central government has already begun limiting auto loans, and it may raise interest rates as well to dampen inflation.
        In addition, both foreign and domestic auto firms are struggling to cope with the glut of new cars that have flooded the Chinese market. Sticker prices are falling in the wake of stiff competition. In the 12-month period ending in April, vehicle purchase prices dropped 8.8 percent on car company sales to dealers and large buyers, according to the People's Bank of China (www.pbc.gov.cn/english).
        GM, though, seems unfazed by such obstacles.
        "GM remains highly confident in the long-term prospect of the China market, the world's fastest-growing vehicle market," said Murtaugh.
        Simple numbers affirm GM's confidence. China now has only about 16 cars and light-passenger vehicles per 1,000 people. By comparison, the U.S. has about 700 vehicles per 1,000 people, while Japan has 598 per 1,000 people.
        Analysts are projecting that China's numbers by 2014 will rise to 51 vehicles per 1,000 people. And in a nation of 1.3 billion people, that adds up to a whole lot of cars.

On top of that, GM's Chinese vehicle sales are about 15 times more profitable than its U.S. sales. Analyzing the company's net profits in China shows that GM and its joint-venture partners make almost $2,230 on every vehicle sold in the country. The comparable North American figure is about $145 per vehicle.
        Murtaugh, however, seemed very careful to emphasize that his company's China push would help, not hurt, the U.S.
        "Between 1997, when we launched our major operations in China, and 2003, we imported more than $1.8 billion worth of parts, components and equipment from North America," he said. "Our sourcing from North America will continue to grow along with the expansion of our business and China's automotive industry."
        Since the 1980s, foreign automakers have invested some $30 billion in their Chinese operations.