China surprise

General Motors

Mar 31st 2005 HONG KONG
From The Economist print edition

The abrupt departure of its China boss raises doubts over a rare GM success story

THE last thing General Motors (GM) needs is another puncture. The world's largest carmaker is already trundling along on several flat tyres: it is still in the red in Europe, losing market share in America and, last month, shocked investors by giving warning of a first-quarter loss. The credit-rating agencies are preparing to downgrade its vast pile of outstanding debt to junk status—the level at which it is already trading in the market.

Now GM is losing the executive who built the group's highly profitable bridgehead in China, until recently the world's fastest-growing large car market. The resignation of Phil Murtaugh, chairman and chief executive of the group's China operations (which include Hong Kong and Taiwan), on March 30th, was put down to personal reasons. “Nobody at GM is pushing Phil out of the door,” said a local spokesman, denying any connection to the sharp slowdown in sales. Insiders point instead to the recent appointment of Troy Clarke, a Detroit veteran, as Asia-Pacific president. He moved GM's regional headquarters from Singapore to Shanghai, to the annoyance of the independent Mr Murtaugh.

GM moved swiftly to announce a new China boss, Kevin Wale, an Australian running its British operations, who previously worked in Asia. He faces a hard task.China has been a big source of profit for beleaguered GM. It is estimated to account for up to 80% of the group's Asia-Pacific operations, which made $729m in 2004—one-fifth of the firm's $3.6 billion global net profit. Sales in China, driven by the upmarket Buick saloon and cheaper Excelle sedan, rose by 27% to nearly 500,000 cars. With a share of 9.3%, GM is catching Volkswagen, the long-time market leader.

After several years of rapid growth (for instance, 75% in 2003), however, the Chinese car market is slowing abruptly, largely as a result of a government crackdown on cheap car loans as part of wider efforts to stop economic overheating. In the fourth quarter of last year, GM's Asia-Pacific profits dropped by one-third compared with a year earlier, to $117m, because of China. In January and February, Shanghai GM, the firm's main joint-venture, saw passenger-car sales fall by more than 50% compared with the first two months of 2004 (the total market fell by around 10%). Slumping sales and growing competition from foreign and local companies, such as Chery and Geely, are squeezing prices and eating into profit margins. The profits of China's car- and car-parts makers fell by 62% in the first two months of this year, says the National Bureau of Statistics. GM expects a recovery in the second half of the year—Mr Clarke says that Chinese sales are on track for “double-digit growth once again this year”.

But given the huge increase in new capacity, even a revival in demand may not translate into a recovery in profits. International (and increasingly, domestic) carmakers plan to invest over $10 billion to double production to 7m units by the end of 2007, with further expansion planned thereafter. During such turbulent times, Mr Murtaugh's good relationships with the Chinese government and the American group's local partners—he set up the original Shanghai GM joint-venture in 1996—as well as his experience, are likely to be sorely missed.

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