GM Races To Sell Cheap Cars To China’s Rising Middle Class As Competition Heats Up

As the Chinese middle-class continues to balloon, automakers are stepping up efforts to design and expand production of low-cost passenger costs in order to appeal to the more price sensitive customers and first time buyers. General Motors (NYSE:GM), through its joint venture (JV) SAIC-GM-Wuling Automobile Ltd, opened another manufacturing unit in China to boost the production its low-cost models such as the Bajoun, the sales of which exceeded 10,000 units in October. The new plant will help the automaker raise its capacity by 400,000 units eventually. ^[1]

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The automaker is present in China through 10 joint ventures but sells almost half of its vehicles through the SAIC-GM-Wuling JV. GM sold a total of 2.5 million vehicles in China last year so once the plant becomes fully functional, GM will be able to sell one-sixth more cars in the country. Unit sales are already up 10.3% to 2.3 million through October in 2012. Almost 30% of the automaker’s global vehicles are sold in China, and we estimate this is the automaker’s most valuable division, contributing almost 38% to the company’s stock price.

Demand Of Low-Cost Cars To Remain Strong

Most of the sales are skewed towards the smaller, low-cost vehicles in developing countries which is hardly surprising since a majority of them are purchased by first-time owners or customers with limited earnings relative to the car prices. Furthermore, a significant percentage of the population still cannot afford even the least expensive cars available in the market. As incomes rise and people move into a  higher income strata, we should see the demand sustained in the long term.

However, GM is not the only automaker which has stepped up its focus on the small-car segment. Ford Motors (NYSE:F) is developing a low cost model in its Hangzhou plant in Eastern China which is due to begin production from 2015 onward. Currently, the cheapest model that Ford offers is the Fiesta, priced at around $13,000 or 30% more expensive than GM’s Sail.

Thus, offering a low cost model is critical to Ford’s long term sustainability in the country. Ford only has 6 models in China currently (compared to GM’s 30) but is adding a seventh model, the Kuga compact SUV at the start of the next year. Similarly, Nissan, along with its joint ventures, plans to have a total of five low cost cars in the country by 2015. It launched its second affordable car under the Venucia brand earlier in the year and expects to sell 300,000 of the same brand annually by 2015.

We currently have a Trefis price estimate of $26.70 for General Motors’s stock, which is slightly higher than the current market price.

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1. General Motors opens a new manufacturing plant in Liuzhou, China, November 21, 2o12, cartrade.com [↩]