Why It Makes Sense For GM To Import This SUV From China

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General Motors (NYSE:GM) has announced a new SUV from its Buick brand. The vehicle is the 2017 version of Buick’s Envision and will be manufactured in China. [1]  The model is a five passenger crossover SUV that will compete with the likes of Acura RDX, Audi Q5, BMW X3 and Lexus NX in the small luxury SUV category. In the U.S., the small luxury SUV is still a small category—it contributed only 305,047 unit sales in 2015—but a rapidly growing one, having grown at a pace of 38.6% over the year. [2] That pace is over 6 times faster than the pace at which overall industry wide auto sales grew.

As far as the Buick Envision is concerned, there are plenty of interesting things to note. The vehicle is built on a new GM architecture, that the vehicle shares with its all new full electric vehicle Chevrolet Bolt. The vehicle was introduced in China late in 2014 and was a strong seller in 2015, selling just over 147,000 units for the full year. [3]  The model makes up the Buick lineup, along with smaller crossover Encore and the bigger Enclave.

Why is GM Building It in China?

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As mentioned earlier, the vehicle shares an architecture with Chevrolet Volt. Generally, this would mean that the vehicle is produced in the U.S., along with other Chevrolet and GMC vehicles with which it shares an architecture. However, these vehicles don’t yet exist. Moreover, they’re at least two years away from introduction.  The refreshed versions of the Chevrolet Equinox and GMC Terrain are expected to be built on the same architecture as the Envision, but they’re nowhere near production yet. Consequently, it makes no sense for GM to push forward the capital expenditure required to build the assembly line to build those vehicles.

Meanwhile, GM’s Chinese factories have the capacity the produce enough vehicles to not only meet Chinese demand but also for the U.S. GM’s dealers can only benefit from having the Envision to sell along with Encore and Enclave, which make up around 60% of Buick’s sales in the U.S. Therefore, it makes sense to import the Envision from China to sell in the U.S.

What Does It Mean

The decision to manufacture a vehicle meant for sale in the U.S. in China is likely to upset a few vehicle participants. The United Auto Workers, a labor union to which many of GM’s workers belong, is already complaining, accusing the Detroit-based company of betraying the American taxpayers whose hard-earned money was used in bailing the company out in 2009. [4] But it is unlikely that these things will affect sales of the vehicle.

From GM’s perspective, it is only an opportunity to use excess capacity in its Chinese plants to produce a vehicle that can sell well in the U.S. auto market. It is quite likely when the Equinox and Terrain come on board in the next 2 years in the U.S., GM will shift manufacturing of the Envision to its U.S. plants. Buick is an important brand for the company, contributing around 6% of the company’s overall sales. However, Buick sales fell in 2015 by 2.6%, even as overall auto sales grew by 6% and overall GM sales grew by 6%. Buick’s contribution to overall GM sales fell by 60 basis points itself. Introducing a new vehicle to the lineup is a known way of boosting sales and can help the brand overcome its 2015 slump. Therefore, it makes complete sense for GM to go ahead with its plan to import the vehicle from China. buick

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Notes:
  1. 2016 Buick Envision might be your first Chinese-built crossover, Autoblog, January 2016 []
  2. Small Luxury SUV Sales 2015, GoodCarBadCar, January 2016 []
  3. GM’s CEO Barra says she believes in growing China market, Reuters, January 2016 []
  4. Chinese-built Buick to be sold in US, angers UAW, ABC12, January 2016 []