U.S. automakers like GM are rapidly losing ground in China, once an engine for growth

DEROIT – General Motors CEO Mary Barra has been aggressive in exiting unprofitable or underperforming markets over the past decade, but leaving the automaker’s latest problematic country would be far more difficult than others.

China was once a profit engine for GM, and its top sales market from 2010 to 2023. But the automaker lost $106 million there during the first quarter, only its third quarterly loss in the region in at least 15 years and the largest outside of the coronavirus pandemic during that time.

It comes after a nearly decade-long slide in profits and market share for GM in China that has some industry watchers questioning whether the automaker can turn around the operations, or if it would be better to exit the country – an unimaginable prospect just a few years ago.

Barra, who visited China last week during an auto show in Beijing, said GM remains committed to the market, which the company entered through a joint venture in 1997.

“Over the long term, we’re committed to China. We believe that it’s a market that, over the medium term, will have substantial growth,” she said during GM’s quarterly earnings call on April 23.

The comments came months after Barra told investors in February that “nothing is off the table in ensuring that GM has a strong future to generate the right profitability and the right return for our investors” in China.

GM CFO Paul Jacobson last week told investors that the company expects the operations to return to profitability this year, with results similar or slightly lower than its roughly $446 million profit in 2023. He attributed the first-quarter loss to production downtime designed to reduce built-up vehicle inventory.

The automaker’s fall from grace in the country is staggering amid geopolitical tensions between the U.S. and China, along with changing consumer sentiment and increased domestic competition there.

While the challenges aren’t unique to GM, the company has the most to lose after it restructured or exited from other markets in a bid to become more profitable. The philosophy during much of Barra’s 10-year tenure has been if GM wasn’t a leader in a region — and didn’t see a track to become one — then it shouldn’t do business there.

Most notably, in 2017, the automaker sold its European operations to then-PSA Groupe, which is now Chrysler parent Stellantis. It also ended domestic production operations or exited Russia, India, Thailand and Australia, among other countries, around that time.

The moves shrank GM’s footprint and put outsized importance on China and North America. Those two markets are now responsible for an overwhelming amount of its annual earnings, along with its financial arm.

GM’s international operations, which recorded $1.2 billion in adjusted earnings last year, include South Korea, Brazil and the Middle East, among other markets. The automaker also is in the early stages of reentering Europe with EVs.

GM’s market share in China, including its joint ventures, has plummeted from roughly 15% as recently as 2015 to 8.6% last year — the first time it has dropped below 9% since 2003. GM’s earnings from the operations have also fallen, down 78.5% since peaking in 2014, according to regulatory filings.

GM’s U.S.-based brands such as Buick and Chevrolet have seen sales fall more than its joint venture sales with SAIC Motor, Wuling Motors and others. The joint venture models accounted for about 60% of its 2.1 million vehicles sold last year in China.

Other than the first quarter of this year, the only quarterly losses for GM in China since 2009 were a $167 million shortfall during the first quarter of 2020 due to the coronavirus pandemic and an $87 million loss during the second quarter of 2022.

John Murphy at Bank of America Securities, a top automotive analyst, has asked for two consecutive quarterly earnings conference calls whether GM would consider exiting China. He most recently said, “Is it time to really start thinking about strategic alternatives over there to potentially closing or selling the business?”

In response, Barra said new products will help the automaker better compete in the market, including what China calls “new energy vehicles” like all-electric and plug-in hybrid electric vehicles. GM revealed several vehicles last week in China, including plug-in hybrid versions of its Buick GL8 minivan, a best-seller in China, and the Chevrolet Equinox crossover.

“We think clearly that market has shifted and the landscape has shifted … with the capability of the Chinese [automakers],” Barra said. “But we still think there’s a role and a place for GM to play with luxury premium.”

GM’s focus on “luxury” is a shift away from mainstream vehicles amid increased competition in China. The company’s plans include importing flagship vehicles such as the Hummer EV and other large SUVs to the country through a new unit that sells directly to consumers called the Durant Guild. GM announced the unit in 2022.

But some, such as Michael Dunne, a former GM executive in Indonesia, believe it may be too little, too late for America’s largest automaker in China.

“We’re at the beginning of the end for [traditional] U.S. automakers in China,” said Dunne, an expert on China and CEO of consulting firm Dunne Insights. “Everything’s heading in the wrong direction for Detroit automakers in China.”

The decline of western automakers in China is a result of growing competition from government-backed domestic automakers fueled by nationalism, and a generational shift in consumer perceptions of the automotive industry and electric vehicles.

Mark Fulthorpe, an executive director for automotive at S&P Global Mobility, believes GM has too much equity in its China operations to give them up like they have other markets.

“They’ll try and consolidate what they’ve got. I’m sure they’ll have another go at it,” he said. “I think there’s still a bit to play for.”

It’s not just domestic Chinese automakers eating into market share for GM and crosstown rival Ford Motor, which experienced a 32.4% decline in China sales from 2018 to 2022. U.S. EV leader Tesla has also played a role, according to Dunne.

“I call it the Tesla effect. It transformed Chinese consumers’ views on electric cars. Suddenly, wow, here’s the Apple-equivalent of the automotive industry,” he said. “By extension, electrics were the ‘new cool’ for Chinese consumers.”

The electric vehicle manufacturer started Chinese production in 2019. It quickly grew production following Covid lockdowns in the country and proved to many Chinese consumers that electric vehicles – even non-Tesla models – were viable options, Dunne said.

Tesla is facing pressure in China but remains in vogue more than its traditional rivals, experts say. But it has had to aggressively cut prices to compete against Chinese automakers such ay BYD, Nio and others.

Morgan Stanley analyst Adam Jonas, a longtime Tesla bull, believes the automaker and other Western auto companies will likely “enter a new phase of capex spend (lower), protectionism (higher) and cooperation with China (eventual).”

“We believe that Western auto firms (including Tesla) have come to a unanimous and simultaneous realization: China has won the contest for EV supremacy,” he said Friday in an investor note.

Tesla is in the midst of a global restructuring that has included laying off more than 10% of its workforce, as EV market conditions shift.

Tesla’s revenue in China increased 57% from 2021, to $21.74 billion last year, according to its annual regulatory filing. But its Chinese revenue fell 6% to $4.6 billion during the first quarter of this year compared to a year earlier.

“If you look at the drop in our competitors in China sales versus our drop in sales, our drop was less than theirs. So, we’re doing well,” Tesla CEO Elon Musk said last week during an investor earnings call.

Musk also touted a potential expansion of the automaker’s driver-assistance systems such as Full Self-Driving, or FSD, in China but gave no timeline.

It was reported Monday that Tesla passed a significant milestone to roll out its advanced driver-assistance technology in China amid a visit by Musk.

Tesla also partnered with China’s search engine giant Baidu to provide digital maps for its driver-assistance systems.

JL Warren Capital CEO Junheng Li said while the developments are positive for Tesla, “a lack of critical detail makes it impossible to value the China FSD” for the automaker’s business.

In light of lingering supply chain and geopolitical challenges in China, automakers such as Stellantis and Ford have moved to what they call “asset-light” operations in the region.

As the term suggests, that means continuing operations, but by using fewer assets or better utilizing what’s already there.

Stellantis, for its part, has shifted strategies after its Chinese joint venture with Guangzhou Automobile Group filed for bankruptcy in late 2022. The partnership to produce Jeep vehicles in China was dissolved, and Stellantis opted instead to go “asset-light” and import such SUVs into the country.

Stellantis CEO Carlos Tavares earlier this year called Chinese automakers his company’s “No. 1 competitor.” Stellantis continues to operate partnerships with Chinese companies.

Most notably, it bought a 20% stake in China-based Leapmotor and leads a joint venture with the company to produce EVs. The agreement includes exclusive rights for export and sale, as well as for manufacturing products outside of Greater China.

Stellantis’ vehicle sales in China have fallen 44% from 124,000 in 2021 to 69,000 last year. The automaker does not break out its China financial results. But its adjusted operating income in the “China and India & Asia Pacific” region fell about 22% last year from 2022, while revenues decreased by roughly 1 billion euros.

Ford’s strategy still includes China-based production, specifically for its Lincoln luxury brand. But the company uses Chinese plants to produce vehicles for exportation elsewhere in an attempt to utilize excess capacity.

“We’ve really spent a lot of work on trying to de-risking that business. We’re asset-light. We’re leveraging the assets in China. We’re also leveraging our partners to export from China with low-cost products to markets around the world,” Ford CFO John Lawler told media last week during an earnings briefing.

Lawler noted Ford last year exported 100,000 vehicles out of China to South America and other regions. It recently started exporting its Lincoln Nautilus SUV from China to the U.S. The company plans to continue to increase exports from the country, a Ford spokesman confirmed.

Ford no longer reports its financial results by region, but from 2017 to 2022, the company lost roughly $5.5 billion in China. Lawler said all of the company’s regions of its traditional “Ford Blue” operations, including China, were profitable during the first quarter, but that unit does not include commercial sales or EVs.

Amid the tougher business and competition in China, S&P Global estimates U.S.-based automakers exported about 482,000 vehicles from China last year. That’s more than 3.5 times higher than 2019 and a roughly 22% increase from 2022.

“It’s difficult to imagine what what’s going to change the Chinese consumers’ minds to take a fresh look at GM products or Ford products,” Dunne said. “That’s, that’s the question that the boardrooms are looking at right now. How do we get them, how do we get Chinese consumers to like this again?”

— CNBC’s Lora Kolodny, Eunice Yoon and Michael Bloom contributed to this report.