GM leads foreign charge to low-end China car market

SHANGHAI - Foreign automakers enjoying success in China may be gearing up to take on local players in the high-volume but competitive low-end market, following General Motors' recent roll-out of a model priced as low $8,300.

GM's move represents a direct challenge to domestic names like Geely Automobile Holdings and Chery Automobile, which have developed a reputation for making cheap cars for price-sensitive buyers.

For more than a decade, GM has competed with foreign rivals like Volkswagen in China's lucrative medium-to-high end segment, leaving the lower end to national brands, which now control about a third of the market selling to upwardly mobile consumers concentrated in smaller cities.

GM took aim at those brands with the launch in January of its new Sail under the Chevrolet brand, priced at between 56,800 and 68,800 yuan ($8,314-$10,070). The five door model is a far cry from GM's higher-end models in China, ranging from its Buick LaCrosse that costs up to 320,000 yuan, while a top-end Cadillac can cost more than 1.5 million yuan.

It's a large portion of the market and our job is to compete wherever the market is, said Kevin Wale, GM's president and managing director for China.

As wealth grows in China, now the world's biggest auto market, smaller inland cities are quietly catching up with affluent coastal cities as major consumers of everything from automobiles to flat screen TVs and digital gadgets.

Car sales surged more than 50 percent in second and third-tier cities last year compared with 26 percent in Shanghai and 32 percent in Guangzhou, according to data provided by Gasgoo.com, a major Chinese auto parts trading platform.

People in smaller cities do not have as much money as those in big cities. If a foreign car manufacturer like GM comes up with a model like Sail, it is an extremely attractive offer, said Klaus Paur, director for global industry consultancy TNS's North Asia automotive division.

BIG NAMES, LOW PRICES

In keeping with its aim of going after homegrown favorites like Chery's QQ or BYD's F3, GM unveiled the Sail in the inland city of Chengdu.

To support its low-end initiative, GM is planning a major expansion of its Chevrolet dealership network this year, bringing the total to over 500 from about 380 now, said Terry Johnsson, vice president of GM's China operations. Most of the new dealers will be in smaller cities.

GM has already logged more than 30,000 units in backorders after selling about 8,000 units of the Sail less than a month after its launch.

My wife and I had being shopping around for quite a while until we saw the new Sail, said Paul Lin, a 27-year old engineer hand-in-hand with his 24-year old bride.

That's exactly what we have in mind for our first car, he said at a GM dealership in Shanghai where he just put down 5,000 yuan toward a new Sail.

The strong sale uptake would more than offset the thinner margins from cheaper models and could tempt other foreign rivals to follow as big-city markets start to mature, analysts said.

I bet GM won't be lonely out there for too long as no one can afford to miss out on such a great growth opportunity, said Qin Xuwen, an analyst with Orient Securities.

Some of the next movers might be Korean brands, such as Hyundai Motor, already known for their relatively low prices compared with other foreign brands such as Volkswagen, analysts said.

Foreign automakers were mostly mum on the move by GM, with Ford, Hyundai and Toyota Motor Co saying it would not affect their China plans. Hyundai is already planning to launch a new smaller Sports Utility Vehicle in April and a small car in September, but it has not provided details.

CHINESE FIGHT BACK

GM's move comes as Chinese automakers look in the other direction, trying to broaden their image beyond that of purveyors of affordable but lower quality goods.

Names like Geely and Beijing Automotive Industry Holding (BAIC) have made recent plays to acquire more high-end intellectual property, with the former nearing a deal to buy Ford's Volvo brand and the latter working to integrate designs recently purchased from GM's Saab unit into its own cars.

But so far, SAIC Motor, China's largest automaker, has been the only domestic brand to make inroads to the mid-sized and large car segments with its Roewe sedan, which it developed using technologies acquired from overseas.

The Shanghai-based automaker, which also operates joint ventures with GM and Volkswagen, has set an ambitious goal to double its own-brand car sales to 180,000 units this year.

Geely, a low-end player, could also raise its profile in China and elsewhere, if it plays its cards right following its Volvo purchase, analysts said.

Meantime, BAIC has started integrating Saab technology into its vehicles with an aim to sell 100,000 self-developed passenger cars in 2011.

Chinese manufacturers can be successful in the upper medium segment and be competitive, said Zhang Xin, an analyst with Guotai Junan Securities. But that will not happen overnight, it takes time.

($1=6.832 Yuan) (Editing by Doug Young and Lincoln Feast)