In China, troubled GM enjoys small-car boom

A popular small-car lineup. Booming sales growth. A promising future.

General Motors (GM.N) is not often described in such terms in the media these days, but in China at least, they all hold true for the No. 1 U.S. automaker.

GM said on Thursday it had reached a deal with some major bondholders that would give them a bigger stake in a reorganized automaker and could pave the way for a fast-track bankruptcy backed by the U.S. Treasury within days..

Analysts doubt that a Chapter 11 filing would have any serious impact on GM's China unit, one of its few profitable operations globally.

Its China division, primarily two ventures with SAIC Motor (600104.SS), is profitable and self-sufficient, and able to fund its own daily operations and expansion, executives say.

While the U.S. corporate behemoth is associated with slow-selling, gas-guzzling trucks and SUVs at home, in China it churns out compact minivans preferred by farmers and small businesses, and its Buick is an established prestige marque.

"Shanghai GM is a brand name here by itself and its Wuling minivans and minitrucks are selling like hot cakes all over the country," said Zhang Xin, an analyst with Guotai Junan Securities.

"I think it will be business as usual here, as whoever is calling the shots at GM eventually would make sure that its China business remains on the right track."

WELL-KNOWN WOES

GM's vehicle sales in China, its largest market outside the United States, surged 50 percent to a monthly record of 151,084 units in April, buoyed by brisk demand for its minivans and small trucks that are eligible for state subsidies.

In contrast, GM's U.S. sales fell by one-third to just 172,150 and risk soon being overtaken by sales in China.

The Detroit automakers' woes have been chronicled extensively in China's national media and on the Internet. Most Chinese believe the Obama administration cannot afford to let its biggest automaker end up in liquidation, so its struggles at home are not seen affecting its position in China.

"It would be wrong to assume those who like American cars would easily switch to a German or Japanese brand. GM's Buick, for example, is a household name and has its own fan base," said John Zeng, analyst at international industry consultancy IHS Global Insight.

GM, which vies with Volkswagen AG (VOWG.DE) for the top ranking among foreign car makers in China, sold 1.09 million vehicles in China in 2008, roughly twice as many as Toyota and three times Ford Motor Co (F.N).

And after losing ground in the United States for years to its big Japanese rivals, GM has stolen a march on Toyota Motor (7203.T) and Honda Motor Co (7267.T) in China.

Toyota and Honda opted to focus on bigger vehicles in the Chinese market, now the world's largest, despite their global reputation for quality small cars, and missed out on government incentives for small car purchases that have fueled record monthly sales.

"The problem with Honda and Toyota is that their portfolios are tilted toward the upper market segment. Their compact models also cost a fortune compared with local brands," said IHS Global Insight's Zeng.

Honda's compact Fit is nearly four times as expensive as Chery Automobile Co's QQ, priced as low as 30,000 yuan ($4,394).

Such domestically developed cars have shown strong sales, boosting their market share in the first four months of the year to 29.28 percent from 26 percent in 2008.

Nissan Motor (7201.T) has also beaten its Japanese rivals with 60 percent growth in April alone. Almost two thirds of the cars made at its venture with Dongfeng Motor Group Co (0489.HK) are powered by engines of 1.6 liters or less, company executives say.

But in China's car market, a rare bright spot in the global downturn, even the winners are finding profit margins can be slim for the small cars racing out of showrooms.

"A lot of the volume is coming from compact cars and minivans since buyers can get tax breaks or subsidies for them, but small cars mean small margins," said Chen Qiaoning, an industry analyst with ABN AMRO TEDA Fund Management.

Some 70 percent of the 2 million passenger cars sold China in the first quarter were equipped with small engines, data provided by China's official industry association showed.

Still, many Chinese makers of small, low-priced autos, bolstered by Beijing's tax cut on models with 1.6 liter or smaller engines and rebates for farmers, are taking comfort in the fact that their showrooms are packed.

"We are grateful that we can still see some volume growth while the rest of the world is collapsing. Growth in the bottom line is just asking for too much at a time like this," Changan Chairman Xu Liuping told reporters in April.