GM turnaround strategy gets lift in China

General Motors Co.'s turnaround effort will come under fresh scrutiny Monday as the company reports financial results, but one part of the strategy appears to be working: China.

GM's sales are expected to have doubled in China during the third quarter compared with a year earlier, and are now running neck and neck with the Detroit auto maker's sales in the U.S. The company's 478,000 vehicle sales in China helped GM remain a relevant player on the global auto stage, and—more importantly—provided much-needed profit for GM's international operation, according to a person familiar with the results.

Although not expected to be exhaustive, the auto maker's third-quarter results will provide the most comprehensive look at the company's financial health since it filed for bankruptcy-court protection in June. The company is to update its cash position, indicate how close it is to earning money in North America, and update its progress on restructuring Adam Opel GmbH in Europe.

But for GM Chief Executive Frederick "Fritz" Henderson, the most positive story lies in China, where government-sponsored sales incentives and the popularity of the Wuling microvan venture GM partially owns lifted the company's auto sales 34% in the first nine months of 2009 compared with a year earlier. GM's share of that market has increased as well, climbing to 13.4% in the third quarter from 12% a year earlier and cushioning the company's lead over its rivals.

GM's China business, which wasn't included in bankruptcy-court proceedings in the U.S., is actually composed of a web of joint ventures with Chinese auto makers. Profits are spread across those partnerships, and to other parts of GM's organization, such as GM-Daewoo in South Korea. The auto maker doesn't include Chinese vehicle sales in its revenue line, and the business isn't a source of cash needed to rebuild operations in other parts of the world.

But Shanghai has become a spiritual and physical second home for GM. The company in July decided to headquarter its international unit there, and an increasing number of GM's global purchasing and development duties are being sent to Shanghai.

The China joint ventures are a critical platform for GM's growth in several emerging markets. For instance, the company will team with a partner, SAIC Motor Corp., to expand in India. It also plans to ship Wuling vehicles, including a coming sedan, to a variety of developing nations.

The auto maker doesn't break out specific results for the China unit, and it plans to consolidate all operations outside the U.S. into the international operations.

To be sure, GM needs to turn around its ailing North American business if it hopes to be truly viable. The U.S. serves as the hub of GM production, and is still seen as offering the most profit potential of any market in the world.

The third quarter will give a fuzzy picture of GM's progress at home. While costs have plunged thanks to layoffs, debt reduction and plant closings, the company's North American operation is a shell of its former self.

The auto maker lost considerable U.S. market share during the third quarter compared with the same period in 2008, falling to about 19.5% from about 24.5%. The company also nearly halved production and increased per-vehicle spending on sales incentives, according to Autodata Corp. Even with the benefit of the U.S. government's Cash for Clunkers sales-incentive program, GM's sales volume fell.

For Mr. Henderson, momentum in China isn't necessarily lining GM's pockets, at least not yet. The bulk of the sales taking place in China are credited to Wuling, of which GM owns about a third. Wuling vans and small pickups are generally strong among light commercial buyers and farmers, and can be bought at a fraction of what U.S. vehicles cost.

GM is on track to sell nearly two million vehicles this year in China, or likely about as many as it will sell in the U.S. Two-thirds of those sales are likely to be Wulings, with the balance of the sales going mostly to the Buick and Chevrolet brands.

Buick is GM's mainline brand in China.

Profits aside, China's momentum has been critical to GM's ability to keep pace with other global industry heavyweights, notably Volkswagen AG and Toyota Motor Co. Both are expected to surpass GM in global sales this year, but those leads are likely to be muted by GM's strength in China.

Sales in China have helped GM fill the hole left by the weakness in the U.S. and softer sales in Europe.

China is also a rare pocket of growth amid a collection of GM operations that have been sinking for years. In the three years spanning 2006 to 2008, GM lost market share in 12 of the top 16 markets where it sells vehicles. It currently is gaining share in China.

China now accounts for at least 25% of the company's global sales, compared with 10% a year ago. Whereas three GM vehicles were sold in the U.S. for every GM vehicle sold in China a year ago, that ratio has fallen to 1.25 vehicles sold in the U.S. for every sale in China.

As GM's operations struggle to gain steam in most of the world, analysts and GM executives cite the China unit as an example of the auto maker at its best. The unit is now allowing the company to lap its chief rival, Toyota, in China.

Toyota's China sales have suffered this year after a failure to anticipate demand for smaller cars. The Japanese auto maker's China sales from January through the first eight months of the year only rose 9% from a year earlier to 415,000 vehicles, compared with more than one million at GM during that time.