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General motors invests 3b in china { June 7 2004 }

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GM to invest $3B in China
World's No. 1 automaker hopes to double capacity in 3 years; analysts question if market has peaked.
June 7, 2004: 7:07 AM EDT

BEIJING (Reuters) - General Motors, the world's top automaker, will invest over $3 billion in China in the next three years to more than double capacity, declaring it will overtake leader Volkswagen AG.

GM, now a distant second to Volkswagen in the world's fastest-growing car arena, plans to introduce almost 20 models over three years in a country that should become its second-largest market in 2004, executives said Monday.

Brushing off signs the market may slow drastically this year as Beijing curbs easy lending to cool overheated parts of the economy, GM said Chinese growth would outpace mature markets.

Car sales nearly doubled in 2003 after breaking the million mark for the first time in 2002. But growth slowed to 45 percent in the first quarter and a further deceleration could worsen a margin-sapping glut and spark a price war, analysts say.

Multinationals plan to spend about $13 billion to build capacity to make some six million cars annually in coming years.

"We believe that by doing what we've been doing, GM can ultimately claim the largest share of this crucial market," the company's China head, Phil Murtaugh, told reporters.

"To be honest, margins in China are going to come down. But I'm not sure it's accurate to call it a price war," Murtaugh said ahead of this week's Beijing Auto Show.

Prices have already slid 10 percent on average this year. One Hong Kong-based auto analyst foresaw a deluge of cars forcing another 10 percent price cut in the second half.

GM itself cut prices in May on two of its core models -- the Buick Regal sedan and the GL executive wagon -- by as much as 11 percent, anticipating lowered import tariffs next year.

Even after the cuts, the Buick Regal sells in China for about $40,000, which is around $15,000 more than in the United States -- largely because of taxes in China and heavy incentives in the United States.

"The China car market has in many ways already peaked," analyst Gu Qing at Haitong Securities in Shanghai. "If the government does not take measures to get demand going again, I'm afraid it's looking like going downhill from now on in."

GM hopes to ramp up annual output to 1.3 million units by 2007 through expanding existing factories and building new plants. Its new investment would be funded from GM's existing operations and joint ventures.

Murtaugh said there had been a sales slowdown in recent weeks. "There is a lot less rapid growth in sales over the last 30 days than there has been previously. Growth has slowed from 80 percent to 20 percent," Murtaugh said, without elaborating.

Shanghai GM, the company's main joint venture in China, has seen cars sold with financing fall to about four percent in past weeks, said Christian Weidemann, head of the auto loan business.

That's down from around 18 percent for 2003. But Weidemann argued that Beijing's curbs would have only short-lived impact.

Customers may be holding off buying in anticipation of major price cuts expected to be announced during the Beijing auto show. GM executives would not say if the company would make such cuts.

Total car sales in China slipped almost three percent in April from March, though they were up 38 percent from a year ago, industry figures show.

Meanwhile, GM also intends to begin assembling its range-topping Cadillac in China this year, it has said.

But the competition is not standing still. Volkswagen said last year it too would double China production, to 1.6 million vehicles, over a similar time frame.

Looming uncertainty
The German firm commands more than a third of China's car market, compared to GM's roughly 19 percent at the end of 2003.

But GM has downplayed its rivalry with Volkswagen in the past, saying it also has to compete with the likes of Ford Motor Co and Nissan Motor Co.

Its resurgent efforts in China are not surprising, given that profits from its joint ventures nearly quadrupled to $162 million in the first quarter.

If sales growth and margins continue at those rates, China would produce about a quarter of the group's $4 billion in profits forecast by analysts for this year.

The Detroit giant sold about 70 percent more cars in China in the first quarter than in the year-earlier period, topping 122,000 units. Sales in the United States over the same period grew just five percent.


Copyright 2004 Reuters

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