General Motors Corp. Chairman and CEO G. Richard Wagoner Jr.'s predecessor John F. Smith Jr. got GM (GM) into China. But Wagoner is clearly stepping on the gas. Just as economists talk about China's economy overheating and analysts speculate that rivals are building too many new car plants there, Wagoner decided the time is right for GM to lay down an additional $3 billion in new investment there. It has already plowed $2 billion into China to build four plants -- all joint ventures with a Chinese auto maker.
Now, Wagoner will add more production and launch the Cadillac brand. His play: To build on GM's early entry into China and boost share just as the market is taking off. Already GM has pushed its share in China to 11% from 9% last year. And it's minting money even as prices fall. BusinessWeek Detroit Correspondent David Welch recently sat down with Wagoner to discuss about the risks and possibilities in the world's fastest-growing car market. Following are edited excerpts:
Q: You made $437 million in China last year, almost half of your global automotive profits. Looking down the line, how vital does China become for GM's profitability?
A: It's important today, and I suspect it will continue to be. If we had some decent performance in Europe and better Latin America growth, the percentage would not be as high for Asia. Over time, it should be a big contributor. I'm not sure it can continue to grow as fast as it has.
Q: Given the difficulties you're having in Europe and balance-sheet issues in the U.S., does China help GM roll along while you work out those long-term fundamental issues in those markets?
A: That's a result. I don't think it was the basis for doing it. What is extraordinary so far is not only is China rapidly growing market, but it has become quite a profitable market at the same time. Very frequently in a new market you have to invest a lot up front, and it takes a while for profit to come back. In China, the growth has come so fast that it has allowed us to pay off the investment more quickly.
Q: GM's investment in China has worked out so far, but others are rushing in. Because of the challenges in other markets, is this industry's gold rush?
A: It's not just because of the challenges in the other markets. It's a great growth opportunity. It has redefined what a great growth opportunity is. We thought that an industry of 300,000 units that can grow 15% a year is a great growth opportunity. But take a market that is 5 million units and growing at 30% or more. That's like an electronics industry. India and Russia have great opportunities, but I don't think they will grow this fast.
Q: There is a lot of capacity coming online. Is it too much?
A: The market has been growing, and our share has been growing. The only reason we lost share in China in recent years is because we didn't have enough capacity. And we're growing at a plant a year.
Q: Despite all of this growth, pricing is falling significantly. Why is that?
A: It is. It's competition coming in. It's China's entrance into the WTO [World Trade Organization], which is reducing duties. We're also growing a lot of sales with smaller, lower-priced vehicles.
Q: The industry's last big growth market was Brazil, which overheated, and the industry had had all kinds of problems with excess capacity there. Will that happen in China?
A: I find it to be very different. The size of the market today is dramatically bigger. The management of the economy has been for two consecutive decades very, very good. The Chinese have reserves and can play that currency game. Brazil, when I was there in the '80s, didn't have reserves. If things got bad, they couldn't import oil. They didn't have the money. They would have to go to the IMF [International Monetary Fund], get money, borrow.
China doesn't have those issues. They have a strong balance sheet. That has enabled them ride through some of the down cycles.
Q: But China did have some trouble in the early '90s.
A: Remember the late '90s when all of the Tigers crashed and Asia really headed down. China puttered right through that. They kept growing just fine.
Q: What's different about the flood of capacity coming in China?
A: First of all, in China the auto growth started slower and picked up. It grew much less than the economy did in the early days. About 30% of market in China is held by these small manufacturers who make marginally acceptable vehicles. Over time, some will get to be real players, and a lot of them will be merged into other players. If you assume that these 30% guys shrink down over time, which is probably the betting odds, there's room for all of us to grow for a while, eating out of that 30% instead of each other.
Q: But don't those smaller companies sell very cheap products in segments that you don't want to compete in?
A: Absolutely. But over time, people who can only buy those now with cash up front will be able to use that money as a downpayment and get retail financing to buy a bigger, better car. It won't happen today or tomorrow, but it will clearly happen over time.
Q: You have Chevy on the low end, Buick, above that, and Cadillac is coming. And your costs are the same as everyone else's. It's like GM is the same company in China that it was in the U.S. back in the 1920s. Is this how you would recreate GM if you could?
A: It is pretty much the way we created GM in the U.S. market. This is 75 years later, the closest thing we've seen to that, in China. The idea is market segmentation and the use of the brands. I can't tell you that it was the initial plan. It sort of worked out that way.
Q: Do you need retail lending to keep the growth going?
A: Can this market grow at 35% a year without U.S.-style formalized consumer finance, or is it more likely to grow at 10% to 15% without it? What could keep it growing at 30%? Retail financing. China has a couple issues. No credit-rating services and the inability in many markets to put a lien on the vehicle so I can't take the car back. Some municipalities have those rules. We'll start in places where you can get liens on the vehicles.
Q: Some Chinese banks have pulled out of automotive retail lending because they got burned. How will you manage that without a consumer-credit system?
A: We'll go at it deliberately. We don't need to rush it because the base growth rate continues to be pretty good. But as we look out over the next decade, it's going to give this growth significant additional legs.
Q: Some people speculate that with all of the auto capacity coming in, when growth slows Chinese-made cars will head to the U.S. Do you agree with that?
A: I don't think it's inevitable. This is the greatest growth opportunity the auto industry has seen in many years. We're going as fast as we can to get capacity to sell locally.
Could it be that products are exported or imported to fill out model lines? Sure. That could happen. Could it be to the U.S.? It might be. Will we end up with a Japanese-like situation where you build an industry based on exporting to the U.S.? I don't think so.
The Chinese market is too important. The profitability is so good. Is this a big deal if we export two vehicles or 200,000? Two hundred thousand is a long ways off, if ever.