Decision time for GM in China: Stay, scale back or go

General Motors, long a dominant player in China, was hoping to reinvigorate its faltering business in the world’s largest car market with an influx of new models over the past two years.

Among them was the electric Cadillac Lyriq, a flashy luxury car that executives hoped would appeal to Chinese consumers who were increasingly gravitating to plug-in cars.

“We think that’s going to be a really, really strong vehicle for us in China and, I think, a good test of things to come,” GM Chief Financial Officer Paul Jacobson said in 2022.

Two years later, the Lyriq is barely a blip on GM’s sales charts in China, and the automaker’s market share in the country has shriveled. After years of consistent profits in China, GM swung to a loss in the first half of this year.

On Tuesday, GM executives are expected to again field questions during the company’s investor conference on their plans for China—this time under more pressing circumstances. The market-share losses have prompted calls for GM to scale down its business there or even retreat from China altogether.

Most every foreign automaker—from Volkswagen and Toyota Motor to Tesla—faces slowing or shrinking business in China, where consumers are flocking to Chinese cars that were once viewed as inferior to the larger global brands.

Traditional automakers haven’t kept pace with the country’s rapid move to electric and plug-in hybrid vehicles. Chinese brands also have leapt ahead in tech features and often are priced well below their foreign rivals.

GM Chief Executive Mary Barra has said the company will stick it out there. The automaker in July disclosed plans to restructure the business, a process that often results in a reduction of factories, models and jobs. The company has shuffled its leadership in China as it hashed out a plan with its main joint-venture partner, state-owned SAIC Motor. Their agreement expires in 2027.

Rivals Ford Motor and Jeep-maker Stellantis have responded to shrinking sales in China by cutting factory output, focusing on niche slices of the market and using their Chinese factories to export vehicles to other countries. Stellantis two years ago terminated a money-losing joint venture with a Chinese partner and took a roughly $300 million write-down.

Such an approach could prove more complex and costly for GM because it has more factories and employees in the country, analysts say.

GM could close some factories and trim the number of models it offers, said Bill Russo, the Shanghai-based principal of consulting firm Automobility. It could also look to forge ties with a more digitally savvy, homegrown EV maker, as rival Volkswagen did when it invested in Chinese automaker XPeng.

“You allow the faster horse to run, and tie your wagon to the faster horse,” Russo said.

A GM spokesman said the company sees promise in new EVs and plug-in hybrids as well as new driver-assistance features and other technology. GM also is working to pare back production and “take cost out of the business” in China, he said.

Seismic shift

Under Barra, GM has pulled out of many overseas markets, including Europe, India, Australia and parts of Southeast Asia. Retreating from China would further shrink the company’s global presence and leave it more heavily reliant on its home market of North America, its main profit source.

GM’s investor show comes as the automaker’s shares have far outperformed its Detroit-based peers despite its China struggles. Its share price has risen 28% this year amid stock buybacks that have returned more than $11 billion to shareholders in the past year.

Barra in May said the move to electric cars in China has been a “seismic shift,” and that the company “could have managed better the EV transition” there. She didn’t detail turnaround plans but said “there’s a place for us to play in China,” especially in the luxury market.

GM got into China in the late 1990s, soon after the government opened the country to foreign investment on the condition that automakers partner with domestic companies. Both GM and Volkswagen entered joint ventures with SAIC Motor, which was widely viewed as among the most sophisticated Chinese automakers.

China soon became GM’s growth engine. Early last decade, it was selling more cars there than in the U.S. By 2016, the company had 18 assembly plants in China, one less than in North America.

The company’s market share has fallen in recent years to 8.4% in 2023 from 13.7% in 2018, according to GM figures. Its downturn reflects a broader trend in which Chinese brands have grown from about one-third of the market early this decade to nearly 60% in the first half of this year, according to investment bank Bernstein.

The newer Chinese companies have moved faster on EVs than the traditional automakers, which had specialized in combustion engines for decades, said Swamy Kotagiri, CEO of automotive supplier Magna. “They went right to the next step,” he said.

‘Not in the sweet spot’

Russo, the Shanghai-based analyst, said GM in some cases was too slow to offer customers electrified options. For example, the automaker only this year introduced a plug-in hybrid version of a popular Buick minivan, the GL8, a model that had propelled GM’s China growth.

“They just were not in the sweet spot of where this market was going,” he said.

GM and other legacy automakers have also fallen behind their Chinese competitors on the digital experience inside the vehicle, such as voice commands, internet-connected capabilities and seamless integration with the driver’s smartphone, said Tu Le, founder of consulting firm Sino Auto Insights.

Li Henhen, a 32-year-old car enthusiast, was recently checking out a showroom for Li Auto, a rising Chinese brand, in a Beijing shopping mall.

Li, who recently bought an X9 minivan by Chinese EV maker XPeng, said she has seen new EVs offered by Buick and VW, but she said they lack technology.

“They are essentially just gasoline cars converted to electric by changing the engine,” she said.

Yoko Kubota contributed to this article.

Write to Christopher Otts at christopher.otts@wsj.com