Shanghai General Motors Sustainability in Partnerships Presentation Read a article and make a powerpoint sild to answer the question ” What factors contrib

Shanghai General Motors Sustainability in Partnerships Presentation Read a article and make a powerpoint sild to answer the question ” What factors contribute to the sustainability of a joint venture partnership? In this context, discuss the potential conflicts that can arise in the GM?SAIC joint venture. Is the partnership sustainable? ” For the exclusive use of Y. YOU, 2019.
HKU395
ZHIGANG TAO
SHANGHAI GENERAL MOTORS: THE RISE OF A
LATE-COMER
In February 1998, the Asian Wall Street Journal, sceptical at General Motor’s (GM)
investment in China, ran a front-page story with the headline, “GM bets big on a market
littered with casualties.”1 Seven years later, in January 2005, GM featured once again in the
same paper, only this time, the headline was more positive “GM vehicle sales in China rose
27% in 2004”.2 While Shanghai Volkswagen (SVW) maintained its leadership position with
about 25% of China’s automobile market in 2004, Shanghai General Motors (SGM), GM’s
flagship joint venture (JV) with Shanghai Automotive Industry Corporation (SAIC), was
closing the gap with sales increased by 26% year-on-year to 252,896 units. SGM said that its
market share in China rose to around 10% in 2004, compared with 8.5% in 2001.3 However,
in 2004, SGM’s growth rate slowed down drastically, compared with the 46% rise in 2003.
This was largely on account of the tougher consumer credit requirements, higher interest
rates and a market characterized by price wars.
Jack Smith, GM’s Chairman and CEO, made a promise in 1994 that the company would
bring its best technologies to China, and help the country to build one of the strongest and
most advanced automobile industries in the world. Given GM’s vast investment and
willingness to engage in technological transfer in China, some analysts commented that GM
was too hungry, and gave up too much to win the deal with SAIC. Regardless of the
criticism, GM was determined that its venture in China was long-term, and was willing to
invest in the development of China’s automobile market. Eight years into its partnership
with SAIC, GM was still very optimistic. In mid-2004, it announced plans to double
production capacity by 2007, and to relocate its Asia-Pacific headquarters from Singapore to
Shanghai. 4 What factors contributed to SGM’s strong growth? What synergies existed in the
GM -SAIC joint venture? Given the intense competition in China’s automobile industry,
how best could SGM sustain its growth momentum in the future?
1
Smith C.S. & Blumenstein R. “GM Bets Big on a Market Littered with Casualties”, Asian Wall Street Journal, February
12th 1998.
2
“GM’s Vehicles Sales in China Rose 27% in 2004”, The Asian Wall Street Journal, January 7th 2004.
3
Ibid.
4
McGregor R. “General Motors Plans US$3 billion Expansion in China”, Financial Times, June 6th 2004.
Emily Ho prepared this Case under the supervision of Dr. Zhigang Tao for class discussion. This Case is not intended to show
effective or ineffective handling of decision or business processes.
© 2005 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise (including the Internet)
– without the permission of The University of Hong Kong.
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Shanghai General Motors: The Rise of a Late-Comer
The Automobile Industry in China
Designated as a Pillar Industry
It was nearly impossible for an ordinary Chinese citizen to own a car during the Communist
era, when only party officials had the privilege to proudly ride in Red Flag limousines.
These cars were produced by the state-owned First Automobile Works (FAW), which was
set up in the 1950s with help from the Soviet Union. During the Cultural Revolution in the
1966-1976, imports of foreign auto equipment, required for technological advancement,
were restricted because of rampant xenophobia. As a result, China’s ability to develop
automobile technology and absorb imported know-how was limited for years. In the 1990s,
as household incomes grew, Chinese officials shifted focus to making passenger cars, but
were crippled by the poor management, old technology, incompetent workers and regional
rivalries. In addition, each region wanted to develop the local automobile industry, which led
to an upsurge of auto and auto parts companies, many of which were former army weapons
manufacturing operations. To control the situation, national economic planners laid out a
game plan that altered the industry landscape through mergers to result in three to four largescale motor vehicle conglomerates within 15 years. The automobile industry was then
designated to be a pillar in China’s economic development. Aspirations soared far beyond
the domestic horizon, with the Chinese government wanting domestic manufacturers to join
the ranks of Toyota, GM and Nissan, in battling for global sales.
To succeed in implementing such an ambitious development plan, China had imposed a
“market-for-technology” strategy that would accelerate the country’s absorption of foreign
investment. China invited foreign automobile companies, on a case-by -case basis, to set up
joint ventures. Foreign companies were, however, not allowed to have wholly-owned
operations in China since the government intended to help local companies through this
initiative.
The severe inflation in 1988 and political unrest in 1989 had slowed down the pace of
market reform. In 1992, subsequent to Deng Xiaoping’s “southern tour”,5 reforms and
economic growth in both, theory and policy, gained momentum. The economy began to pick
up again, and the Chinese government had to deal with an overheated automobile industry.
Provincial governments were guilty of indiscriminately launching repetitive automobile
projects, and the local industry lacked economies of scale, owing to the large number of
state-owned, debt-ridden production plants. In 1997, China’s 27 provinces and autonomous
regions boasted of an estimated 123 vehicle assembly plants, with 22 of the country’s
provincial-level administrative areas declaring automobile manufacture as a pillar industry.
However, only four factories at that time had achieved annual capacity of more than 100,000
vehicles.6 After much deliberation, the Chinese government enacted a number of measures
aimed at slowing the growth of auto purchase financing, and restricting the number of new
entrants into the sector. For example, restrictions in car loans in early 2004 immediately
cooled down sales growth. In 2004, the government also announced that the manufacturing
licences of bankrupt or failing automakers could only be bought by purchasers who were
willing to invest a minimum of US$240 million in the business and a further US$60 million
in research and development, aimed at developing the local car and component technology.
This new measure barred low-margin manufacturing companies from purchasing licenses,
and entering the sector.
Despite the fact that the economic dimension of the automobile sector was becoming more
significant in China, it was still relatively small compared with the world average.
5
In January 1992, Deng Xiaoping, the former leader of China, traveled to Shenzhen of southern China on campaign tour to
energise the reform-oriented “open door” economic policy.
6
Miller M. “GM Had Its Work Cut Out in China”, Asia Times, April 4th 1997.
2
?
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Shanghai General Motors: The Rise of a Late-Comer
Accounting for 20% of the world’s population, Chinese citizens only owned roughly 1.5%
of the total number of cars in the world. In comparison, U.S. citizens owned 25% of the
world’s cars with only 5% of the population. In fact, China had the same number of cars per
person as the United States did in the 1910s. China’s low car ownership was largely on
account of sluggish domestic demand that stemmed from economic woes and the Asian
financial crisis in the late 1990s. Auto sales rose only 3.7% year-on-year during JanuarySeptember 1998 compared with a 27% gain during the same period in 1997.7
The growth of the auto industry accelerated from 2001 [see Exhibit 1]. By 2004, sales of
vehicles were 5.1 million units, including 2.3 million passenger cars, which increased by
15% year-on-year. 8 The government’s clampdown on car loans and delayed purchases by
consumers anticipating lower prices, had caused a sudden slowdown of passenger car sales,
with growth rate plummeting to 15% from a high of 75% in 2003.9 Against a backdrop of
overall sluggish growth rate of car sales, SGM outperformed the market and the market
leader, SVW. SGM posted a 26% rise in car sales in 2004, while sales at SVW dropped 8%
and its market share dropped to 16% from 20% in 2003 [see Exhibit 2]. Only Honda,
Hyundai and Ford, whose sales were growing from a lower base, had managed to fend off
the worst of the slowdown and maintain high double-digit growth rates in 2004. The
slowdown was also accompanied by a rapid change in the kind of cars Chinese consumers
bought, with the expensive mid-range car segment priced at around US$24,000 suffering the
most [see Exhibit 3]. In response to the sudden slowdown, automobile manufacturers were
forced to curtail their pace of production, and thereby fell short of their annual targets [see
Exhibit 4]. Passenger car output rose 12% to 2.3 million units in 2004, a lackluster show
after a surge of 83% in 2003.
Foreign Participation
The first few foreign companies that crept into China in the 1980s were mostly through joint
ventures. Despite dampened vehicle sales, many auto companies, including foreign joint
ventures, had increased capacity to a level that was more than twice the current demand at
that time [see Exhibit 5]. The excess capacity had prompted half-a-dozen foreign carmakers
to close down or retreat from the China market. During 1997-1998, Peugeot-Citroen SA
abandoned a factory, and Daimler-Benz got out of a deal to produce Mercedes minivans
before it had even begun.10
The Chinese government issued the first industrial policy for the automobile industry in
1994. The policy sought to consolidate the dozens of automobile companies into the “Big
Three” model in the United States, and to protect all manufacturers located in China
(including foreign joint ventures) from international competition by establishing import
quotas and stiff tariffs. Foreign ownership in joint ventures was limited to 50% to give the
Chinese partners more control and bargaining power. Further, all joint ventures had to
localise their parts and components by at least 40%. The policy also encouraged knowledge
transfer to the local firms, as the foreign companies had to establish joint technical centres
for training Chinese workers. The policy was intended to give Chinese vehicle producers
enough time to prepare for tougher competition, considering that car production was
growing too fast. The restrictions on new car ventures also provided existing joint ventures
with a golden opportunity to consolidate their leads. Adherence to the policy was, however,
a daunting task to for those automakers that were biding their time to enter the market.
7
“GM Rolls Out First Buick in China’s ‘Proud Moment’ for Shanghai Joint Venture Partners”, Reuters, December 1998.
8
Zhang Y. (??), “Auto Sales Exceed 5,000,000 for the First Time in 2004”(“2004 ?????????? 500 ???),
Market Post (???), January 21st 2005.
9
“China’s Car Sales Growth Slows Suddenly”, Financial Times, January 12th 2005.
10
Smith, G and Blumenstein S. “GM Makes an Uneasy Tradeoff in China: It Wants Access to an Immense Market. But Beijing
Wants Access to its Technology”, The Wall Street Journal, February 11th 1998, B15.
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In fact, the 1994 policy did little to stem the influx of foreign automobile companies into
China. After the policy was issued, almost every big multinational automobile company had
bid to establish a joint venture with SAIC. According to government statistics, total agreed
investment into the automobile and auxiliary industries from all sources was approximately
US$60 billion during the 1990s.11 Many foreign automakers were lured by China’s huge
market potential and lucrative profit margins. According to Standard & Poor’s estimates, the
average net profit margin for the entire automobile sector, including trucks and buses, was
about 30% in 2004. SGM estimated its own margin was around 10%, which was twice its
global average of around 5%.12 It earned a handsome US$2,267 per vehicle in China in
2004,13 compared with GM’s earning of just US$145 per vehicle in the US.14
The overcapacity situation continued to exist through 2004. It was estimated that assembly
lines invested by foreign automobile manufacturers would be able to produce 8 million units
by 2010, even though the estimated market demand then would be half of that. In response,
automobile manufacturers began to cut prices on some models by 30% in 2004, resulting in
razor thin profit margins. 15 In June 2004, The National Development and Reform
Commission issued a new auto policy, replacing the one issued in 1994. The new policy
would both loosen (for eg, the number of JVs allowed for a foreign company) and tighten
(research & development requirement) restrictions on foreign investors in the auto industry
from different areas [see Exhibit 6 and Exhibit 7].
Shanghai General Motors
“We [GM] know what the profit number is, and we know when it is going to
happen. We are focused on shareholder return. This is by no means a
benevolent operation. This is an operation that will be competitive. But since
we are starting from ground zero, we have a long-term strategic plan.”
– Rudolph A. Schlais Jr., the former President of GM China 16
In 1997, GM signed a contract, worth US$1.6 billion, with SAIC to manufacture cars in China.
Al Gore, the then U.S. Vice-President, and Li Peng, the then Chinese Premier, witnessed the
contract signing ceremony. The agreement included a deal whereby GM would supply
components and assemblies for about 13,000 vehicles, including Cadillacs, Buick Regal sedans
and Buick GL8 wagons. At that time, SAIC was one of the big three automobile manufacturers
in China, with 65,000 employees, 33 joint ventures and an annual production of 600,000 cars. In
comparison, GM had 3,500 employees in China and three joint ventures. 17 GM had great
expectations from the new joint venture, and company officials envisaged that 20 years down the
road the company would sell more cars in China than in the US. They also saw a US export
potential of US$1.6 billion in the first five years. 18
SGM began producing Buicks in late 1998 with a production capacity of 100,000 units a year.
The Buick model was chosen as SGM’s first car because of its popularity in China before the
Communist Party came to power in 1949.19 Customers of Buicks were classified into four
11
China Automotive Technology & Research Center, [www.document] http://www.catarc.ac.cn (accessed January 28h 2005).
12
“Business Asia”, The Economist Intelligence Report, June 14 th2004.
13
US$1 = Rmb 8.28 on February 15th 2005.
14
“Business Asia”, The Economist Intelligence Unit, June 14th 2004.
15
Forney, M. “Here Comes the Really Cheap Cars”, Time, January 17th 2005.
16
Sugawara S. “As China’s Auto Market Accelerates, GM Jumps On”, Washington Post Foreign Service, January 2nd 1997, A01.
17
“GM Reads Tea Leaves in Tailoring China Family Car”, China Securities Bulletin, June 25th 2001.
18
Chan, E. “GM’s China Angst”, Bloomberg News, December 18th 1998, C3.
19
Smith, C. “Buick’s China Plant Opens with Simper GM Searches for Smaller, Cheaper Car to Make”, Wall Street Journal,
December 16th 1998.
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Shanghai General Motors: The Rise of a Late-Comer
segments: joint ventures and fleet companies (40%), private businesses (30%), government
bureau and state-owned enterprises (20%) and individuals (10%).20
Upon entry, SGM found the market environment unpleasant. China was experiencing
sluggish economic growth since 1995. Further, in view of the dipping demand and excess
capacity, the Chinese government was keeping the brakes on the market ? it had stopped a
pilot auto-loan program in northeastern China, and many cities had quit issuing license plates for
private cars. Car sales were further impeded by consumers’ expectation of lower prices after
China’s WTO accession. Government employees, regardless of their rank, were banned from
purchasing cars by the Chinese government in January 1999. Government cars were consolidated
into fleets, and employees were given monthly stipends to pay for their use.
Shrinking revenue from government segment, and the low production of its light-truck
assembly joint venture plant in Shenyang had forced SGM to increase its investment in order
to survive. Also, sceptics doubted whether SGM would be able to sell the 30,000 Buicks it
planned to produce in 1999, or meet the production target of 100,000 cars per year. The
Buick model, though mid-sized by US standards, was criticised for being too big for China’s
crowded streets. Even the ubiquitous Mercedes sedans were mostly smaller models, and
First Auto Works’ 1.8-litre Audis never sold more than 20,000 a year in China. The Buick
was sold at around US$38,000 to US$43,000, 21 well above what the wealthiest Chinese
individuals could afford, and almost twice as much as the country’s best-selling sedan,
Volkswagen AG’s Santana.
Indeed, SGM encountered tough sales in the early days. Although the early demand for
Buicks in 1999 exceeded expectations, sales dropped 48% in 2000, despite the fact that
SGM had lowered the price of Buick to US$25,000.22 Car sales of SGM were also threatened
by the influx of imported cars as China gradually lowered import tariffs. This meant that
most big automobile manufacturers would be able to ship cars into China as cheaply as GM
could make them locally. In spite of disappointing initial sales of the Buick sedans, SGM
rolled out the new Buick G sedan model, with a lower price tag, in 2002, followed by the
Buick Excelle HRV hatchback and Buick Royaum premium sedan in 2004.
The growth rate of SGM’s passenger car sales outperformed that of the industry during
2002-2004, while SVW under-performed when compared with the market growth [see
Exhibit 2 ]. This indicated that SGM was growing at the expense of its competitors, and had
become a force to reckon with in China’s growing auto markets.
General Motors Group
GM’s presence in China dated back to 1922, when its Manila branch was moved to
Shanghai. In September 1924, a GM Buick four-door sedan and limousine were sold to Pu
Yi, the last emperor of China.23 In 1990s, GM established joint ventures with Chinese
enterprises as it realised that China was a huge potential automobile market. Not being very
successful in Asia, GM considered China not only a huge market, but also an entry point to
the Asia-Pacific region.
The GM venture was the last automobile-manufacturing project to be allowed under the
state’s long-term industrial development plan. Before this joint venture, the company had
already established a light-truck assembly joint venture with First Auto Works (FAW) Jinbei
in the northeastern city of Shenyang. It also owned a components subsidiary, Delphi
Automotive Systems, which had 21 joint venture plants in China [see Exhibit 8].
20
“GM: Buick Production Begins at GM’s Joint Venture China Plant”, M2 Presswire, April 13th 1999.
21
Chen, Q.D “Shanghai General Motors Cooperation”, Shanghai Star, May 25th 1999.
22
“Sales of Foreign-brand Cars Slow with China’s Approach to WTO Entry”, SinoFile Information Services, June 14th 2000.
23
“China Could be Biggest Auto Market in 25 Years”, China Business Information Network, September 14th, 1999.
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