By on December 6, 2009

Panic in Detroit. And Shanghai. And Russelsheim. And Bupyeong...

News that GM is selling a control-shifting single share in GM Shanghai to its Chinese partner SAIC was the toads-from-heaven flourish at the end of an epic week for the RenCen. The day after the last of GM’s lifer CEOs left the building, Opel’s CFO followed suit. One management re-organization and a rough LA Auto Show later, came this symbolic surrender of GM’s largest market for a measly $85m. Accompanied by news that The General would buy out Suzuki’s stake in CAMI for an estimated $46.5m, no less. Oh yeah, and something about India. Freshly-minted CEO and notorious rattlesnake killer Ed Whitacre isn’t about be accused of not trying to shake things up. The only question is where will everything land?

The true impact of GM’s loss of control over Shanghai GM will take time to asses, in part because Shanghai’s role on GM’s balance sheet is not clear. And no, not just because bloggers are lazy. GM’s Asian financial results were notoriously opaque way even when they were GAAP-compliant. Moreover, GM’s claim that the sale will not functionally change the partnership’s “cooperative spirit,” further clouds the situation. In any case, neither of these unknown quantities will prove to be net positives: the only question is how much GM will suffer by becoming a junior partner in Shanghai GM.

But as apocalyptic as the symbolic handover in China might seem, the India-market gambit was by far the more significant late-week maneuver. SAIC will become the first Chinese firm to establish itself in India, a prospect that Tata, Bajaj and the gold-rushing multinationals have likely been dreading. This alone is no mean feat, considering the deep suspicions between China and India. In essence, it gets to piggyback on GM’s existing GM India infrastructure of dealers and, less helpfully, factories. In return, it will invest some $350m into the venture in hopes of improving on GM’s 65,702 unit sales in 2008.

Ironically, the firm that GM parted ways with on Friday is also the reason for GM’s gambit. Suzuki’s Indian JV, Maruti, sold 711,818 units in India in 2008, and with strong market growth and SAIC investment, GM imagines it can make major inroads on that number. Indeed, GM’s India sales will have to double on the strength of SAIC’s investment to make the deal worthwhile. As a global player, GM has made a momentous decision to share half of its future in one of the world’s most untapped markets. Why then, if GM was willing to walk away from half of India’s future growth, did it not get more free cash (as opposed to Indian-market investment) out of SAIC?

The short answer is that India is seen as the next China: an underdeveloped, underserved market of vast potential. It goes without saying that GM doesn’t have the cash to match Indian offensives by Ford,  Renault, Honda, Hyundai, and Toyota, but GM does have a relatively strong position to start from (#5 in sales in 2008). Early entry into China was key to GM’s success in that market, and it surely sees India through the same lens. This influx of foreign competitors has created a gold rush environment that has GM trading in its long-term strategic position for a short-term boost. Unlike those competitors though, GM has more to worry about than merely falling behind in the Indian market.

GM’s global woes, specifically cash influx needed to right its struggling Opel and Daewoo units, are a far bigger threat than mere also-ran status in India. After all, these two divisions are responsible for developing GM’s most successful global products, and should it lose them GM’s status as a global power would become little more than a fading dream. After all, the Buicks that Shanghai GM builds and sells with great success in the Chinese market were developed by Opel. The Cruze, Aveo and Matiz Creative (Spark) that form the backbone of GM’s developing-market (i.e. India) strategy were developed (and in many cases, built) by Daewoo. Without these products and their successors, GM and SAIC’s cooperation will be for naught. So why didn’t this latest flurry of wrangling result in a solution to these crucial divisions’ troubles?

Probably because, even if SAIC’s $350m came as free cash, it wouldn’t even make a dent in the problem. Daewoo lost $2b last year on foreign exchange hedges, and out of credit, it’s staying alive on $413m that GM injected into the firm a few months ago. Opel, meanwhile, needs about $5b for its restructuring, some 20 percent of which GM has said it will contribute to the cause. But the rest of that money will have to come from European governments, an unlikely prospect considering how unloved GM is on the Continent. If the Europeans don’t come through with restructuring aid, GM will have to burn through a good quarter of its government-supplied cash pile in hopes of keeping a division it has admitted it can’t survive as a global player without. And that’s not counting the real amount needed to keep Daewoo developing new products, which could easily be in the billions.

There’s no doubt that GM needed to make faustian bargains to remain a global player, post-bankruptcy. Fritz Henderson’s approach saw Opel as the most expensive and expendable dillema on GM’s plate, and his deal to sell the German division would have represented a major setback to GM’s ambitions. But in calling back the Opel deal, new CEO Ed Whitacre sent the message that Opel’s development capability was too valuable to give up. And so Whitacre made a faustian bargain of his own, in which GM gave up control in China and half of its future in India. Though this deal hurts less in the short-term than seeing Opel become independent, the long-term strategic implications are just as worrying, and more importantly, it does nothing to resolve GM’s underlying global challenges. Fritz’s deal with the devil was an act of necessity, Whitacre’s has the air of a desperate gamble.

Having survived on international profits for decades, it’s ironic that GM’s post-bankruptcy era is  being defined by trouble abroad. Moreover, it’s troubling that GM is ceding leadership in the growth markets that have sustained it to its Chinese partners, especially since the deals haven’t created any more certainty or security for The General on the global development front. On the other hand, if GM is stepping back, sustaining its overseas presence by bringing in its Chinese partner, perhaps that same strategy will save the day when GM finally deals with its crumbling cornerstones in Germany and Korea. SAIC was mentioned as a possible partner in the Daewoo rescue, and since its future is so closely tied to GM  maybe the cash-rich Chinese firms will take stakes in Opel and Daewoo.

This week’s news is as much the story of SAIC’s rise as GM’s continued decline. With the Chinese government pushing for consolidation in the auto industry, SAIC may see GM as a dying host from which to springboard into international prominence. With half of GM’s mega-market efforts, GM’s Chinese tail need only take stakes in Opel and Daewoo to truly begin wagging the dog. After all, GM’s alternatives to more cooperation with SAIC are expensive, messy and will most likely involve sending taxpayer money overseas. But with pressure for an IPO looming, GM has to get its international house in order. Though this week’s manuevering hasn’t secured GM’s position, it may just point the way towards The General’s Chinese-led future.

(imagine if GM and Suzuki’s ill-fated cooperation had included India in the first place)
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16 Comments on “GM Zombie Watch 22: International House Of Panic...”


  • avatar
    John Horner

    When you have to pick from an array of unappealing choices, you pick the least bad one. Last week’s moves by GM all seem like the least bad ones which could be made given the limited options available.
    Prediction time: After much hang wringing, the various European governments will pony up money to keep Opel alive. None of them want to deal with the job losses an Opel liquidation would entail given the unemployment problems most of the developed nations are in the middle of right now.
     

  • avatar

    the bottom line is that GM still doesn’t understand automotive retail. all the cuts, closings, borrowings, bankrupty filings, spinoffs, and executive shuffles won’t make a hill of beans difference until they get the marketing right. for years I preached against Red Ink Rick and LaNeve’s idiotic merchandising. I was proclaimed to be a nutjob but now have been vindicated. still, Return to Greatness sits on the sidelines as GM continues it’s descent.

    • 0 avatar
      Robert.Walter

      @Buickman:  Glad to see you posting again, even if it is sad commentary.  Haven’t been to your web-site in a long time, have you updated it with recommendations to fit the current situation?  Would love to see that!!

    • 0 avatar
      ASISEEIT

      J.D. you’ve spelled it out! G. M. seems self destructive and nothing is going to stop them!  I believe this is being done on purpose! It doesn’t make sense to normal people why would anyone eat their offspring? I’m thinking destroy north American operations and you destroy retiree’s costs. At the same time you destroy the wage structure and eliminate benefits and NOW WE CAN COMPETE!  Now it’s, “Let’s Destroy Everything Worldwide!  There has to be a bigger picture here and that’s what is so frustrating. When you keep painting yourself into a corner somethings very wrong! It seems “Normal Thinking” will not give you the answers!

  • avatar
    oboylepr

    Very good article Edward. At this point in time GM is in full blown retreat on all fronts. John, you may be right about funding for GM in Europe but I doubt it. I get the feeling that Europe would rather pay the unemployment benefits as a result of a GME meltdown than help a hated corporation. Besides it’s cheaper in the short term if the US/Canada bailout is anything to go by.

  • avatar
    Robbie

    It seems to me that ideally a different radical approach is needed. In an ideal world, without unions and US government bailouts, shouldn’t GM become OpelDaewoo? Why isn’t GM closing up shop in North America to the maximal extent they can during the bankruptcy phase while they can get away with it?
    The whole word seems to be happy with Daewoo-Opel developed cars. In the specific large-cars-cheap-gas-high-incomes situation of the US market, GM is incapable of competing. It seems to be that North American operations are killing them. India and China are 2.5 billion people . Why does GM need the US?

    • 0 avatar
      Bunter1

      Hi Robbie,
      I suspect it may be like this, Gm will never have majority control of China which is thier only healthy large market division.
      To remain a global player they will have to hold on in NA, they haven’t got that many choices on where to stand and none that they control are “solid ground”.

      Ego could be part of it, look at how desperately they try to convince themselves that the idiot buyers perseption is the problem in NA, every move they have made was “good”, it’s all just been bad luck.

      Some thoughts.

      Bunter

  • avatar
    dougjp

    Whitacre looks like the weakest “suit” to have prowled the upper floors of those office towers, while at the same time the biggest egotist and most annoying individual that’s been there for many years. Given the people being compared to, that’s pretty conclusive criticism.
    It seems these decisions are based on the simple old theory of how to keep your job – “a change is better than a rest”.  Some of his AT&T moves were much the same, how do you rate ability when the results of decisions hasn’t happened yet.
    It really appears to me that GM is starting to catch Chrysler in the race to the bottom.
     
     

  • avatar
    Robert.Walter

    Wasn’t the point of GM’s Ch11 bankruptcy restructuring to clean out problem areas, get it back on solid footing, properly finance it and thus set it up for success going forward?

    With the continued lurching about, it would seem that the above objective(s) have not been fulfilled.

    And if “success” in NA required the engineering and production resources of healthy subsidiaries in Korea and Germany, why was this not dealt with?  It would seem that the integral nature of GM-DAT and Opel to GM world-wide was widely known and talked about here on TTAC, but why was this seemingly given short-shrift by the PTOA?

    Seems to me, with all the retrenchment and draining coffers, GM is dancing on the rim of a volcano, with diminishing room for error.  Surely, the goal of the PTOA couldn’t have been to deliberately do the GM job halfway, so as to leave GM so weakened that it couldn’t recover, or become take-over bait, could it?

    @Edward:  Great analysis, this is the kind of thing I had in mind (but was too lazy to write-up in detail) when I was writing of the other shoe dropping (i.e. creeping and, inevitably, Chinese ownership of GM Corp.)

  • avatar
    Bunter1

    Hard to rate GM’s future overall at this point, currently they have been able to convince the credulous MSM that everything is going up but with major problems in NA, Yurp und Korea I smell trouble.

    Those three balls (chainsaws?) in the air are gonna keep Ed’s hands full. Anything else hits, or he misses a grip, and they will fall.

    OK John, I’ll make a prediction too, say 55/45 that it will happen: GM’s “Trepidous Three” will continue to suck up cash and jeapordise the corporations health, SAIC will suck up control a bit at a time (suspect S.Korea w/ not let them in…duh). Seven to ten years from now GM, as we know it, will not exist, it will be controlled/owned by SAIC. Could happen faster.

    Bunter

  • avatar
    Dimwit

    It may all depend on Fiatsler, funny enough. I have the sneaking suspicion that the Suits are trying to shuffle the deckchairs long enough that when (not if) Fiatsler finally bows out of NA, tail between its legs, the leavings will be plenty enough for a revitalized GM. One year? Two?

    If they can keep it together that long then they will be in a position to come storming back. India can wait. It’s behind China economically and won’t be in position to materially affect the balance sheet until 2014? 2015? 2020? By then, they could have models and can aquire the partners to properly reenter the market.

    As long as Opel and DAT are still in the folds GM has the small vehicle design potential available. If that goes away and they’ve almost lost both a couple of times, then the NA portion has to accede the rest of the world. It’s been obvious over the years that GM’s NA offerings don’t sell well abroad and that isn’t about to change.

  • avatar
    fincar1

    Geithner got laughed at in China when he said they didn’t have to worry about the value of the dollar. Obama came back from China without even t-shirts for his daughters let alone anything of value to the country. Perhaps the Chinese see the falling-star trajectory of GM as that of the United States as well.

  • avatar
    porschespeed

    It may all depend on Fiatsler, funny enough. I have the sneaking suspicion that the Suits are trying to shuffle the deckchairs long enough that when (not if) Fiatsler finally bows out of NA, tail between its legs, the leavings will be plenty enough for a revitalized GM. One year? Two?

    It’s entirely possible using GM logic. Of course, the death of Chrysler will have no positive effect on GM sales, which everybody knows. Except the suits at GM.
    If Uncle Sugar isn’t careful, GM’s BK: the sequel will happen prior to the next election.

    • 0 avatar
      rnc

      The people who buy ChryCo vehicles fall into four catagories.  First is the die hard american/chryco and will never buy anything other than an american vehicle, this is maybe a third of thier sales (half ford, half GM).  The second group is the lowest cost/available financing people, GM can best cater to them through Ally (which as a bank, has much lower borrowing cost and can make riskier loans, the treasury will bail them out), Ford is pushing up market to compete with Toyota and Honda as they should, this group will primarily be left to GM as well.  The third group is the minivan people, this group would be lost and the fourth group are  jeep people, someone will buy jeep (tata maybe to go with LR).  So yes it would help GM in the short term, however this will also allow them to continue selling lower quality cars and if the short term mentality takes over again they will just be following a circle.

  • avatar
    Rix

    A new candidate for CEO of GM: Hakan Samuelsson, who just got kicked out of MAN (3rd largest truckmaker in EU) by everyone’s favorite villain, Ferdinand Piech.

  • avatar
    Mark MacInnis

    Where, exactly, is the tip-over point, beyond which US taxpayers would have been better off to let GM go tango-uniform?  If we ain’ there yet, it’s gotta be soon….

    We are heading into an economic ice-age, metaphorically speaking…..and GM is the Mastodon….big, ponderous and clueless…..that’ll be frozen in the glacier.


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