In December 2009, freshly government owned GM cut a deal with its Chinese joint venture partner SAIC: For the chump change of $84.5 million, GM sold SAIC one percent of their Chinese joint venture. It was not just any one percent. It was THE one percent, the golden share that brought SAIC’s holdings to 51 percent. It allowed SAIC to consolidate the profits of the GM China JV in its books. And now, GM wants the golden one percent back.
“We have an option to buy that 1 percent,”GM CEO Dan Akerson told shareholders yesterday at the automaker’s annual meeting in Detroit. “It’s our intention to exercise that.”
Why and what for is anybody’s guess. For control? The usual Chinese standoff 50:50 split provides not more control than 51:49. Back when, then GM China chief Nick Reilly told the New York Times that “the 51 percent stake would give S.A.I.C. the right to approve the venture’s budget, future plans and senior management. But the venture has a cooperative spirit in which S.A.I.C. has already been able to do so.”
Last we looked, GM didn’t write the law in China. What’s SAIC supposed to do? Cheat on Chinese taxes? Understandably, Akerson’s announcement causes a lot of shaking and scratching of Chinese heads:
“Any possible repurchase by GM needs to meet the condition that SAIC can include Shanghai GM’s revenue into our accounts,” Zhu Xiangjun, a spokeswoman for SAIC, said to Bloomberg. “That’s why we bought the shares in the first place.”
“GM may find it difficult to buy back its stake because it’s not in the interest of SAIC or the Chinese government to sell,” said Zhang Xin, an analyst with Guotai Junan Securities Co. in Beijing. “The Chinese government has been encouraging automakers to be independent and they’re unlikely to approve GM’s repurchase unless GM can offer some attractive terms in exchange.”
And what could those attractive terms be? Bloomberg brings up an interesting point:
“Even as the automaker sells more cars in China than in the U.S., it earns more profit in the U.S., where it delivered 2.22 million vehicles in 2010. GM’s North American operations had profit before interest and taxes of $2.13 billion in the second quarter, while the company’s international operations, including China, earned $646 million, it said Nov. 10. “
The way to make money with a joint venture is usually not by divvying up profits. One charges license fees for cars, sells systems, parts, anything to reduce the foreign profit before it is split with the joint venture partner. What Bloomberg seems to insinuate is that there might be a deal that looks ok on paper, but that will reduce these unequal profits down the line.
That one percent is worth much more than $84.5 million to the Chinese. If Akerson wants it back for whatever unfathomable reason, then it will cost him.