GM Puts a Tiger in Their Tank
Imagine an alternate reality where General Motors operates state-of-the-art factories with flexible manufacturing systems allowing production of vehicles with different platforms on the same production line. Where they operate with a lean manufacturing philosophy that encompasses purchasing, logistics, manufacturing, sales and quality management. Where they use non-union labor to keep costs down and profits up, avoiding the legacy costs unions bring to the table. Where sales are up more than thirty percent. Huān yíng guāng lín to China.
In 1997, GM entered a 50-50 joint venture with Shanghai Automotive Industry Corp. (SAIC) to form Shanghai General Motors (SGM) Co. Ltd. At the time, it was the largest single foreign investment in China in decades; many analysts considered it a high-risk undertaking. They’ve since been proven wrong, as the partnership continues to prosper. Currently, SGM produces 29 products under five main brands: Chevrolet, Buick, Cadillac, Saab and Opel. Additionally, they manufacture and sell ACDelco parts and Wuling minivans and pickups.
SGM also operates China's first automotive engineering and design joint venture: the Pan Asia Technical Automotive Center (PATAC). PATAC handles all the vehicle design, development and testing for SGM and their domestic joint ventures. It has more than 1100 salaried employees, many of whom have masters and/or doctorate degrees. Their emission testing facility is one of 11 certified by the Chinese EPA and can test to European or American standards (including California’s stringent super-low emission standards).
GM has invested billions of dollars in their booming Chinese operation. If anyone has any lingering doubts about GM’s commitment to this market, the American automaker has just announced their plans to mass produce hybrid cars in China by 2008. While they’ve eschewed hybrid cars in the US (focusing instead on pickups and the Saturn Vue), the company’s PR flacks state "the GM Hybrid System is flexible and cost effective and is ideal for high volume global applications, which include its introduction in China in 2008." So far, The General hasn’t indicated any plans to expand its hybrid market in the US. But few industry observers would be surprised to see hybrid powertrains– or even complete hybrid-powered cars– coming through customs shortly after their Chinese debut.
So what does GM get in return for their investment? They have access to what is arguably the fastest growing automobile market in the world; sales jumped 36.7% in the first three quarters of this year. GM’s leadership is acutely aware their Shanghai goose is producing dozens of golden eggs, and they’re doing everything they can to keep it healthy. During a visit to Shanghai earlier this month, Rick Wagner stated, "we are willing to invest ahead of demand here because we are very bullish that demand is going to keep growing here."
All is not sunshine and rainbows, though. SAIC is using the expertise and experience gained from their joint ventures to launch their own premium brand, Roewe, at this month’s Beijing Auto Show. Their first offering, the Roewe 750E, is based on the Rover 75 sedan. They will market it as a premium brand in direct competition with Cadillacs, Saabs and top line Buicks. SAIC plans to launch 30 new models under the Roewe brand between 2006 and 2011, and hopes to produce 120K Roewe cars in 2007.
Where does this leave GM? It’s too early to tell. Under Chinese law, foreign automakers have to be in a joint venture agreement with a domestic company. That means GM can’t sever their ties with SAIC– unless it hooks-up with another Chinese manufacturer. SAIC says it has gleaned "rich experience and resources in every field" from its work with GM. GM says it “understands" SAIC’s "desire for further growth" and is confident "SAIC recognizes that the success of both companies in the China market is closely linked to the success of our joint ventures." Industry analyst Michael Dunne states, "the Chinese formed joint ventures for one purpose: to learn how to do it themselves one day. That day is here."
In the short term, GM will feel very little impact from SAIC’s decision. Cadillac is one of the top brands in China, on par with (or maybe even more desirable than) Mercedes. Buick has been on the Chinese market for almost 10 years. Both marques have solid reputations as prestige brands, so it may take Roewe a while to catch up. GM seems to have the inertia they’ll need to survive in the Chinese market.
However they can’t drop their guard. They have to keep up with market trends and keep manufacturing costs in check. And whatever else they do, they must avoid the brand dilution that plagues them in other markets. Hopefully, GM’s China connection will provide the capital it needs for a corporate turnaround. In fact, the future of GM’s North American operations may depend on it.
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