By on December 4, 2009

A little more green would have been nice...

Fresh details on GM’s Asian wranglings are coming in, and it seems that SAIC paid The General a mere $85m for the one percent needed to control the joint venture. GM’s Nick Reilly tells the New York Times:

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… S.A.I.C. wanted to have a majority stake to consolidate the venture in its financial reporting

Which is about as credible as the conclusion that the Shanghai and India deals are going to provide GM International with a meaningful amount of cash with which to rescue its European and Korean divisions. As it turns out, the Indian deal isn’t going to translate into free cash for GM. GM and SAIC will set up a joint Hong Kong-based investment company, which GM will give its Indian operations and SAIC will fund with $300-$530m, bringing its overall value to $650m.

Reilly explains the value of the India venture thusly to the WSJ:

SAIC’s participation helps GM “defray or share large investment” required for the India push and help the partners achieve results faster, Mr. Reilly said in a conference call with reporters. It also allows GM to market more products in India that had not been “envisaged in our GM-only plan,” particularly ultracheap micro minivans and buses that GM makes with two Chinese partners.

But here’s the rub, as explained by Reilly:

The long-term goal of the Hong Kong investment company will be to expand into other emerging markets. But the initial management structure will be in India, while any expansion into other emerging markets would be managed from G.M.’s Asian headquarters in Shanghai

Though this partnership will not be without its value, the idea that this sale will actually help GM International’s cash position is suspect at best. The $85m for the one percent of SAIC is clear cash, but it doesn’t begin to scratch $413m recently spent on Daewoo’s share offering, let alone the estimated $5b needed to restructure Opel.

So what is the real payoff for GM? Possibly a larger stake in GM-Wuling, although Reilly says “we don’t have anything to announce on that, but SAIC has been very supportive in discussions around that.” The only thing looking like a real benefit from this deal is only hinted at by Reilly:

GM also has been “able to achieve some funding for other activities [in China] from the Chinese banking sector, which would have been difficult to do on our own,”

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8 Comments on “One Percent Of GM China Worth $85m...”

  • avatar
    Cammy Corrigan

    If, as posited before, that GM did this sale to finance the restructure of Vauxhall/Opel, then there’s a problem. The loans offered by the German Government were worth €4.5bn; this sale netted $85m. What else are GM going to sell? What else do GM have to sell? The maths do not add up.

    • 0 avatar

      It’s not what GM is getting from this deal, it’s what this deal allows them to get from the chinese “government” (in the form of the endless banks and companies it owns).  I wouldn’t be surprised to see SAIC purchase a large piece of Opel for the restructuring with funds provided the government (SAIC controls china and GM controls europe, but the upside is there for both, GM needs china and china needs opel)

  • avatar

    If GM would actually “sell” something for “cash” which they would then invest in another venture, then this wouldn’t be smart. It would be taxable. Not that GM doesn’t have  tons of losses, against which the gains could be accrued, but who wants to do this. These deals are usually done in a tax efficient manner, with as little  real cash changing hands  as possible. I bet the Investment Bank that handles the (very tax efficient) HK setup already is complaining about the stamp tax.
    So 1% of GM China is worth $85m? That puts  a $8.5b valuation on all of GM China.  Come on. The chatter in China is that the 1% (which allow SAIC to book all of the JV as theirs, and I bet GM does the same …) did cost around 20% of what the JV is worth. Somewhere. Somehow. Just not in open cash on the table. Only amateurs do that. GM is run by accountants.  They know accounting.

    The NYT on the other hand needs to learn a lot about tax efficient accounting. They swallowed the line “Companies often choose to incorporate subsidiaries in Hong Kong because it has a strong legal and financial system.” Baloney.

    Companies usually choose to incorporate in Hong Kong, because it is one of the last tax havens on the planet. HK coporate tax rate (last time I looked) 16.5%. No cap gains tax. No VAT. Write-offs like you’ve never seen them before. Loan to foreign entity: Interest income not taxable in HK. And the list goes on …

    Note that Reilly went to great pains to avoid saying that SAIC “bought” 50% of the Indian ops. Taxable event. Instead, the HK investment company is created, GM “contributes” the Indian ops, SAIC contributes money. No taxable event. The investment company can receive loans and can lend out money (tax free in HK, but an expense elsewhere.) That HK Investment Co. can be a great funnel for all kinds of money, with nobody really knowing where it comes from.

  • avatar

    So it is OK for a Chinese company to get financing from the government, which runs the banks, yet if the US government helps GM everyone gets their upset and bitches. I’m just confused how people are ok with the advantage these companies that are backed by government funds have. Didn’t the Chinese bitch about the bailout to the WTO yet the gov runs everything there. Would love if someone can explain how the western corporations are not at the disadvantage operating in that type of marketplace.

  • avatar
    Kyle Schellenberg

    Here’s an out there thought: what if GM decides to change its focus away from the American market?
    Developing cars in cheap non-union markets and selling them with American know-how to developing markets with big growth opportunity.  It seems like the everconstant pursuit of being no.1 in the States has killed them financially as a company so maybe it’s time to walk away from that mantra.  They would still sell cars in the U.S. but falling to 2nd, 3rd or 4th place wouldn’t matter as long as they make ground elsewhere.
    Regardless, it seems like car sales are blossoming everywhere but here, so there’s no time like the present.  It took the Japanese and the Koreans decades to convince the public that they could build quality cars.  Without the value proposition on American brands they wouldn’t maintain sales on quality alone.  If they want to go the quality route it would likely take a decade to win people’s perception.  They don’t have the luxury of that option because the government’s rug pulling machine is on a timer.

    • 0 avatar

      1. What car company HASN’T decided to focus on China and away from America? It’s just good business.
      2. GM didn’t pursue being No.1 in US; it conglomerated its way into No.1. (And then pissed it away.)
      3. “Pulling the rug out” is an expression for surprise. Where’s the surprise knowing it’s on a timer?
      I think in the longer term (10-15 years?), Americans will be offered only what the car makers are making in China (plus a smattering of premium Japanese and Korean US-made transplants – depending on the tariffs), so basically ‘export quality’ Chinese market cars.

  • avatar
    Kyle Schellenberg

    Where’s the surprise knowing it’s on a timer?
    I was thinking more along the lines of a jack-in-the-box kind of thing – only the government knows when that timer goes off, but the rug pulling happens suddenly all the same.

  • avatar

    Good God, what a mess.

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