By on June 8, 2011

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.

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11 Comments on “GM To China: Recall! We Want Our Shares Back!...”

  • avatar

    I’m a little confused by this. When Ackerson says “We have an option to buy that 1 percent”, I take that to mean that they hold a call option, which is a contractual deal allowing the option holder (buyer) to purchase an asset at a fixed price for a certain period of time. The Bloomberg article states that it is a call option.

    If so, are things in China really squishy enough that the price or terms of the option can be manipulated outside that contract? If the call contract stipulates that SAIC retains the revenue bookings, fine, but the implication of the article is that the whole transaction is subject to negotiation and Chinese government interference. Is that really how things work there – where a contract is not really a contract?

    • 0 avatar

      “Is that really how things work there – where a contract is not really a contract?”

      Yes it is.

      I had a friend that worked for a large ticketing company (you know the one). While in China he had to have armed guards protect him while he carried astronomical sums of cash just to handle the last minute bribes and ransoms required to put on a concert for a globally recognized superstar. For example the crew started loading the music equipment and breaking down the stage a couple hours before the show started and wouldn’t stop and set it back up until they were given additional cash beyond the original contract fees.

      That is just how they do things over there.

      • 0 avatar

        Uh, that’s also how they do things here. Big box companies agree to pay within 60 days. Think it happens? Refer to the contract and the other party argues you breached first.

        You weigh the costs, litigation and damage to relationship or cash in hand.

        Personally I hate that but see it everywhere.

  • avatar

    shell game at best.

  • avatar
    Educator(of teachers)Dan

    Should have just asked the Chinese to make us an offer on the whole GM-Worldwide ball-o-wax. It would have sped up the inevitable.

  • avatar

    The article mentioned that it was a call option. A call option has a time line and a price set to it. If it is within this time frame, any idea why the sell would be blocked?

    • 0 avatar

      Yeah, contracts basically mean nothing in China. Along with human rights, intellectual property and all those things we in the West take for granted.

  • avatar

    GM + sound management = oxymoron

  • avatar

    I agree with EEGeek, this option is likely either for a fixed price or for a price determined by some external measure. This option only has value if Ackerson threatens to exercise it – even if he really doesn’t intend to buy it. GM could cut a deal to modify and/or extend the option in exchange for monetary or nonmonetary considerations without a dollar leaving GM’s pocket.

  • avatar

    China is a tough place to do business. Ask the MG Rover Phoenix 4 who like SAAB kept trying to do deals only to be scuppered by Chinese government interference.

  • avatar

    Thanks for the article Bertel!

    This is the most underreported subject of major importance to GM that I know of.

    GM has lost control of its growth market and can’t get it back. Why did GM sell the 1% for such a paltry sum? There is more to this story. I wish I knew.
    Do the Chinese have rights to all GM technology now?

    In any joint venture one party is akin to a chicken the other party akin to a pig. One party gives eggs to the venture and thrives the other party sacrifices ham.

    GM is giving ham.

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