By on October 28, 2011

 

There may be a deal in the works to return GM’s golden share in the increasingly important joint venture with China’s SAIC. It will be a skewed trade: The joint venture will go back to 50-50. In return, a sales company will be set up, which is majority controlled by SAIC in a 51-49 joint venture. SAIC will be controlling the most important aspect of the car business: The selling of cars.

In 2009, GM sold one percent of the 50-50 partnership.to SAIC for a token sum of $85 million. Officially, this was to allow SAIC to reflect the JV’s earnings on its books. New Chinese accounting rules say that the earnings can only be reflected if there is substantial control of the company. People had scratched their heads back then – if this share is so important, then why was the price so low? In a 10-K filing, GM explained later:

“The sale of the 1% ownership interest to SAIC was predicated on our ability to work with SAIC to obtain a $400 million line of credit from a commercial bank to us…

Remember, this was 2009, with GM hanging on for dear life. And why is the sales company suddenly a solution? Reuters explains:

“One possible option to show that SAIC is in some form of control would be to incorporate a sales company for Shanghai GM that would be majority-held by SAIC.”

This, however, is another interesting development. The word in China is that foreign joint venture partners are gaining the upper hand. China realizes that it needs a lot of foreign know-how, and that it currently is “big, but weak.”  Foreigners are gaining strength on two fronts:

According to Chinese rules, you need to form a joint venture for car manufacturing. Two crucial areas of the business do not need a joint venture: Parts manufacturing and the selling of cars. Foreigners have quietly established fully owned parts manufacturing enterprises in China and are planning to do the same with distribution networks. A Chinese sales company does not need a Chinese joint venture partner, let alone one that has majority control.  If that deal pans out, then GM is giving up control of something is could own outright, in exchange for going back to a 50-50 Chinese standoff situation.

 

 

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12 Comments on “Chinese Trade: GM Gives 51 Percent, Receives One Percent...”


  • avatar
    mike978

    Under the current arrangement is the entire enterprise (including car manufacture, sales and parts manufacture) 49:51 (GM:SAIC)? Or does GM currently have 100% of the sales channel?

    • 0 avatar

      “The channel” would include all dealers. Nobody owns that. They are talking about a “sales company.” A national sales company usually is the sole or master wholesale distributor for a country or a sales region. An example would be Toyota Motor Sales in the U.S. It sells both imported and domestically produced vehicles – to dealers.

      The way I understand it, currently this function is one of the many roles of Shanghai GM.

  • avatar
    GS650G

    Peggy Lee should do their negotiating for them. 10 years from now this is going to be one of many mistakes they made.

  • avatar
    Steven02

    When I was reading this, it sounds like there is going to be a new sales company setup. Is this correct? Will there be 2 sales companies?

  • avatar
    wsn

    I don’t understand this. If GM planned to survive on its own (like Ford), then yes, every penny counts. But since the start, it’s clear that GM needed a multi-billion bailout anyway, why sell the 1% if it’s important? That tiny amount of money won’t really make the bailout plan look better.

  • avatar
    racer-esq.

    Why would a 50 percent Chinese owned manufacturer provide cars to a 100 percent foreign owned distributor? I would think the Chinese partner would demand a 50 percent interest in any distributor that the joint venture provides cars to.

    • 0 avatar

      Wrong. A Chinese manufacturer sells to whoever pays the bills and sells the most cars.

      • 0 avatar
        racer-esq.

        So then the Chinese auto manufacturers disagree with you about the value of distribution rights? The value of distribution rights is highly country specific because it depends on the laws governing the relationship, so I’m tempted to take their word on it.

        It sounds like GM got a good deal, going from owning 49 percent of the company to owning 50 percent of the company, but only 49 percent of a subsidiary that is being spun-off.

      • 0 avatar

        You are mistaking distributor with sales company. A sales company is the sole top level marketing organization. Think of it as a spun-off sales and marketing arm. The JV has a contract with the sales co. Whether the sales co is 100% foreign, 50-50 owned or 100% Chinese, all cars go through that company. Below that are distributors, wholesalers, dealers etc.

        Because car manufacture must be a JV, the fight for control is fought at the inpoints and outpoints. The inpoints are parts and component manufacturers, which can be 100% foreign. An important inpoint is development, which usually is 100% foreign controlled (unless you give that up.) The outpoint is the distribution system which can be 100% foreign. In theory, everything can be foreign in Chine except the actual assembly of cars.

  • avatar
    tekdemon

    Man that chick’s Chinese sounds worse than mine. At least she cops to it being Taiwanese mandarin though it really sounds more like Taiwanese-American mandarin, lol.

    • 0 avatar
      PlentyofCars

      My spouse is from Taiwan. She says Peggy is purposely using a foreign mandarin accent when playing the customer. Her speech is normal when playing the shopkeeper.

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