Chinese Trade: GM Gives 51 Percent, Receives One Percent

Bertel Schmitt
by Bertel Schmitt

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.

Bertel Schmitt
Bertel Schmitt

Bertel Schmitt comes back to journalism after taking a 35 year break in advertising and marketing. He ran and owned advertising agencies in Duesseldorf, Germany, and New York City. Volkswagen A.G. was Bertel's most important corporate account. Schmitt's advertising and marketing career touched many corners of the industry with a special focus on automotive products and services. Since 2004, he lives in Japan and China with his wife <a href="http://www.tomokoandbertel.com"> Tomoko </a>. Bertel Schmitt is a founding board member of the <a href="http://www.offshoresuperseries.com"> Offshore Super Series </a>, an American offshore powerboat racing organization. He is co-owner of the racing team Typhoon.

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  • Racer-esq. Racer-esq. on Oct 28, 2011

    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.

    • See 2 previous
    • Bertel Schmitt Bertel Schmitt on Oct 28, 2011

      @Bertel Schmitt 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.

  • Tekdemon Tekdemon on Oct 29, 2011

    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.

    • PlentyofCars PlentyofCars on Oct 31, 2011

      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.

  • SaulTigh When I was young in the late 80's one of my friends had the "cool dad." You know the guy, first to buy a Betamax and a C-band satellite dish. Couple of stand up arcade games in the den. Bought my friend an Atari 2600 as soon as they came out. He had two of these crap heaps. One that only ran half the time and one for parts in the yard. My middle school brain though he was the most awesome dad ever, buying us pizza and letting us watch R rated movies recorded on free HBO weekend. At the time I though he was much better than my boring father.Now with adult hindsight, I now know he was "dad who should have taken better care of his family" and not had so many toys.
  • Dave Has to be Indy 500. Many more leaders and front passes than NASCAR, and Monaco is unwatchable with the inability to pass on that circuit.
  • Jeff How did the discussion get from an article about a 56 billion dollar pay package for Elon Musk to a proposal to charge a per mile tax on EVs in California or paying increase registration on vehicles to make up for lost gas tax revenue? I thought such a discussion would better fit Matt's Gas Wars series.
  • Master Baiter Both people who bought ID.4s will be interested in this post.
  • Urlik Not a single memorable thing happened in the big three races this weekend IMHO.
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