Get A Slice, Give Half The Cake: GM Gets It's Golden Share Back, Cedes Control Of Chinese Sales

GM and its Chinese partner SAIC finally have worked out a deal that would get GM its coveted golden share back. In its darkest hour, GM had sold one percent of its 50:50 joint venture to SAIC, for the chump change of $85 million. Later, it became known why the number was so low: SAIC co-signed a note of $400 million. GM needed the cash to save its Korean arm. GM itself was facing bankruptcy, which happened only little later. Now, the share is coming back. For a hefty price.The return of the golden share was not easy. Chinese accounting rules say that a company that has substantial control of a partnership can reflect its full earnings on its books. According to the WSJ, “GM’s China ventures last year generated $30 billion in revenue and $3.2 billion in profit, of which GM received about $1.5 billion.” SAIC could book the full $3,2 billion. Not a bad deal for $85 million. Understandably, SAIC wants to continue showing the full profit on its books.

To do so, a complicated structure was worked out, which GM may regret one day, if not already. The Wall Street Journal and Reuters say that the deal will go down as we predicted last year. GM and SAIC will establish a sales company. SAIC will have 51 percent majority control of the sales company, “which would be where revenue is booked”, says the WSJ.

In turn, GM will receive 1 percent of Shanghai GM and will return to a 50:50 partnership in a company that has been stripped of the sales company that collects the money. You don’t think that’s a good deal? I agree.

Even worse, GM is no longer afforded the possibility of owning the sales company outright. As we explained last year, Chinese rules demand 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 looking into doing the same with distribution networks. A Chinese sales company does not need a Chinese joint venture partner, let alone one that has majority control. GM is giving up control of something it could own outright, in exchange for going back to a 50-50 Chinese standoff situation.

What’s more, GM and SAIC are moving closer and closer elsewhere on the planet. GM’s international operations are already in Shanghai. GM and SAIC are going into the interesting Indian market together. GM and SAIC already export cars to Latin America, “and potentially could begin building vehicles there, but not for some time,” says the Wall Street Journal.

GM CEO Dan Akerson already hints at a joint venture of global proportions:

“SAIC is the principal relationship that we have around the globe now and we expect that to be the case into the future.”

Other automakers don’t do joint ventures in important growth markets such as India or Latin America. They want to book the profits themselves. A financially weak GM has sold its future to a Chinese partner.