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The secret history of GM’s Chinese bailout

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ALL ABOUT THE GUANXI
The secret history of GM’s Chinese bailout
January 24, 2016
Edward Niedermeyer
By Edward Niedermeyer
When US taxpayers footed a $50 billion bill for the bailout of General Motors in 2009, few could have guessed that the biggest of the Detroit “Big Three” (GM, Chrysler, Ford) would go on to import Chinese cars to the United States. Yet just seven years after its publicly-funded and highly-politicized rescue, GM says it will do exactly that: early next year the automaker will begin shipping Chinese-made Buick Envision crossovers across the Pacific for sale at its US dealerships, with a plug-in hybrid version of Cadillac’s CT6 flagship sedan to follow. Anyone who believed that GM’s bailout would create a bulwark against a long-feared flood of Chinese cars might be puzzled to find the very same automaker championing Chinese imports. In fact, this move is just the latest in a pattern that dates back to 2009, when GM received a secretive Chinese “bailout” that appears to have turned America’s largest automaker into a Trojan horse for its Chinese partner.

In his 2011 book American Wheels, Chinese Roads author Michael Dunne explores GM’s profound success in the Chinese market, dating back to the founding of its 1995 “Shanghai GM” partnership with the Shanghai Automotive Industry Corporation (SAIC). He describes the relationship between the two firms as being mutually-beneficial through the early 2000s, but when the 2008 downturn brought GM to the point of bankruptcy the partnership took a troubling turn. Because the US auto task force refused to let GM spend TARP aid on its foreign operations, GM was forced to turn to SAIC for help. The resulting deal would forever alter the delicate balance of power in the Shanghai GM joint venture and drive GM to restructure its entire global strategy around its partnership with SAIC.

GM’s Asian-market woes in 2009 centered around its Korean operations, then known as GM-Daewoo Automotive Technology Company (GMDAT). Once GM’s global “home room” for engineering and exporting low-cost small cars for developing markets including China, GMDAT ran into serious cash flow problems when it lost $1.5 billion in foreign exchange alone in the first quarter of 2009. With GM headed towards bankruptcy, its US government rescuers unwilling to pay for overseas problems, credit markets largely frozen by the financial crisis and the Korean Development Bank refusing to extend loans beyond the $2 billion already owed to it by GMDAT, GM’s only option was to turn to its Chinese partner for liquidity.

By mid-November 2009, GM suddenly had $491 million to spend on GMDAT’s turnaround, but it wasn’t immediately clear where the money had come from. That December, the first details emerged: GM had sold 1% of Shanghai GM to SAIC, giving the Chinese partner a controlling stake in the venture. It also turned its struggling GM India division into a joint venture, with SAIC receiving a 50% stake in return for an additional investment of $350 million. At the time, GM executives said the deal would also allow SAIC to consolidate earnings from the joint venture and that in exchange it had helped GM “achieve some funding for other activities from the Chinese banking sector, which would have been difficult to do on our own.” In its 2010 year-end SEC filing, GM eventually clarified that SAIC had helped it secure a $400 million commercial bank loan, with its stake in Shanghai-GM as collateral.

The token $85 million price SAIC paid for the “golden share” in Shanghai-GM was the first sign that there was more to the deal than met the eye. In a business culture that obsesses on guanxi, or the “favor economy,” SAIC’s assistance at GM’s moment of desperation was a favor of epic proportions and one which would require significant strategic compensation. As Dunne points out, China’s joint-venture auto industry strategy had easily-identifiable goals:


Step 1: Form joint ventures with leading global carmakers.

Step 2: Absorb the foreign partner’s technologies related to car design, engineering, and manufacturing.

Step 3: Build cars under China’s own brand name.


With the upper hand on its bankrupt partner, SAIC had the leverage to make serious headway on this agenda. GM would eventually buy back the golden share, although not before SAIC received a controlling stake in the joint-venture’s sales company. But even this significant advantage didn’t square the bill: in the years following the golden share deal, GM began paying SAIC back on the strategic terms laid out by Chinese industrial policy.

Starting in 2010, GM began an unprecedented wave of technology transfers and joint development that would tie the two firms closer than ever and put the century-old automaker on an increasingly level footing with its upstart Chinese partner. GM announced that it would jointly develop its next generation of global small gas engines and first-ever dual-clutch transmission with SAIC at the R&D facility the two firms had established in Shanghai. At the same time, it signed a memo of understanding agreeing to “long-term strategic cooperation” on “new energy vehicles”—the Chinese government’s term for plug-in hybrid and pure electric vehicles. At a time when rising emissions regulations around the world were making fuel-efficient and electrified vehicle technology critical to the future of every automaker, GM was tying that future to its Chinese partner. With GM now importing its top-of-the-line Cadillac CT6 plug-in hybrid from its Chinese joint-venture plant, that future has already begun to arrive.

Even GM’s current core technology suddenly began appearing in the hands of its Chinese partner. The 2010 Chevrolet New Sail was described as the first passenger car to be jointly developed entirely in China, but under its skin lay the Gamma II platform that still underpins GM’s subcompact offerings like the Chevrolet Spark, Sonic, and Trax. By 2012, SAIC had developed vehicles using GM’s Delta II compact and Epsilon midsized platforms, giving it access to all three of GM’s core global car platforms. That year SAIC also launched its first vehicle with a dual-clutch transmission, the Roewe 550, beating its hundred-year-old partner to the punch. Within just three years of the golden share deal, SAIC appeared to be pulling ahead of GM technologically.

But success in China required more than the latest technology and GM also shifted its low-cost, developing-market focus from Korea to Shanghai. A three-way joint venture between SAIC, GM, and Wuling had been rapidly expanding sales of its spartan micro-vans and in 2011 it burst into the mainstream with its first own-brand vehicle, developed on the GM “J” platform: the Baojun 630. In 2012, the Baojun brand began producing its own version of the old Chevrolet Spark and has since added a subcompact SUV and MPV both based on its own “jointly developed” platform. Nearly one out of every four GM cars sold in China is now a Baojun, but as just 44% partner in Shanghai-GM-Wuling GM’s share of the profits is even thinner than at Shanghai GM.

With SAIC enjoying the upper hand in China and jointly running GM’s business in India, another shift took place in the relationship: GM began rebadging its partner’s Chinese-branded vehicles for export markets. Exports of Chevrolet-branded Wuling vans began as early as 2008 and the export of complete knock-down kits to for assembly in GM plants around the world accelerated after the golden share deal. In 2013, the Baojun 630—which had been planned as an export model—was rebadged for export to a variety of developing markets as the Chevrolet Optra. That same year GM’s global exports of Chinese cars exceeded 100,000 units, and when asked if Chinese-made cars might some day be sold in the US, GM China president Bob Socia replied “it could very well happen.”

The alignment of GM and SAIC’s global strategies has culminated in their announcement of a jointly-developed new architecture that will underpin all of GM’s small cars sold outside Europe and the US. Between this platform and the jointly-developed Small Gas Engine family, the line between GM and SAIC will have been all but erased in the majority of the world’s markets. This not only means GM will have to share all future growth market profits with SAIC, it also means the end of royalty payments that GM once earned for every car built using its engines and architectures. In every market with strong future volume growth potential, GM’s unique advantages with respect to its newly-empowered partner have been whittled down to the brands it uses to gloss over any stigma around Chinese products.


The importation of the Buick Envision will be the first major US-market impact of GM’s Chinese realignment, but at GM’s outposts in Korea and Australia the pain is being felt far more directly. In 2013 GM announced that it would end all production at its Australian division Holden, replacing the fiercely independent development and production center with a lineup of imported models. As late as 2003, GM executives said Holden’s last unique vehicle the Commodore—which was imported to the US as the 2004-6 Pontiac GTO—could be exported to China; by 2017 that car will in fact be made in China and exported to Australia, where all that remains of Holden is a sales and service operation.

GMDAT was renamed GM Korea in 2011 “to reflect its heightened status in global operations of GM” according to GM’s official announcement, but the name change seemed to have the exact opposite effect. Having once provided the core technology behind many of GM’s most successful China-market products, GM Korea has lost its status as GM’s emerging-market “home room” to Shanghai-GM’s new joint emerging-market vehicle platform. In 2013, when GM decided to stop selling the Chevrolet brand in Europe, a market that accounted for more than 20% of GM Korea’s production disappeared almost overnight. Having kept GMDAT afloat for years with billions in Korea Development Bank loans, Koreans now find themselves swallowing bitter layoffs and preparing for likely plant closures.

Across Asia, there more signs of SAIC’s rise: GM’s Indonesian operations are being replaced by a S-GM-Wuling plant, GM canceled a planned expansion in Thailand after SAIC entered the market with a different partner, and GM moved the last remnants of its dwindling “international operations” to Singapore. SAIC did reduce its stake in GM India to just 7% in 2012 but only because, according to GM’s Socia, SAIC was ready to compete with GM. Since both companies will soon be offering the same family of emerging-market vehicles they are developing together in Shanghai, SAIC’s confidence is hardly surprising. With GM- and jointly-developed technology already underpinning its lineup of cars bearing the classic British MG (Morris Garages) brand, SAIC is also pushing into markets like Australia and the UK where GM has been in retreat for years.

Thanks to its unprecedented access to GM’s infrastructure, technology, brands, and cooperation in the wake of the golden share deal, SAIC has become the fastest-growing automaker in the world by market value. GM’s latest products and platforms debut in China before other markets, and its $12 billion three-year investment plan for China is more than twice the $5.4 billion allocated for the US market over the same period.

The fact that Korea and Australia have taken the brunt of GM’s China-centric restructuring proves that GM has long relied on overseas operations to supplement the products and profits generated in its home market. But American taxpayers should be aware that years of public assistance from the Australian government and Korean Development Bank did not prevent GM from moving development and production jobs to China. The comforting myth that government aid can halt GM’s strategic shift to China has simply not been borne out.

If US consumers don’t bridle at the presence of Chinese-made Buicks at their local GM dealerships, it seems likely that GM will continue to favor its now-dominant partner with a growing share of US-market profits. With a new United Auto Workers contract raising US wages and an expected Federal Reserve rate hike potentially raising the value of the dollar, Chinese imports will only become more cost competitive. Though GM may never become a fully Chinese company on paper, it will continue to integrate with and be eclipsed by its erstwhile Chinese protege. Having relied on the guanxi of a Chinese partner while in a position of desperation, GM could be repaying the favor forever. And until the US market can offer the growth opportunities China does, our 2009 investment in GM may never pay off anywhere near as handsomely.
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Now you should know why I boycott GM, and will for probably for life..
And they want to be my "dealer for life" Ha! :hammer:

Piss on GM.

Regards, Kirk
 
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