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General Motors: Will hardship at home tie down its development in China?

– by Demi Lu and Shing Woo
 
Sales plunge. Capital shortage. Worker layoffs. Plant shutdown. Detroit-based General Motors is in a crisis. It has been revealed that GM’s cash flow can hardly be maintained much beyond the end of this year. The world’s biggest automaker has appealed to the U.S. government for help.
 
In China, the first nine months of 2008 saw Shanghai-GM’s profit drop and its share of the Chinese auto market shrink, as shown in the following table.
 
Market share of major automakers in China, January-September 2008
Automaker            % Change         Automaker          % Change
GM                         -1.11         Mercedes-Benz     0.12
Chery                     -0.80                 Suzuki                        0.16
PSA Citroën            -0.61                  VW                            0.19
Mitsubishi               -0.50                  Mazda                        0.30
Ford                      -0.45                  Honda                        0.31
Fiat                       -0.35                   Kia                             0.55
Tianjin Auto           -0.24                   Nissan                        0.74
Geely                    -0.24                   Hyundai                      0.82
Chrysler                -0.10                   BYD                            0.93
BMW                      0.03                   Toyota                       1.17
 
Will GM’s difficulties at home market adversely affect its operations in China? Will GM change its strategy in China? Gasgoo.com, an automotive Internet portal, has recently invited a number of experts for a discussion on the subject. Following are excerpts of the discussion:
 
Marcus Chao, president, Lean Enterprise China, Inc.: GM’s current state of affairs in North America mainly constrains its product R&D for the Chinese market. GM headquarters does R&D for some of its product lines. Now that GM is faced with a financial crisis, such R&D might not be able to proceed. GM’s R&D center in China might be adversely affected.
 
GM has a lot of suppliers. GM’s crisis in North America may have a direct impact on the development of its suppliers. GM’s supply chain is part of its global supply system. If GM comes up with fewer new products, naturally there will be fewer new products from GM’s suppliers in China. And this will adversely affect GM’s development in China.
 
Financially, GM China Group will not be impacted by the difficulties of its mother company in North America since Shanghai-GM has a basically balanced sheet.
 
Zhou Fangyu, former director of Business Development, GM China: Generally speaking, the current state of affairs of General Motors in North America will not affect its operation in the China market. Owing to its financial difficulties in North America, some of its projects in China might be postponed, for example, its plan to build a big independent R&D center in China and its plan to build an assembly plant for export.
 
However, GM China’s product strategy and investment capability will not be affected. In the first nine months of 2008 Shanghai-GM made a net profit of ¥3.8 billion. GM China’s earnings from the China market are enough to support its next round of investment.
 
It’s probably not possible for GM to divert part of its earnings in China to help the mother company in North America since Shanghai-GM’s revenues are less than one-tenth of GM’s global earnings.
 
Zeng Zhiling, senior analyst, IHS Global Insight: GM has been hardest hit in North America. It has fared moderately well in the European and Asia-Pacific markets. At a time when its North American market does not hold much of a hope, GM is not likely to give up the China market with continued growth prospects. The China market will not become less important for GM. This market, in fact, has become GM’s most important chessman for its “self-salvation.”
 
GM’s financial difficulty may adversely affect its product development strategy for the China market. GM might not have the capability to introduce a lot of new models to the China market, and the speed of its product renewal is likely to slow down. With the mother company confronted with such a serious crisis, GM China’s investment capability will naturally be impacted adversely.
 
If it increases its stake in SAIC-GM-Wuling Auto Co., GM is expected to enjoy a greater advantage in the mini vehicle segment.
 
Junyi Zhang, analyst, Roland Berger Strategy Consultants: There is no doubt that GM’s current situation in North America will adversely affect its development in the China market. Most enterprises, when they meet difficulties in Europe and North America, would focus their attention on emerging markets such as China and increase their investment there. But GM now faces a graver problem and needs urgent financial help from the U.S. government. GM certainly wants to boost its strength in China but the key problem is that it now has neither the capital nor the energy to do so.
 
GM is an enterprise that is always in the limelight. The media shower it with attention. But they do not have confidence in the automaker. The entire auto industry does not have enough confidence in it. This is my first point.
 
Secondly, faced with a cash bottleneck, GM stands in need of direct help from the government, but the Bush Administration has not approved of providing the help. Generally, Barrack Obama comparatively shows more concern for Detroit and has set about studying some rescue schemes but specific measures will not be known until his inauguration as president of the United States early next year. Signs show that the next U.S. government has a greater willingness to come to the aid of the economy including the auto industry. The economy has a direct bearing on people’s livelihood. The unemployment rate is also an important indicator of a government’s competence.
 
Thirdly, with regard to the development of product lines, GM favors a global approach, global synchronization. Owing to its difficulty in North America, many models meant for the China market have failed to come off the assembly line on schedule. GM is in the cycle of continually introducing car models to the China market but now this poses a problem.
 
Fourthly, Shanghai-GM faces its own bottleneck. Its sales have fallen gradually in the last few months. Shanghai-GM’s current predicament is similar to that faced by Volkswagen in 2004.
 
However, GM will not likely announce bankruptcy. People will not buy its cars if it goes bankrupt. The car is a big-ticket item involving maintenance and aftersales service. People fear that a bankrupt company can hardly provide maintenance and service.
 
Victor Yue Yuan, chairman, Horizon Research Consultancy Group: On its operations in China, GM’s current situation in North America will have limited impact for the first half to one year but, longer term, an adverse impact will be felt.
 
Firstly, GM China is expected to spend less on product development. If GM cuts spending on R&D relative to other automakers within the same cycle, its product renewal program for the next two years will be compromised.
 
Secondly, GM is a global automaker. The mother company provides financial support for its operations throughout the world. It would be difficult for GM to get support from its joint ventures. The mother company’s weakened financial support for subsidiaries will adversely affect GM China’s procurement and expansion capabilities.
 
Besides, if it wants to get support from the Chinese government in the new energy policy field, GM must make promises on technology transfer and cooperation. Its Chinese partners will not feel fairly treated unless GM delivers on such promises.
 
Cui Dongshu, deputy secretary general, China Passenger Vehicle Association: GM’s bad state of affairs in North America will definitely affect its operations in the China market. The impact will be reflected in the following aspects:
 
Firstly, GM’s strategic planning for North America itself has been in a state of chaos and confusion. This will impact its operation in the China market.
 
Secondly, GM’s brands are now in an unstable state. In the face of a crisis, it may decide what to retain and what to discard. GM has operated in China for many years. It would suffer a great loss if its brands should be called into question.
 
Thirdly, GM’s global R&D has slowed down and its support for R&D in China has naturally weakened. In North America, GM has now eased all possible spending and has even postponed the launch of new models. This will exert a big impact on GM’s product-related strategic shift in the China market and its product disadvantage will become more pronounced.
 
Fourthly, will GM divert part of its earnings from the China market to support the mother company in North America? If this comes true, it would represent a big loss for GM China.
 
GM has been hit hard by the ongoing financial crisis. Survival is first priority. This is in sharp contrast against rapidly expanding Japanese enterprises in a slumping world economy. Under the circumstances, GM’s inferior position will become increasingly evident amid competition against Toyota and Honda.
 
Rewritten by Raymond Chen based on the authors’ story carried by gasgoo.com

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