Wednesday, April 18, 2012

GM is getting its 1% back, and it won't be cheap

Back in January, GM announced it wanted to buy back the 1% it had sold to its partner, Shanghai Auto (SAIC). In the post I wrote at that time, here was my prediction:
The only way I can see this happening is if GM were to agree to set up the sales organization that SAIC had first proposed, which may be possible now that the US government is no longer a majority owner in GM (though still technically the controlling owner).

As it turns out, this is exactly what is happening.  According to an article (free registration required) from Automotive News China:
Company CEO Dan Akerson told the Journal that the partners plan to split Shanghai GM into two units: sales and operations.

General Motors would have a 50 percent share of the operations unit, which would make product decisions. SAIC would retain a 51 percent share of the sales unit, which would allow the Chinese automaker to book the joint venture's revenue.
The remaining question, which the partners have not yet answered, is what consideration is changing hands. How much is GM paying to SAIC for the 1% of the manufacturing operation?

As for the ongoing implications, GM once again presumably has an equal say in SAIC-GM board meetings.  This is good for GM because they will have leverage in charting the direction of the firm, appointing executives, and planning production.

However, this new sales organization, of which SAIC will now own 51%, will funnel a bit more cash toward SAIC for the foreseeable future.  What's that worth?  According to my very rough, back-of-the-envelope math, possibly as much as $150 million a year in sales -- that's every year in perpetuity.*

If my math is even close to correct -- cut my figure in half and assume $75 million a year in sales -- that will very quickly add up to a lot more than the $85 million or so GM originally got for selling that 1% to SAIC in 2009.

Of course, SAIC and GM could just tell us what this will cost and people like me wouldn't have to do voodoo math. I'm sure GM's shareholders would like to know.

* My back-of-the-envelope math.  According to the WSJ, GM gets about $30 billion in revenue a year from China.  Last year, SAIC-GM sold 1.2 million vehicles and SAIC-GM-Wuling sold 1.3 million (data here).  Again, very roughly, taking GM's 49% of SAIC-GM and GM's 44% of SAIC-GM-Wuling reveals that about 52% of GM's China revenue came from SAIC-GM.  Even more roughly, 52% of GM's $30 billion is $15.6 billion and 1% of that is $156 million.

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