Wednesday, October 17, 2012

GM and SAIC: Trouble in Paradise?

General Motors (GM) and Shanghai Auto (SAIC) announced in December of 2009 that they were deepening their partnership beyond their joint venture in China.  Together they created a 50:50 joint venture, registered in Hong Kong, for expansion outside of China.  Now that partnership appears to be coming apart.

Initially, the plan for the HK JV was for the two sides to work together in India and possibly elsewhere in the future.  (For further insight into this particular deal, please see Chapter 4 of Designated Drivers.) As for the India venture, GM would contribute two existing factories in India, along with its Chevrolet brand, and SAIC would contribute cash -- something that GM had been seriously lacking as it had emerged from bankruptcy earlier that same year.

Another part of the deal was for GM to hand over 1% of its ownership in its 50:50 China-based JV with SAIC in exchange for about $85 million.  As GM's people explained it, SAIC would be able to help GM gain bank financing outside of North America (as if no one outside the US had been aware GM was in bankruptcy).

Thanks to a clever analyst who has combed through GM's SEC filings, it has now emerged that SAIC appears to have backed out of the India joint venture, and GM has stepped in to buy out SAIC's portion for $125 million -- ironic since GM was previously so desperate that it was willing to hand over control of SAIC-GM to SAIC for a mere $85 million.  The India joint venture has now gone from an equal 50:50 partnership to a 93:7 partnership in favor of GM.

One can only speculate as to why SAIC has decided to pass up an opportunity to participate in the burgeoning demand for small cars in India. Until now, the two partners, SAIC and GM, have been considered to be among the "most harmonious" Sino-foreign joint ventures.

Now that GM has regained its profitability in North America, has GM perhaps decided it no longer needs SAIC's cash to expand to other markets? Has SAIC decided it would also prefer to go it alone?

If things have truly soured between the two partners (or if they are merely less keen on each other than they were before), SAIC has the most to lose here.  In China, SAIC still makes most of its money by selling GM- (and VW-)branded vehicles.  While SAIC has its "own" brands, MG and Rover, these were purchased outright from the UK and not self-developed. GM, on the other hand, appears once again to be running its massive research and development pipeline full steam ahead back at home.