SAIC Targets 4.3 Mil. Sales in 2012, Board Approves Selling 1% Stake in SGM Back to GM

Chinese automaker Shanghai Automotive Industry Corporation (SAIC) plans to sell as many as 4.33 million vehicles in the current year, reports China Business Newswire. This marks an increase of nearly 8% year-on-year (y/y) from the 4.01 million vehicles sold by the company and its joint ventures (JVs) last year (see China: 5 January 2012: SAIC, Together with JVs, Sells 4 Mil. Units in 2011). The company also expects to sell over 200,000 own-brand passenger vehicles this year.

SAIC is the leading Chinese automaker and has passenger car JVs with General Motors (GM) and Volkswagen (VW) which generally account for more than 60% of its sales volumes. SAIC's own brands, Roewe and MG, are less sought-after and account for a small proportion of its total sales. The company also has a microvan JV with GM and Liuzhou Wuling Motors- SAIC-GM-Wuling (SGMW) which, apart from domestic sales, exports vehicle kits to Egypt and India.

Board Approval for Splitting SGM

In a separate development, SAIC's board of directors approved the proposal to sell a 1% equity stake in Shanghai GM (SGM) to its JV partner, the automaker said in a statement filed with the Shanghai Stock Exchange. The move will restructure the partnership to make GM, which currently holds 49%, an equal partner in the JV. The restructuring is subject to approval from Chinese regulatory bodies. GM will pay USD91.4 million to acquire the stake. Regulatory approvals are expected some time around the third quarter, reports Reuters.

Outlook and Implications

SAIC's vehicle sales target for 2012 reflects the scaled back expectations among automakers due to the underlying weakness in the Chinese automotive market. This comes after registering double-digit percentage growth rates in 2009 and 2010. In the first four months of 2012, SAIC sold 1,497,525 vehicles, up 9.33% y/y, largely on the back of strong sales of GM and VW models. However, not every automaker was fortunate to beat the market which shrank 1.3% y/y in the same duration (see China: 16 May 2012: Chinese Vehicle Market Drops 1.3% Y/Y in YTD on Lower CV Sales—CAAM). SAIC is a major beneficiary of the general trend of strong sales for passenger cars from established high-end brands such as Buick, Chevrolet and Audi. On the other hand, Chinese automakers without strong JV partners such as Chery, JAC and Lifan registered lower sales in the period, with the exception of Great Wall.

Meanwhile, the board's approval for restructuring SGM brings the JV's future to a logical conclusion (see China: 19 April 2012: Shanghai GM to Be Restructured, GM to Buy Back 1% Stake). For over a year, SAIC and GM have been involved in talks with the former agreeing to sell the stake but wanting to keep the revenue status of the JV sales. The parties agreed in April to split the JV's operations and sales functions to reflect equal ownership of GM in operations while allowing SAIC to book JV revenues in its books. Having equal say in operational issues such as new product development and personnel matters in the largest vehicle market would be advantageous for GM. The automaker sold the stake for USD84.5 million in cash and a USD400-million line of credit in 2009 shortly before filing for Chapter 11 bankruptcy protection. However, the agreement included the option for GM to buy back the stake for USD85 million in the future. The consideration of USD91.4 million is inclusive of an annual interest of 4.86%.

While SGM's restructuring reflects GM's significantly improved financial condition from the painful days of 2009, it also underlines the strong urge on GM's part to further its co-operation with SAIC. GM aims to double its vehicle production in China to 5 million units by 2015 and a successful relationship with SAIC will be key to success in the country. At the same time, the JV with GM is extremely important for SAIC to keep its leadership position in a cooling market and thwarting the challenge from Dongfeng.

Over the years, SAIC has emerged as a strong partner for GM in its global operations, at times taking up the responsibility to invest when GM could not. Currently, the JV exports compact vehicles to South American countries such as Chile in addition to supplying knocked down kits to Egypt and India. GM and SAIC also have a 50:50 partnership in India in the form of General Motors India Private Limited. "SAIC is the principal relationship that we have around the globe now and we expect that to be the case into the future", GM chief executive Dan Akerson said recently confirming that co-operation with the partner will not be limited to the Chinese market.

However, GM's growing collaboration with SAIC for international markets puts question marks on the former's newly minted partnership with the PSA Group (see World: 1 March 2012: GM Announces Alliance with PSA Peugeot-Citroën). Local production of vehicles in Latin America would be a natural extension of GM and SAIC's "principal relationship" but that appears to be a distant possibility as the agreement with PSA covers South America in addition to Europe.