New GM-SAIC JV Targets Expansion in India; GM Cedes Control of Chinese Venture

China's Shanghai Automotive Industry Corporation (SAIC) and General Motors (GM) signed an agreement on Friday (4 December) to extend their joint venture (JV) and co-operation in Asia to include model-sharing and manufacturing facilities in India. GM will cede control of the JV in China as part of a restructuring at SAIC, which suspended trading in its shares ahead of an announcement expected tomorrow. SAIC will now control 51% of the Chinese JV, Shanghai GM, as a result. The announcement may include further structural changes to its other JVs.

The Indian JV will see the creation of a new 50-50 investment company, called General Motors SAIC Investment Limited, based in Hong Kong and aimed at facilitating the companies' expansion efforts, GM said in a statement. GM and SAIC also announced plans to combine resources to support expansion in emerging markets, beginning with India, where GM is currently expanding its vehicle assembly and powertrain manufacturing capacity. "Based on the automotive industry's long-term potential for growth in India, SAIC and GM have formulated a joint strategy for investment in the country", a company statement said. "They will utilise GM's two vehicle manufacturing facilities and a powertrain facility in India and GM's nationwide distribution network in the formation of a new joint venture."

The new JV is expected to be set up as early as the first quarter of 2010 and will build some of the smaller models currently made by Shanghai GM and mini-commercial vehicles from SAIC-GM-Wuling. Nick Reilly, head of GM's international operations, said that GM will contribute about US$300 million to US$350 million in assets to the US$650-million JV, although its existing manufacturing plants in India will be valued as part of this investment. Reilly said that GM will sell a 1% stake in Shanghai GM to SAIC for about US$85 million, but added that the deal "doesn't have anything to do with GM's restructuring". GM is selling the stake so that SAIC can consolidate earnings from the JV, something it is prevented from doing under Chinese accounting rules without a majority stake. "Without consolidating Shanghai GM, they [SAIC] can't reflect the true value of the company", Mr Reilly said. "Over the past decade, SAIC and GM have created one of the world's most successful automotive industry partnerships", Reilly said. "Both companies felt this was the proper time to deepen co-operation beyond China’s borders", adding that the move "will provide investors a clear understanding of its business".

SAIC chairman Hu Maoyuan said in the statement that, "Changes in the worldwide economy have created new opportunities in emerging markets…By leveraging our individual assets and those of our China joint ventures, SAIC and GM are in a strong position to introduce competitive products outside China that will satisfy the needs of consumers in India and other high-potential global markets." Shanghai GM's current joint management structure will continue to operate the business and oversee its operations.

Outlook and Implications

Precisely what GM will gain from ceding control of its fast-growing JV in China with SAIC is unclear, although it appears likely that it was used as a bargaining tool to expedite the move to expand into India for what appears to be very little in cash terms. From the details so far released, GM appears to have used the 1% stake and its plants and technology as collateral for the Indian JV. Given that the U.S. government own 60% of GM, the move is probably more politically palatable, despite the relative freedom GM still retains through its "International Operations" division—set up as it emerged from bankruptcy to enable the company to run its global businesses.

Interestingly, GM holds 50% of the Indian venture. Although it is undoubtedly a positive move, losing control of the Chinese venture seems a heavy price to pay. GM has lagged behind many of its rivals in the Indian market and fresh impetus and new models could create a buzz around the brand in the country, which is exactly what GM needs to achieve. Producing the right models is still only part of the solution, however, and Chevrolet's currently below-par distribution network will need investment. GM has a number of initiatives in the country, including a tie-up with India's Reva aimed at introducing electric vehicles in the country (see India - United States: 24 September 2009: GM Signs Agreement with Reva, Set to Launch Electric Car in India). GM is now gearing up to increase its participation in the dominant small-car segments in India as it readies an engine plant at its second factory at Talegaon in Maharashtra. Apart from gasoline (petrol) engines, the new engine plant will produce a small 1.0-litre diesel engine that the company plans to install on the Beat when that model is launched next year.

However, one of the key factors in this expansion strategy is the latent ability of the Shanghai-GM-Wuling JV to target the huge light commercial vehicle market in India. In this area, Shanghai GM has an excellent opportunity to compete head-on with the key players with an established and popular model range. The venture has the largest-selling commercial mini-vehicle range in the sector in China and has huge potential in the fast-growing sector in India.

The move has raised a few eyebrows, but it is perhaps an indicator of the rapidly emerging new world order as Chinese vehicle manufacturers use their sheer domestic scale to take over the "old world" auto industry, in much the same fashion as the U.S. industry did a century ago.