The Refinancing of Shanghai General Motors Harvard Case Studies
Introduction
While many carmakers have been struggling in recent years, Shanghai General Motors is one of the world’s fastest growing automakers. The Chinese market is the fastest-growing in the world, and SAIC’s access to GM’s brands, technology, and infrastructure has given it an advantage over its global counterparts. And GM has made it a priority to bring new products to China before they enter other markets(Veblen, 2003). The company has allocated $12 billion for the next three years to expand its operations in the country. This amount is almost double what the US auto industry has allocated to the same venture.
In the early days, SGM faced tough sales in China. While SGM sold 30,000 Buicks in 1999, sales of the sedans were below expectations. In 2000, it cut its price to US$25,000, but the sales volume fell 48% in the next year. The company was forced to increase investment to survive. However, the Chinese government’s policies changed, and the country’s government had already started regulating vehicle prices, making it difficult for SGM to compete with foreign brands.
Besides its own manufacturing facilities, Shanghai GM also owns a joint venture with Shanghai Automotive Industry Corp to develop new Chevrolet-branded vehicles. This new partnership will make local Chevrolets and Buicks. The new Shanghai-built cars are expected to hit the market in late February. The company plans to set up 100 new sales outlets in the country. With this new strategy, GM will compete in the Asian market. In the meantime, the Shanghai operation has a lot to look forward to.
General Motors Entry in China Through Joint Venture
One of the main reasons GM entered the Chinese market was to bring its world-renowned brands to China. The new United Auto Workers contract will raise US wages, while the US Federal Reserve’s expected rate hike could push the dollar up against the Chinese currency. With this strategy, GM will continue to benefit from cheap Chinese imports and sell them at a lower cost than their US counterparts. But GM will never be a fully Chinese company. But it will integrate with its erstwhile Chinese protégé.
Conflicts with Joint Venture
The partnership between General Motors and Shanghai Automotive Industry Corporation has given GM an edge over its global rivals. The new joint venture has turned a former tractor plant into a carmaker, and SAIC’s models are directly competing with GM’s. Chinese government policies require foreign automakers to set up joint ventures with local partners. One potential conflict in a joint venture is as ownership. Because the joint venture is not wholly owned by a foreign company, the Chinese partner can deal directly with Government organizations. However, the Government may seek to limit or restrict the operation. Joint ventures are ideal for building a bridge between a foreign company and a Chinese market. They are also beneficial for the development of new products or services that address local needs.
Actions to Mitigate the Conflict
The JV governance structure should leverage the key capabilities of each partner and ensure that each of them is aware of their responsibilities and roles. In one example, a global automaker has partnered with two Chinese OEMs to set up two JVs in different regions. Each JV has a slightly different positioning for its vehicles, which helps mitigate market risk but creates competition between the partners. Because of the global automaker’s brand strength, the global automaker has managed the strategic alignment and coordination of the two JVs.
Environmental and Industrial Circumstances
The SGM entered the Chinese market in 1995. The Chinese government was keeping a tight rein on the market. It halted a pilot auto-loan program in northeastern China. In addition, many cities stopped issuing license plates for private cars. The WTO’s admission into the Asian market meant that consumers were expecting lower prices. As a result, sceptics questioned how SGM would sell 30,000 Buicks by 1999. This was although Buick’s model was too big for the Chinese streets.
Shanghai General Motors Performance in China
In 1992, the automotive industry in China had grown significantly, although it was still relatively small compared to the world average. During this period, Deng Xiaoping, then-leader of China, visited Shenzhen for a campaign tour. He was enamored by the city’s “open door” economic policy and had hoped to use it to help GM grow the business there. When SGM entered the Chinese market, China had been struggling with sluggish economic growth. The government had been keeping a tight rein on the market, such as banning auto loans to citizens and halting a pilot auto-loan program. The government had also banned the sale of private cars to government employees, reducing the number of potential buyers. In China, the company has four major brands, 18 product lines and almost 60 models. The company has an integrated global and domestic resource structure, and focuses on brand and product localization. This strategy has helped Shanghai GM sell nearly 750,000 cars in the country. However, it has faced tough sales in the early years. While early demand for Buicks was higher than expected, sales fell 48% the following year. To survive, SGM had to increase its investment.
Part of Auto Market in China for Entry
Initially, GM was having difficulty selling cars in China because of tougher consumer credit requirements and price wars. As a result, the company lowered prices on its vehicles. Its rival, Volkswagen AG, was selling its Santana for less than half its price. SGM’s first vehicles were not marketed well, primarily because of high prices. Despite the high prices, SGM still sold some Buicks, which were more expensive than Volkswagen AG’s Santana. In 1999, Buick sedans were far more popular than the Santana, which sold for US$38,000. In 2000, sales of Buick fell 48%. SGM lowered its price to US$25,000.
GM plans to accumulate the capacity of its joint venture factories in China. It has already begun building a vehicle plant in Shanghai and a power-train plant in Shenyang. By 2014, the capacity of the engine plant will grow from 250,000 to 3 million units per year, depending on the design. GM plans to build a new plant in western China and continue construction of the Wuhan passenger car plant....
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