Shanghai general motor

SHANGHAI GENERAL MOTOR: THE RISE OF LATE COMER H A N I N D I TA G U R I T N A - 2 9 1 1 471 3 M I C H E L L E M O N I C A A . - 2 9147 27 E D W I N L U M E N TA - 2 91 1476 0 E S K A A N I S A N . F. A - 2 9 1 1 47 7 7 R I N I A M E L I A - 2 9114 8 57

HISTORY OF SHANGHAI GENERAL MOTORS

1922 Moved GM Manila branch to Shanghai

2002 Launching of new Buick G sedan model

1998 Start producing Buicks

1997 GM signed US$1.6 billion contract with SAIC

1999 Signed MOU with 5 Chinese universities

2004 Launching of Buick Excelle HRV hatchback and Buick Royaum premium sedan

1.

WHY WAS GM SO DETERMINED TO ENTER INTO PARTNERSHIP WITH SAIC IN 1997, A TIME WHEN AUTOMOBILE INDUSTRY WAS EXPECTING OVERCAPACITY, PLUMMETING DEMAND AND DROPPING CAR SALES?

REASONS FOR PARTNERSHIP BETWEEN GM AND SAIC •

GM faced crisis in the early 1990s due to lack of productivity, lower quality cars than Japanese, lengthy new-model cycles and lack of workforce in the US

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China’s big population and aggressive economic expansion which resulted in middle class growth

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China lowered import tariffs, which allows GM to enter easily

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SAIC (Shanghai Automotive Industry Corporation) was one of the big three automobile manufacturers in China.

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SAIC was wholly-owned by the Shanghai Municipal Government (state-owned enterprise) and SAIC was supported by and closely linked to the policy makers (government).

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GM officials envisaged that 20 years after the joint venture, the company would sell more cars in China than in the US.

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GM saw a US export potential of US$1.6 billion in the first five years after the partnership was formed.

2. EXAMINE THE JOINT VENTURE RELATIONSHIP BETWEEN GM AND SAIC. WHAT IS THE AGENDA OF GM AND SAIC RESPECTIVELY?

JOINT VENTURE

A joint venture is a business enterprise under-taken by two or more persons or organizations to share the expense and (hopefully) profit of a particular business project.

TYPES OF JOINT VENTURE Equity-based joint ventures  benefit foreign and/or local private interests, groups of interests, or members of the general public.

Non-equity joint ventures (cooperative agreements)  the parties seek technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, or one-time contracts.

“The types are actually depends on the objective the company want to reach”

THE JOINT VENTURE RELATIONSHIP BETWEEN GM AND SAIC Based on the case:

The partnership was frankly like symbiotic mutualism where each party could get advantages by doing joint venture as the parties tried to reach the objective (developing and leveraging the automobile industry in China), such as absorbing the advanced technology

THE AGENDA OF GM AND SAIC RESPECTIVELY? GM

•Increasing the sales performance of automobiles in China

•Strive to build a world-class automotive industry in China

SAIC

•Strive to become competitive in international level by establishing joint ventures

•Attract international automobile to upgrade the local automotive •Build a holistic supply chain in China that globally competitive and industry and reduce large-scale imports form a good distribution system (dealership)

the agenda of GM and SAIC respectively? (Cont’d) GM

•Redesign the Buicks to suit customer preferences in Chinese market, which were classified into 4 (high, mid-high, medium, lowend) •Develop modern marketing practices so that the Chinese customers would value the GM brand

SAIC

•Together with GM, the joint venture partnership set up the three-way (Chinese-ChineseForeign) joint ventures with local Chinese companies and other new joint initiatives

•Besides, the joint ventures jointly established the US$50 Million PATAC

3. THE PARTNERSHIP BETWEEN GM AND SAIC CAN BE CONSIDERED A LEARNING ALLIANCE. DISCUSS THE BALANCE OF POWER BETWEEN THE TWO PARTIES.

SGM AND SAIC CONDITION PRIOR TO JOINT VENTURES SGM

• Could supply components and assembly 13,000 vehicles • 3,500 employees in China • Currently has 3 joint ventures

SAIC

• One of 3 biggest automobile manufacturers in China • 65,000 employees

• Currently has 33 joint ventures • Annual production of 600,000 cars

ADVANTAGE FROM THE JOINT VENTURE SGM

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Granted permission to establish its own distribution and sales network in China Could reproduce supply chain similar to the one in the US Could apply auto financing business license by forming JV with a subsidiary of SAIC

SAIC

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Absorbed imported technology from GM

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Could develop manufacturing competencies

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Acquire competitive advantage and trust from Chinese government

BALANCE OF POWER BETWEEN SGM AND SAIC •

From SGM and SAIC partnership, they made Pan Asia Technical Automotive Center (PATAC), which was equipped with advanced equipment. They re-engineer the Buick Regal, which was introduced in December 2002 under GMs' name, and quickly became the best-selling car in China.

4. DISCUSS THE POTENTIAL CONFLICTS THAT CAN ARISE IN GM-SAIC JOINT VENTURE. DO YOU THINK THE GM-SAIC PARTNERSHIP WILL SUSTAIN? WHAT ARE THE FACTORS FOR SUSTAINABLE JOINT VENTURE PARTNERSHIP?

THE POTENTIAL CONFLICTS THAT CAN ARISE IN GM-SAIC JOINT VENTURE Overcapacity in production pushed such joint venture business to close their company Foreign participants feel that government’s policy of China take sides in local producers One of the parties is against the contract Exposed to high risk of intellectual property infringement

WILL THE GM-SAIC PARTNERSHIP SUSTAIN?

Yes, it will. GM-SAIC partnership will sustain as long as both of the parties do their best in running the business. The facts regarding the sustainability are as follow:

BECOMING THE “BIG THREE” OF AUTOMAKERS MARKET IN CHINA

THE TRENDS OF SGM MARKET SHARES SHOW SIGNIFICANT GROWTH YEAR TO YEAR

THE FACTORS FOR SUSTAINABLE JOINT VENTURE PARTNERSHIP

SGM reached GM’s projected capacity within four years, much faster than that achieved by any other foreign auto company .

The success of the partnership laid a solid foundation for GM’s fulfillment of its long term strategy in China.

Annual sales of vehicles in China is growing.

Skillfully leveraged the SAIC partnership to acquire competitive advantage and trust from the chines government.

5. PERFORM A SWOT ANALYSIS OF GM IN 2004, A YEAR THAT IT HAS ACHIEVED STRONG GROWTH IN MARKET SHARE AND PROFITABILITY. WHAT ARE THE SUCCESS FACTORS THAT CONTRIBUTE TO GM’S RAPID GROWTH? WHAT ARE THE THREATS AND OPPORTUNITIES FACES BY SGM IN THE COMPETITIVE AUTOMOBILE MARKET?

SHANGHAI GENERAL MOTORS SITUATION IN 2004

SGM’S SWOT ANALYSIS STRENGTH

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Strong brand recognition for luxury cars under Buick Has its own distribution and sales network in China Early entrance to China market Extensive GM product lines that targets different segments Joint ventures with SAIC Products tailored to Chinese market requirements

WEAKNESS

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Higher price compared to local automotive market

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Some models mostly still manufactured in the US

SGM’S SWOT ANALYSIS (CONT.) OPPORTUNITIES

T HR E AT S

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Growing economy car market

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Chinese government lowered import tariffs

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Increase in size of the middle class in China

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Higher influx of imported cars for high end segment

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New automotive policy in 2004 for autonomy in sales and distribution (Exhibit 7)

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Maturation of Chinese car manufacturers for middle and low end segment