GM Brings Flint, MI to China
In one of my favorite posts on the risks of a GM collapse, I described the risk of GM’s Chinese partner buying up GM’s American brands.
I was talking with mr. emptywheel about what one of the bad–but by no means worst–case scenarios in a GM bankruptcy would be. This scenario is just one of several that might happen–by no means guaranteed, and Congress would fight the scenario at every stage, though with increasingly less leverage. But it is a scenario that follows a great deal of logic about possible outcomes. It is this scenario, though, that explains why both Toyota (I’ve seen reported–looking for the link) and many in Congress want to bailout GM before it gets to bankruptcy.
Here’s the short version: more details below.
- GM files for Chapter 7 bankruptcy
- GM’s Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)
- GM/SAIC starts importing Chinese-made Buicks and Chevys, undercutting Toyota’s cost advantages
- GM/SAIC owns the Volt technology, requiring US firms to lease it if they wanted to use it
Which is why my stomach turned at the news that GM is about to cede majority control over its Chinese operations to SAIC.
G.M. has become the second-largest automaker in China mainly through a 50-50 venture with S.A.I.C. that makes a wide range of G.M.-designed cars. Under the deal being completed, G.M. would sell a 1 percent stake in the venture to S.A.I.C., raising the Chinese automaker’s share to 51 percent, although G.M. would retain equal voting rights in company decisions and have an option to buy back the stake later, people with knowledge of the transaction said.
Michael Dunne, an auto consultant specializing in Asian markets, said that for G.M. to accept a minority holding in its main joint venture marked an inevitable decline in G.M.’s influence in China, which has overtaken the United States as the world’s largest auto market.
“Dropping below the 50-50 partnership is huge — there may be a way to preserve voting rights, but symbolically, it is a step down,” Mr. Dunne said.
G.M. is separately putting its Indian operations into a new joint venture with S.A.I.C., effectively selling about half of the operations to S.A.I.C. as well.
China will continue to use this moment of weakness (for the country as a whole, not just for GM) to take over our equities in international trade. And few people seem to be watching.
The residents of Michigan need to shout loud about this — along with the rest of the nation.
Our tax dollars cannot allow this.
It’s not a factor of our tax dollars, precisely the opposite. They’re making this move bc Daewoo bet badly in derivitves, and we can’t spend taxpayer dollars to bailout Daewoo.
So GM had to raise cash from the easiest source of moneybags: SAIC.
I get that we cannot bailout Daewoo. The problem is that we gave tax $$ to help prop up and now that will be a waste in terms of protection of US industry.
As you wrote:
I am agreeing with your concern.
I’m sure that’s what management told its board, or which the board determined by overriding advice from managers in China. But if this is solely about raising money, the US should demand the immediate return of every dime it gave GM, because this is a mirror image of how Obama negotiated health reform by giving his opponents exactly what they want.
I think you are wrong about this. GM made this move because of Chinese accounting changes. The sale raised only $84.5m, not nearly enough to accomplish what you suggest.
We’re going to need a new Dante.
As for the turning stomach, I recommend broth. I use no seasoning in mine, except the required vinegar (any kind will do), saving the rest for use-time decision, and incline toward the longer cooking times. The pictures at the article look like my results. Very helpful during this time of the prostrate, draggin’.
These people are not good for one’s health.
It is a shame there was no available liquidity to cover this from the sale of Opel, Saab and Saturn. And the guy who was actually trying to accomplish that just got fired by the guys who buggered it up. Go figure.
This is an occasion where a fax to Sen. Levin’s office about a CFIUS review is warranted.
The selling of US intellectual properties and patents should be restricted by law to allowing non-exclusive licenses only. The neoliberal, offshoring bent of the past 15 years may have stagnated due to the world economic crisis, but to sustain or expand the middle class, a subtle form of protectionism must be put in place. If it was engineered, designed and patented here, it should be built here. If it’s sold here, it should be built here.
Good luck with that, if your point is preventing technology transfer. We’re bound at the hip with China, like Siamese twins.
Yep, that sounds like an unreasonable restraint under the law if applied per se.
Thinking in terms of “unrestricted warfare,” there’s a vested interest we have in transferring some technology. China’s population is considerably larger than ours and at some point will begin to clue in the way both Soviet and East German populations did. As they develop more western attitudes, they’ll become more restless, and that’s not a good thing for either China or the U.S.
So transferring technology which permits leadership to gradually improve living standards for China’s population while assuring they don’t over-consume or consume at the pace of U.S. citizens is a good thing; it’s when we fail to create and implement higher value technology here at home first that we have a considerable problem. China’s Hu Jintao has been pretty direct that the U.S. should be working creating higher value jobs with higher value products, leaving lower value for countries like his where the population’s level of education is considerable less even compared to the U.S.
Yeah, it is not that this should be illegal, it is that it should not have to be done from a business perspective. But with the facts at hand today, GM has limited options in an immediate squeeze. You would think this could have been seen coming and handled differently. I doubt this is totally unrelated to the friction with Fritz.
Yes, Fritz was a heavy hitter inside GM when this deal was signed over a decade ago. He would not have blithely sold that one percent stake for the reasons I cited above. Besides, had the board not reneged on Opel, they wouldn’t have needed cash from SAIC. This is what you get when you put retail phone guys and Wall Street in charge of a manufacturing company that has to deal with plant, people and machines, not paper and lobbying.
You are absolutely correct. For GM, this is an act of public submission, with considerable loss of face and status, not just in China, but throughout Asia. It is also a defeat for all foreign investors hoping to achieve more control or influence over the futures of their Chinese investments. That’s a considerably greater loss than just the long demise of a once formidable manufacturing giant.
GM’s revenue from GM China will not immediately decline, nor will the invitations to prestigious panels and state dinners for its current or former American bosses. But this is not the sale of a one per cent stake. If Rattner or Whitacre think it is, they should be fired or lose all GM-related compensation.
That’s because this transfer of a one percent stake is not about raising money. That carefully balanced 50-50 ownership was the result of years of planning and hard-fought and continuing negotiations. It was a landmark achievement for such a major investment and investor. The sale is a concession long sought by SAIC and its regulatory overlords in Shanghai and Beijing.
This concession signals a fait accompli, a different set of goals or circumstances for GM and its partner and host government. It is the price for something else, something GM can no longer avoid paying. In the short term, it might be the price to expand in China, though it comes at a cost of decreased influence for its expatriate managers and board members.
Strategically, it is the price for something GM wants elsewhere, such as the money or juice to keep itself going or to pull off keeping and restructuring Opel in the face of enormous negative goodwill generated by reneging on an agreed, but not yet binding deal to sell it.
As with the fire sale licensing of American technology to the Japanese in the 1960’s and ’70’s, the true cost of this sale won’t appear on the company’s books or be obvious for quite some time. It will be higher than anyone admits.
Whitacre might imagine that this is only about raising short term cash, but no one in Asia or the car industry will think so. If that’s truly Whitacre’s decision and for that reason, he has no business running a lemonade stand.
Well written. Thanks eoh.
I am troubled but not surprised about GM’s reorganization of its Indian joint venture, bringing in SAIC. The Chinese and Indians are not known for getting along and the Indian auto and parts market remains highly regulated. These days, though, I imagine SAIC is becoming regarded as a more reliable partner than GM. That’s the tragedy.
The one thing readers should keep in mind here is that GM is NOT a private corporation.
The rest of the auto industry which supplies them sees them as the U.S. Government at this point in time.
In other words, the decision to yield a majority share of this business is being made by the U.S. Government.
And none of our elected representatives appear to be processing this information.
Bush and Obama have shown that the US government’s concerns, if it could articulate any independent of K Street lobbying, are the tail on the private sector dog. Obama’s response to the banking crisis, his obeisance to the bankster elite, demonstrates that he has no interest in imposing public concerns on private entities, even when he uses hundreds of billions of dollars of taxpayer funds to drag them out of the financial gutter they’ve recklessly driven themselves into.
China can have an industrial policy without tying itself into ideological and philosophical knots.
American business owners apparently can’t; they imagine delusionally that they are playing on a level playing field that can be improved with less government guidance and regulation. Thirty years says that is a mistake.
Their industrial policy is ad hoc but consistent: it’s written by lobbyists, not government bureaucrats who might have priorities beyond making an individual executive, company or industry fabulously wealthy. That criterion does not have the stranglehold over Chinese or Japanese economic and industrial policy it has here, though cliques that work such policies in their favor have made fabulously fortunes, too.
GM – meaning its private banking owners – claim that their top priority is to buy out the US government share quickly, so their company can go truly private. Hence, GM is raising cash by selling outright control of its top foreign market to the Chinese. Reports don’t say whether control of the Shanghai research and design center, set up separately but in parallel with GM China, will also be ceded to SAIC. That center is home to some very interesting and valuable resources. GM is also selling half its stake in a very difficult to enter Indian auto market venture to SAIC. I wonder what else SAIC wants to buy from the GM candy store. These decisions appear to put secrecy and the wealth of private bankers ahead of the company or the public owner’s interest. Who knew?
Purportedly, GM could unwind the deal at a later date. The odds of that happening are worse than the odds of Congress actually pulling the trigger on implementing a public health care option (were that the price “centrists” get for a theoretical PO in this reform legislation).
The American public may not know what just happened regarding its considerable taxpayer-funded investment in GM, but the US Treasury knows what happened and concurred with it. Is this a cost of a phone guy’s ignorance and hubris or a cost of having China as the US’s principal foreign investor in US debt? Or a little of both.
Another reason GM may have drawn back from selling Opel is that it could not realistically disentangle itself from the Opel technology that it used to set up and oversee most of its non-US operations. Even in China, nominally a Buick market, Opel products and technology are important. They are more important in markets like India, where smaller, less costly and more fuel-efficient cars dominate.
GM’s new owners may be keeping its brands alive, but as technology and operating control slip away to foreign partners as ambitious and well-financed as SAIC, it will retain little else. Until the GM India deal just disclosed, for example, SAIC had been unable to break into the Indian market.
As EW speculated, Fritz Henderson’s departure might well be directly related to his opposition to such deals. He knows where they will lead: cash, but no control, and no viable, stand-alone company. Sounds like the typical Wall Street priority to me.
Your postscript could be a banner headline. I’ll hold my breath until Tweety covers this in detail. Thanks again for your coverage of it, because GM in this regard is leading a downhill race and setting precedents that other American investors abroad will be forced to follow.
The story spilled to Bloomberg notwithstanding, strategic disinvestments of this magnitude do not result as a function of “accounting rule changes”. Such things are controlled by the Chinese government and important projects could obtain exceptions to virtually any rule. On the contrary, such apparently independent features of doing business in China are often specifically aimed at tilting the playing field toward industrial policy goals generally, or the wishes of specific large domestic players, specifically. As a rationale, “accounting rule changes”, which may exist, are as descriptive an excuse as, “The dog ate my homework”.
GM China is GM’s most profitable foreign operations. Its revenues and profit will exceed US ops. GM China forecasts that 2009 sales will climb 50% over 2008, well above a forecast earlier this year of 20% growth. Its forecast for 2010 is 10-15% growth.
Reports are also surfacing that SAIC paid a hefty premium for legal control of GM China, substantially greater than book value for a 1% stake. That would be routine when the sale conveys a controlling interest in a business. On the one hand, that interest is, in fact, worth much more than its nominal percentage; on the other hand, the remaining 49% in GM’s hands is worth less, because it is a minority stake. The claimed amount of $84.5 million may relate to book value. It does not seem to account for the value of a controlling stake in GM China.
This deal also closely relates with two deals with SAIC regarding India, which makes it hard to value each deal independently. One deal involves the sale to SAIC of half of GM’s stake in its Indian venture, a market to which SAIC had not before gained access. Another is a vaguely described arrangement to allow GM’s Indian partner some form of presence in China, also a novel development.
GM reports that it negotiated a buy-back clause in the deal, at yet a further premium on the amount it sold it for. The plausibility of exercising that buy-back seems quite low: GM is strapped for cash. Its North American and other foreign operations are badly in need of reorganization. After the Opel walk-away, finding help from European or Canadian companies or governments will come at a steep price. Most importantly, SAIC’s strength and power is increasing, GM’s is declining (and it’s now run by guys who know nothing about cars or, apparently, international business) and, in this matter, SAIC has the full backing of the Beijing government.
Given the interrelatedness and complexity of these deals, and their strategic value to all concerned, I would approach with caution the value publicly allocated to this 1% stake in GM China.
Companies GM’s size can chew through $84.5 million in a heartbeat. Investment banking, accounting and legal fees incurred for such a deal would reduce the net amount to below $80 million. To put that in perspective, Uncle Sam invested something on the order of $50 billion to help bail-out GM.
If selling a controlling stake in its flagship foreign op – in China, where such things carry considerable meaning – is how Whitacre intends to run his company, he will have a short, bumpy ride as chairman, while SAIC, Goldman Sachs and others pick over the carcase.
Thank you EW for another excellent post, with excellent commentary by others.
It is disappointing to see that what one hoped would not happen is indeed starting to happen.
EOH at 27 you predict that Whitacre will have a short bumpy ride at chairman.
Not to worry for Mr. Whitacre.
I would point out that whatever vehicle he is being chauffeured in has been equipped with an ejection seat so that when the crash occurs, his golden parachute may be deployed; he will land softly.
Investment bankers slash, cut, sell assets,and borrow money. After all the preceding have been done to the point of exhaustion, then it is time to sell stock (in GM ‘s case go public again).
Expect more sales of assets, at whatever terms are offered to GM; irrespective if the terms make long term sense. For the people running GM 6 months(= 2 quarterly reports) is long term.
GM’s deal in China was paired with a deal in India, in which GM sold half its stake in a joint venture to SAIC. Analysts expect the Indian market to nearly double in size in the next six years, growing from 1.7 to 3.2 million vehicles by 2015. SAIC seems to be getting in on the ground floor.
The future of a cash- and leadership-strapped GM may be an “operating merger” instead of a legal one, with SAIC becoming lead partner. Meanwhile, with its purchase of Suzuki’s stake in its Canadian venture with GM, GM is without a Japanese partner.
This news is sure to please bmaz. Unsurprisingly, Henderson’s firing was the tip of an executive reshuffle:
Whitacre described this with the usual spin:
Former Holden’s managing director Mark Reuss becomes head of GM North America.
Mr. Reilly moves from heading GM international – based in Shanghai – to Europe to pick up the pieces with Opel and Vauxhall after GM trashed the Opel deal. Nothing said about Saab.
Tim Lee replaces Reilly in Shanghai. He formerly headed “manufacturing and labour relations”, which tells you the relations of most concerned are with SAIC.
EW’s speculation that Fritz Henderson was canned because he didn’t agree with Whitacre and/or Goldman Sach’s vision of a restructured GM seems born out by this characterization from GM, though it only admits to Whitacre being disgruntled with the “pace” of change, rather than its direction. From the same FT article linked to above:
Yet Henderson was the one making those deals and closing the brands; Whitacre et. al are the ones who blew them up (notably Opel). So there is a bit of disingenuity here (don’t think disingenuity is a word, but I really like it).
Disingenuous would be generous to Whitacre, especially as the Chinese and Europeans prize relationships, which Fritz has and Whitacre lacks.
Bringing in an Australian to ride herd over North America will be interesting. It’s been tried, but I hope it works. As for Reilly’s move from GM International in Shanghai (formerly in Zurich), he will have his work cut out for him. Something of a demotion in formal status, I assume it is meant to be a promotion in responsibility, which means dealmaking.
I am not enamored of labor relations heads in the auto industry being given operating responsibility for international, much less all of it. As EW has pointed out, Chinese workers don’t simply strike or break knuckles when their bosses do ill by them.
The FT article did not mention any change in GM’s top expatriate at GM China, Kevin Wale, another Australian. (Does Whitacre imagine the US guys aren’t competent enough or are tainted by being Henderson’s guys or car guys?) Wale would seem to be in a pivotal, bet the company position.
Last item. The FT’s reporting clarifies the reference other media made to a change in Chinese accounting rules as a public rationale for divesting this 1% stake. According to the FT, it isn’t a “change”. It is a concession by GM to SAIC, which allows SAIC to report GM China’s burgeoning sales and profits in its consolidated financial statements. Under standard accounting practice, this can only be done if a holding company owns a technical majority, 50% plus one share or more, in a subsidiary.
On its face, this is a routine matter of prudential accounting for subsidiary operations. The concession could as easily have gone the other way. SAIC could have sold 1% of GM China to GM, allowing it to report GM China’s burgeoning sales and profits as its own, which would have improved GM’s financial statements.
The explanation is meaningless. It describes a consequence of the sale, not a reason for it, and leaves the question hanging: Why did GM have to make such a major concession and why now? Eighty-five million dollars isn’t much of a reason for a company the size of GM. From the FT:
Sorry see below
And I bet Fritz was a little surprised to be fired for doing the very thing he was stated to have been fired for not doing. It is a little duplicitous.
I agree, but my question is, on whose part?
Someone is making gigantic moves, global scale, which one would assume benefits, someone?
Who besides the Chinese are the beneficiaries of all these improvements?
In the immediate term: everyone collecting fees. Investment bankers, consultants; these fees are paid right now.
The more ‘churn’ of the business and the associated assets and liabilities, the larger the fees.
Duplicitous? “on whose part?”
Jimmy Stewart has long since left the Renaissance Center.
The chances that watching one’s own interests, and the interests of the majority shareholder, coincide; are smaller the higher you go.
Duplicitous, indeed.
As for the ownership, that hasn’t mattered for most companies in a long time. It’s who the managers are. They manage for themselves first, even or especially in public companies, and in private ones, too.
Team Obama appears to have picked Rattner and Whitacre, but who on Team Obama culled the candidates and chose the winners? My guess would be current and former Goldman Sachs players, who have a longstanding relationship with GM.
GM was and is right for the plucking. Goldman or any other investment banking adviser would have chosen GM’s new top management based on their own interests first: having the right paper credentials would have been less important than that they be a made man, that they be political agreeable, and that they give a helluva lot of banking, advising and deal business to the I bank. Trading for their own account, they can do on their own.
Who’s minding the store?
GM ownership at a glance; (From AP)
61 percent: U.S. government
17.5 percent: United Auto Workers union through its retiree health-care trust
11.7 percent: Canadian government
9.8 percent: bondholders from the old company
So which ownship group’s interests are met by the sale of controlling interest in the Asian operations?
What is the likely effect of this sale on the American Automotive industry and it’s American employees?
I’ll wager Fritz Henderson thought taking the hatchet to all those troublesome dealers, and those expensive UAW employees was going to put GM in a position to make some really good moves in Asia.
I’ll wager Fritz Henderson thought that because of the profits GM stood to make in Asia he was going to have a bright and shining future at GM.
I’ll wager Fritz Henderson thought his legacy would be a new and leaner GM, bigger and better than ever.
I’ll wager Fritz Henderson was supremely surprised to find himself on the recieving end of the hatchet for a change.
But don’t worry too much about Fritz, because when they get done chopping up GM, they’re going to get back to chopping holes in the bottom of our boat and so in the end we’re all in this together.