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[Editor’s Note: This is the second of two parts. See Part I by clicking here.]
By William Patalon III
And Jason Simpkins
Money Morning Editors
For anyone who still disputes that we’re operating in a global economy these days, consider this bit of business irony: The long-term survival of America’s biggest car company could depend on how well it does in Mainland China.
As it works its way through bankruptcy and crafts a corporate turnaround plan, General Motors Corp. (OTC: GMGMQ) – derisively referred to as “Government Motors” by critics – has five factors on its side. The first four are pretty predictable fare for a U.S. auto company that finds itself on the ropes:
- First, bankruptcy will turn GM into a company whose smaller size is better suited to the diminished size of the post-financial-crisis U.S. auto market.
- Second, the bankruptcy process will also allow the company to turn billions in liabilities into equity, freeing up cash it can use to invest in its future.
- Third, even with the sale of Saturn and Hummer – and with the elimination of additional models and nameplates – General Motors has a stronger stable of products than most observers realize.
- And fourth, the consumer backlash against the bankruptcy likely won’t be as damaging as had been initially feared – meaning sales won’t just “fall off a cliff.”
But the fifth factor – the wild card – is still China, where GM has established a surprisingly strong and successful presence. That should allow General Motors to capitalize on a market that’s the world’s fastest-growing right now, and that will one day be the world’s biggest market, too. Eventually, GM will be able to use that low-cost market to build cars and trucks and ship them back to the United States for sale at competitive prices. China’s big carmakers are already planning to do just that. So why shouldn’t GM?
The bottom line: China’s car market could be GM’s savior.
Why China Could Save “Government Motors”
The good news for General Motors is that its Asian operations will be unaffected by the bankruptcy.
“Our operations are separate, they are profitable, they are well-funded, and we generate our own funds for future investment,” GM China President Ken Wale told reporters. “We do not see any change to our growth activities.”
GM China is trying to drive home this point by emphasizing to its Asian customers that it isn’t an extension of General Motors, but is actually a joint venture between GM and Shanghai Automotive Industry Corp. Each company owns 50% of the venture.
GM China has actually been one of the bright spots in General Motors’ operations. While U.S. sales have plunged, sales in China have advanced at a stunning rate. In the first five months of this year, GM China sold about 670,000 vehicles – a 33.8% increase from the same period a year ago. May sales surged 75% from last year.
"Shanghai GM is a brand name here by itself and its Wuling minivans and mini-trucks are selling like hot cakes all over the country," Zhang Xin, an analyst with Guotai Junan Securities Ltd, told Reuters. "I think it will be business as usual here, as whoever is calling the shots at GM eventually would make sure that its China business remains on the right track."
And while worldwide auto sales continue to plunge, sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.
“Within 10 years, this will be our largest market in the world,” Wale, the GM China president, told Time magazine.
GM China plans to double its sales in China to more than 2 million vehicles and introduce at least 30 new or updated models over the next five years. Meanwhile, General Motors will close or idle 14 U.S. plants and warehouse operations, shedding up to 20,000 workers.
As part of that streamlining effort, GM is looking at ways to roughly double the number of cars it builds abroad for sale in the U.S. market. Currently the company imports the Chevrolet Aveo and Pontiac G3 from South Korea. The Saturn Vue and Chevrolet HHR sport utility vehicles come from Mexico. And the Pontiac G8 comes from Australia.
The company could export small vehicles such as the Chevrolet Spark from China to the United States. That fuel-efficient mini car is to debut in 2011, GM’s Web site says.
But GM has been so successful in China that it is reportedly negotiating with U.S. lawmakers to send a greater proportion of the carmaker’s production overseas, the U.K.’s Telegraph reported.
No matter how those discussions go, GM will start shipping cars to the United States from Shanghai in 2011. While many carmakers import components from China to save on labor costs, this would make GM the first carmaker to actually import whole cars from Mainland China. But those numbers will be small – at least initially. The company plans to export slightly more than 17,000 vehicles in the first year, before ramping up to 50,000 cars a year by 2014.
In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the United States, a 36% decline from a year ago.
The Wild Cards that Could Cause GM to Crash
Of course, the plan doesn’t sit well with unions.
“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.
Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.
“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told WILX, the Lansing TV station. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”
For its part, GM argues that it is only logical to produce cars where they’re going to be sold.
“GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the The Associated Press.
Harvard Business School professor Clayton Christenson – who was also a consultant to G. Richard Wagoner Jr., the former GM CEO who was also the architect of GM’s China strategy – told Time that inexpensive, Chinese-made Chevys, exported to the United States, could be the “disruptive” force the company needs to resuscitate its North American vehicle sales.
“It’s exactly the right thing for [GM] to do,” Christenson said.
While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, Time reported.
And as Ballard, the Michigan State economist notes, if GM fails, there are no jobs at all.
And perhaps that’s the reality on which everyone should focus. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the country and the carmaker diverged.
Even now, with the Obama administration having anted up with taxpayer money, the near-term steps that GM needs to take to survive may not be very popular with the “Buy America” crowd. In fact, having ponied up billions of dollars worth of federal assistance, U.S. President Barack Obama now finds himself trying to balance the competing interests of all the stakeholders, even as his administration tries to save GM – a balancing act that may prove impossible to pull off.
President Obama might be better served by focusing his energy on saving GM – allowing the company to employ the five factors that favor a turnaround to its own maximum advantage.
In fact, we’ll make this statement: These five factors could save GM. For the company to achieve long-term success, however, two specific things must occur.
- “Government Motors” must employ those five factors to their fullest potential.
- And the Obama administration must allow the company to do so.
Only time will tell if either or both of these happen.
[Editor's Note: To read Part I of this special report, please click here. That story is available free of charge.
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News and Related Story Links:
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Money Morning Special Report:
The Five Factors That Could Save “Government Motors.” -
Money Morning News Analysis:
U.S. Bankrolls GM Bankruptcy With $50 Billion Taxpayer Investment. -
Money Morning Special Report:
General Motors Leaves U.S. Workers by the Wayside as it Accelerates Operations in China. -
Reuters:
In China, troubled GM enjoys small-car boom. -
TIME:
The Other GM. -
NBC WILX 10:
GM to Move Manufacturing to China? -
Telegraph:
GM plans to export cars from China to the U.S. -
The Associated Press:
Chinese imports could bring GM political troubles. -
Reuters:
Deadline passes for GM bondholders. -
The Wall Street Journal:
Bankruptcy Leads Possible Plans for GM, Chrysler. -
The Associated Press:
Analysts say GM bankruptcy may not be all that bad. -
MSNBC.com/CheersAndGears.com:
GM turns to Volt to revitalize its image, But automaker shows ambivalence about its car of the future. -
AutoBlogGreen.com:
Chevy Volt Will Survive Our Bankruptcy. -
Wikipedia:
Transformers: Revenge of the Fallen. -
AutoBlogGreen.com:
GM Letter to Customers. -
GM Letter to Customers:
Letter. -
TIME:
GM's New Ad Campaign: Will It Restart the Engines?
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.
Now that the Federal Government owns 60% of GM does that raise conflict of interest flags with enacting vehicle regulations and purchases?
Interesting piece… I agree with a lot of it and it will probably play out that way, but I also agree with M. Scott!
That's exactly what the Chinese will do! Nixon did more than screw that up… he created the DEA which was formed with an insideous purpose. Plus taking us off the Gold Reserve… as stated earlier… thanks Dick!
Any the above piece does confirm one thing, alternative energy products including vehicles should be our focus. The other key point is… as GM is saved by China, oil consumption will increase which makes it profitable to own that commodity as well as gold.
Read the signs and position yourself appropriately with both short and long term profits.
The Chinese will simply do the same thing to GM that they did to Timkin Bearing. When the contract comes up for renewal 5ive or so years from now the Chinese will simply not renew it. They will, however offer to sell GM replicas of the GM's that the Chinese will now be making in a duplicated plant several miles down the road. And in effect GM will be gone much the same as Timkin is now. Amazing how some business leaders don't learn! Remember, it was Nixon who got us into this mess. Wait until the Chinese begin to really increase their military! Thanks again Dick! Geeezzz
The Obama administration must decide: Who are you trying to save? GM or the American worker. Or it may be even a higher issue, a matter of saving the domestic auto industry in America for our own national security and defense. Can you imagine going to war against China without an auto sector? In this world you must think and plan for the unimaginable. You don't want to be caught with your pants down.
Another point to why GM went bankrupt: Wasn't it largely related to their millions of dollars invested outside the U.S. like China? GM stretched itself too thin expanding globally. And GM kept blaming the unions for their demise. Ridiculous!
And now you tell me that GM China is a separate operation and not part of GM in the United States that went broke after receiving millions of dollars to get the China company going. And you telling the Chinese company employing Chinese workers going ship cheap cars to the U.S. at the expense of U.S. workers? By the way, where do the profits from the China GM go since it is a separate and stand alone entity? Do they come back to GM in the United States? And who owns GM China?
Another question is where is GM's core market? As a corporation owned mostly by the federal government and the union it falls naturally that the U.S. domestic market is the core market and it behooves GM to keep that in mind in setting policy, designing and building their vehicles and marketing their products.
I am currently a proud owner of a Buick. It is a well made car and I am a very satisfied owner. Before that, I was a proud owner of three Oldsmobiles and I was very satisfied. I don't want GM to disappear. It is a great brand and it makes good, quality cars.
The bankruptcy was a case of poor management. The corporation was not able to get its act together going globally like McDonalds, Yum Brands, the former Budweiser, etc..
I hope it get its act together this time after bankruptcy because I want to keep owning GM cars. As far as I am concerned, GM makes great cars! I also own a Ford F150 pick-up truck and a Ford Ranger. I think Ford makes the best pick-up trucks.
As you can see, I am partial to domestic cars and the old reliable brands. I do my little bit to keep American workers employed and keep our domestic auto industry healthy. The other countries do the same for their auto industries. Why can't we U.S. citizens do the same?
We are in a recession and to get out it's all about saving jobs and adding jobs here in the U.S. The Obama administration must look at GM from this angle and the immediate way to go is to stimulate demand from existing under utilized automobile manufacturing plants.
Leftist politicians are very predictable in what they pursue – power and control over as many people as possible. What the Obama administration seeks to save here above all else is the power of the UAW union, a big Democratic party supporter. And we shall see if the Obama administration also seizes the GM bankruptcy as an opportunity to control what GM management is allowed to bring to market in the U.S., namely small, light vehicles that get high mileage, but which you would not want to be inside in a wreck. Remember power and control.
[…] Motors has the model range to compete in the United States. However, GM is doing much better in China, thanks largely to its joint venture with Shanghai Automotive Industry Corp., which expects to sell […]