For decades, GeneralMotors Corp. was an icon of American industry. But over the past decade itssales in China have steadily increased, while dwindling sales at home haveturned the company into a relic.
Now facing bankruptcy, GM has an opportunity to shift itsoperations to China, its fastest growing and most profitable market. The companyis already attempting to move its manufacturing operations to the Asianpowerhouse, and that has given rise to speculation that it will move itsheadquarters as well.
Of course, if GM – which has already received $15.4 ingovernment loans – were to pick up stakes, the political fallout would be epic.What could be more “un-American” than a 101 year-old American automotive companythat’s being propped up by taxpayer dollars moving to a communist nation?
But the reality is that American consumers aren’t buying GM vehicles andChinese consumers are. That means if the company is going to remain viable,China, not America, is GM’s land of opportunity.
GM CEO: Bankruptcy ‘Probable’
GM still has two weeks before the government imposed deadlineto demonstrate sustainable viability expires on June 1. But even GM ChiefExecutive Officer Fritz Henderson has admitted that bankruptcy is “probable” atthis point. And in the minds of analysts, it’s almost certain.
“[Bankruptcy] is looking like a real high probability,” BrettD. Hoselton, an analyst with KeyBanc Captial Markets, told the New York Times.“Chrysler is the best indicator at this point of where we’re heading with GM.”
GM reported a first-quarter net loss of $5.98 billion, comparedto a loss of $3.3 billion a year earlier. Revenue fell to $22.4 billion, a 47%drop from 2008. The company burned through $10.2 billion in cash in just threemonths. GM has now lost $88 billion since 2004.
Last year, GM lost its crown as the world’s largest carmaker toJapan’s Toyota MotorCorp. And a company that 40 years ago produced one out of every two vehiclessold in the United States, has seen its US market share slide to just 19%.
On Friday, GM notified 1,100 of its 6,000 US dealerships thatit is terminating their contracts, and it plans to cut its network down to 3,600dealers by next year.
“This company is sick,” Charles Ballard, an economics professorat Michigan State University told Michigan NBC television affiliate WILX 10,“they’re likely going to file for bankruptcy.”
Investors are equally pessimistic. GM stock has plunged 70% since the Obamaadministration announced it would give the company 60 days to restructureoutside of bankruptcy court. GM has lost 94% of its equity value in the pastyear.
Is China the Right Cure for GM?
So if GM is sick, what then is the medicine? Many analystsbelieve it’s a healthy dose of China.
While its US sales have plunged, sales in China continue togrow exponentially. In fact, GM sold more vehicles in Asia in the first quarterthan it did in the United States. Only 26% of GM’s first-quarter sales came fromthe US, a 36% decline from a year ago.
And while global car sales continue to plunge, auto sales inChina are expected to grow between 8% and 9% this year. China actually overtookthe United States as the world’s largest auto market for the first time inhistory in the first quarter.
And unlike the United States, there is actually a strong demandfor GM model cars. In China, where the company is neck and neck with Volkswagenfor the market-share lead, GM set a monthly sales record of 151,084 vehicles inApril. That’s a 50% increase from its April 2008 results.
“Within 10 years, this will be our largest market in theworld,” Kevin Wale, president of GM China, told TIME magazine.
GM has been so successful in China it is reportedly negotiatingplans with US lawmakers that will send the carmaker’s production overseas, theUK’s Telegraph reported.
GM will start shipping cars to the United States from Shanghai in 2011. Thecompany plans to export slightly more than 17,000 vehicles in the first yearbefore ramping up to 50,000 by 2014.
Backlash from GM’s China Plan
While many carmakers import components from China to save onlabor costs, GM would be the first company to import whole cars from theMainland.
Of course the plan doesn’t sit well with unions.
“GM should not be taking taxpayers’ money simply to finance theoutsourcingof jobs to other countries,” Alan Reuther, a Washington lobbyist for the UnitedAuto Workers (UAW) union wrote in a letter to US lawmakers.
Indeed, the UAW and others argue that the whole point ofbailing out the US auto industry was to save American jobs and help prop up thesagging economy.
Two weeks ago, GM CEO Henderson said his company would cut anadditional 21,000 factory jobs, close 13 plants, eliminate about 2,600dealerships and close its Pontiac division. GM aims to shed 23,000 jobs – 38% ofits workforce – by 2011.
But the company expects to open a new factory in mainland Chinawithin the next few years and continues to build upon its 21,000 Chineseemployees.
“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker,told NBC’s WILX. “I think that’s wrong for America. I think it’s wrong forAmerican jobs. It’s un-American.”
On the other hand, GM argues that it is only logical to producecars where they’re going to be sold.
“GM’s philosophy has always been to build where we sell, and wecontinue to believe that is the best strategy for long-term success, both from aproduct development and business planning standpoint,” GM’s China office said ina written statement to the Associated Press.
Plus, GM already imports cars from other countries, just notChina. The Chevrolet Aveo and Pontiac G3 come from South Korea. The Pontiac G8comes from Australia. The Saturn Astra comes from Belgium, and the Vue fromMexico.
Harvard Business School professor Clayton Christenson – who wasalso a consultant to Richard Wagoner, the architect of GM’s China strategy –told TIME that inexpensive, Chinese-made Chevys, exported to the United Statescould be the “disruptive” force the company needs to resuscitate North Americansales.
“It’s exactly the right thing for them to do,” Christensonsaid.
While China keeps its data on labor costs under lock and key,analysts estimate that wages and benefit payments per factory worker are lessthan a tenth of what they are in North America, TIME reported.
MSU professor Charles Ballard says that while the notion ofoutsourcing more jobs to China may not be pleasing, it is also in GM’s bestinterest.
“I think everyone needs to keep in mind that if this companyfails, that’s the worst case scenario," Ballard said. "It would be really goodfor the people of Michigan and for Lansing for GM to become a viable company.Right now, it’s not."
And perhaps that’s the root of the issue. There was a time whenwhat was good for GM was good for America. But somewhere along the line, theinterests of the two diverged. Now, they’re too far entangled for there to be anamicable solution to this problem, and the Obama administration is left with apolitical powder keg.
The government stepped in to fire former GM chief RichardWagoner, but it doesn’t want to be too heavy-handed in its treatment of theprivate sector. It has already spent months sidestepping questions about whetheror not it would nationalize US banks.
“We didn’t think in America that the President could fire theCEO of a private company,” one Chinese executive told TIME. “For us Chinese itwas very confusing.”
But if the Obama administration lets GM move ahead with itsplans, it must confront the unpleasant reality that it is subsidizing theoutsourcing of US jobs with taxpayer money.
“Production location is a corporate decision, but when it’s onthe taxpayer dime, there are different sensitivities, so the notion of billionsfor a rescue package and offshore production, I think, could be politicallycombustible," Harley Shaiken, a professor at the University of California atBerkley who specializes in labor issues
Source: http://www.moneymorning.com/2009/05/18/general-motors-china/
