GM touts its success in China before IPO

The Detroit News, November 12, 2010

Partner Shanghai Automotive gives it edge in growing market

Christine Tierney / The Detroit News

As General Motors Co. courts investors for next week's initial public stock offering, it's still struggling with losses in Europe and a weak recovery at home, but can point to one prize asset: its thriving operations in China.

There, in the world's biggest auto market, GM has outrun most of its competitors.

This year, GM and its venture partners have sold more than 2 million cars and trucks in China, generating $1.1 billion in income for GM, more than a fourth of its $4.2 billion profit through the first three quarters of 2010.

It wasn't among the first automakers to venture into China, but in the 13 years since GM teamed with Shanghai Automotive Industry Corp., it has become a leading player there.

Compared with the grim picture in Europe, where GM's losses deepened in the third quarter to $559 million, the business in China is providing steady income and growth opportunities. The two automakers are working together now to target the fast-growing Indian car market.

As successful as the Shanghai Automotive-GM partnership is, analysts caution that it's hard to project a long-term value for GM's China business because of complicated politics in the new superpower, and intricate business regulations.

GM's current success rides partly on unexpectedly strong growth in China's auto market, where 2010 sales are forecast to exceed last year's 13.6 million vehicles. But it also reflects smart moves by GM, which sells three times as many global-branded vehicles there as Ford Motor Co., according to J.D. Power and Associates.

GM brought the right vehicles to China, and the right brands, said Bill Russo, president of Synergistics Ltd., a Beijing-based auto consulting firm.

"They also happen to work with probably the best automaker in China, Shanghai Automotive," Russo said. "GM has cultivated a very good and healthy relationship with them."

So good that Shanghai Automotive could become an investor in the GM IPO. Chairman Hu Maoyuan has said the company would consider buying GM shares, and U.S. Treasury Department officials have indicated they would not oppose it.

Still, the unusual structure of the country's auto industry entails risks.

Generally, automotive venture partnerships involve secondary, small-scale operations, but they're crucial in China, where foreign manufacturers may produce vehicles only in ventures with local carmakers.

Joint ventures are inherently less stable than wholly owned businesses — and that's especially true in China, where most big domestic automakers have more than one partner, analysts say.

State-owned Shanghai Automotive's other foreign partnership is with Germany's Volkswagen AG. The venture dates back to 1984, and also is flourishing.

"It's no coincidence that the most successful auto companies in China are VW and General Motors, and they both work with this particular partner," Russo said.

Drawing on the knowledge gained from its ventures, Shanghai Automotive is developing its own line of Roewe brand upscale vehicles.

Last year, China experts wondered if GM's sale of 1 percent of its venture stake to Shanghai Automotive, conceding majority status to its partner, signaled a shift in the balance of power.

Nick Reilly, now president of GM Europe but then head of international operations, told reporters last year that Shanghai Automotive had, in turn, helped GM gain access to Chinese banks.

"GM was in desperate straits," said Michael Dunne, head of Hong Kong-based investment advisory firm Dunne & Co.

Joseph Liu, a former GM executive who works at Shanghai GM, said recently that Shanghai Automotive could become a competitor as it develops. But for now, he said, it's in GM's interest to have a strong partner in China.

Analysts agree. "The reality is, the opportunity is so much greater than the risk," Russo said.

This month, Shanghai Automotive and GM announced plans to deepen their cooperation and work together in key areas, such as the development of electric cars, and share more parts.

The two automakers and their Liuzhou-based partner, Wuling Motors, also are developing entry-levels cars under a new brand, Baojun, which means "Treasured Horse" in Chinese.

The venture partners are pooling their strengths — GM's production facilities in India and the Chinese companies' ability to produce small vehicles at low cost — to target the booming Indian and other South Asian markets.

The deal marks the first time that a Chinese automaker is teaming up with a venture partner to tackle overseas markets.

"That's huge," said Dunne, who is writing a book about GM's experience in China.

"They're the most promising markets for the next 10 years."

Staff Writers David Shepardson and Christina Rogers contributed.

Staff Writers David Shepardson and Christina Rogers contributed.

From The Detroit News: http://detnews.com/article/20101112/AUTO01/11120385/GM-touts-its-success-in-China-before-IPO#ixzz159RgWPnk

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