Understanding Business
Understanding Business
12th Edition
ISBN: 9781259929434
Author: William Nickels
Publisher: McGraw-Hill Education
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Question

Why did GM go into partnership with a state-owned company to produce automobiles in China? What are the benefits and downsides of such a venture?

 

 
In November 2018, General Motors, America's largest home-grown automobile manufacturer, announced it would close three assembly plants in the United States, laying off about 5,600 employees. All of these plants made passenger cars that had fallen out of favor with U.S. consumers, who preferred to purchase sports utility vehicles and pick-up trucks. President Donald Trump, who has made the revival of traditional U.S. manufacturing industries one of his major goals, quickly tweeted that he was “Very disappointed with General Motors and their CEO, Mary Barra, for closing plants in Ohio, Michigan and Maryland. Nothing being closed in Mexico & China. The U.S. saved General Motors, and this is the THANKS we get! We are now looking at cutting all @GM subsidies including for electric cars. General Motors made a big China bet years ago when they built plants there (and in Mexico)-don't think that bet is going to pay off. I am here to protect American Workers!"" In an interview with the Wall Street Journal, Trump offered the observation that "I think GM ought to stop making cars in China and make them here." Trump was right that GM had made a major bet on China. GM has been operating in China since 1997 when it established a joint venture with SAIC Motor, a Chinese state-owned automotive design and manufacturing company. GM has a 50 percent ownership stake in the joint venture, which is known as SAIC-GM. In 2018, GM and its joint venture partner built and sold some 3.64 million vehicles in China, up from 1.2 million in 2011 and 0.4 million in 2006. By comparison, in 2018 GM sold 2.95 million vehicles in the United States. China is now the world's largest automobile market. It's been the largest market for GM since 2012. Despite the size of the Chinese market, there is still lots of room for growth. There are around 173 vehicles per capita in China, compared to 833 per capita in the United States. GM sells models in China under the Chevrolet, Buick, GMC, Cadillac, Holden, Baojun, Wuling, and Jiefang brands. GM exports almost nothing from the U.S. to China, although it does export one China-built model, the Buick Envision, to the American market. GM says it cannot build the Buick Envision economically in the U.S., because the Chinese market accounts for 80 percent of the model's global sales. Like many automakers, GM believes it needs factories close to its customers in order to reduce supply chain costs and design vehicles that best suit local market demands. GM also wants to be in China because the country is leading the shift away from gasoline engines toward battery-powered electric motors. Sales of electric vehicles in China are four times higher than in the United States and growing faster. To foster the growth in electric vehicle production, China has been providing generous subsidies to local producers (including SAIC-GM) and consumers. GM has pledged to invest heavily in electric vehicles and plans to launch 20 electric models in China by 2023. FOR Jvdwolf/ 123RF In addition, there have long been tariffs on imports of motor vehicles into China. Local production avoids these. In 2018, China increased tariffs on imports of American made cars into Page 36 China from 15 percent to 40 percent in retaliation for wide-ranging tariffs Trump had placed on imports of Chinese products into the United States. These tariff increases had little impact on GM, which produced all of its Chinese sales locally. However, they did impact another American manufacturer, Tesla, which had been doing what Trump wanted GM to do: export production from the United States to China. Tesla's Chinese sales fell in half in the months after the tariffs were raised. In response, Tesla slashed prices in China and stated it would accelerate plans to build production facilities there, opening a factory in 2021 or 2022.
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Transcribed Image Text:In November 2018, General Motors, America's largest home-grown automobile manufacturer, announced it would close three assembly plants in the United States, laying off about 5,600 employees. All of these plants made passenger cars that had fallen out of favor with U.S. consumers, who preferred to purchase sports utility vehicles and pick-up trucks. President Donald Trump, who has made the revival of traditional U.S. manufacturing industries one of his major goals, quickly tweeted that he was “Very disappointed with General Motors and their CEO, Mary Barra, for closing plants in Ohio, Michigan and Maryland. Nothing being closed in Mexico & China. The U.S. saved General Motors, and this is the THANKS we get! We are now looking at cutting all @GM subsidies including for electric cars. General Motors made a big China bet years ago when they built plants there (and in Mexico)-don't think that bet is going to pay off. I am here to protect American Workers!"" In an interview with the Wall Street Journal, Trump offered the observation that "I think GM ought to stop making cars in China and make them here." Trump was right that GM had made a major bet on China. GM has been operating in China since 1997 when it established a joint venture with SAIC Motor, a Chinese state-owned automotive design and manufacturing company. GM has a 50 percent ownership stake in the joint venture, which is known as SAIC-GM. In 2018, GM and its joint venture partner built and sold some 3.64 million vehicles in China, up from 1.2 million in 2011 and 0.4 million in 2006. By comparison, in 2018 GM sold 2.95 million vehicles in the United States. China is now the world's largest automobile market. It's been the largest market for GM since 2012. Despite the size of the Chinese market, there is still lots of room for growth. There are around 173 vehicles per capita in China, compared to 833 per capita in the United States. GM sells models in China under the Chevrolet, Buick, GMC, Cadillac, Holden, Baojun, Wuling, and Jiefang brands. GM exports almost nothing from the U.S. to China, although it does export one China-built model, the Buick Envision, to the American market. GM says it cannot build the Buick Envision economically in the U.S., because the Chinese market accounts for 80 percent of the model's global sales. Like many automakers, GM believes it needs factories close to its customers in order to reduce supply chain costs and design vehicles that best suit local market demands. GM also wants to be in China because the country is leading the shift away from gasoline engines toward battery-powered electric motors. Sales of electric vehicles in China are four times higher than in the United States and growing faster. To foster the growth in electric vehicle production, China has been providing generous subsidies to local producers (including SAIC-GM) and consumers. GM has pledged to invest heavily in electric vehicles and plans to launch 20 electric models in China by 2023. FOR Jvdwolf/ 123RF In addition, there have long been tariffs on imports of motor vehicles into China. Local production avoids these. In 2018, China increased tariffs on imports of American made cars into Page 36 China from 15 percent to 40 percent in retaliation for wide-ranging tariffs Trump had placed on imports of Chinese products into the United States. These tariff increases had little impact on GM, which produced all of its Chinese sales locally. However, they did impact another American manufacturer, Tesla, which had been doing what Trump wanted GM to do: export production from the United States to China. Tesla's Chinese sales fell in half in the months after the tariffs were raised. In response, Tesla slashed prices in China and stated it would accelerate plans to build production facilities there, opening a factory in 2021 or 2022.
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