Gm in china case study solution

For the exclusive use of Y. YOU, 2019. HKU395 ZHIGANG TAO SHANGHAI GENERAL MOTORS: THE RISE OF A LATE-COMER In February 1998, the Asian Wall Street Journal, sceptical at General Motor’s (GM) investment in China, ran a front-page story with the headline, “GM bets big on a market littered with casualties.”1 Seven years later, in January 2005, GM featured once again in the same paper, only this time, the headline was more positive “GM vehicle sales in China rose 27% in 2004”.2 While Shanghai Volkswagen (SVW) maintained its leadership position with about 25% of China’s automobile market in 2004, Shanghai General Motors (SGM), GM’s flagship joint venture (JV) with Shanghai Automotive Industry Corporation (SAIC), was closing the gap with sales increased by 26% year-on-year to 252,896 units. SGM said that its market share in China rose to around 10% in 2004, compared with 8.5% in 2001.3 However, in 2004, SGM’s growth rate slowed down drastically, compared with the 46% rise in 2003. This was largely on account of the tougher consumer credit requirements, higher interest rates and a market characterized by price wars. Jack Smith, GM’s Chairman and CEO, made a promise in 1994 that the company would bring its best technologies to China, and help the country to build one of the strongest and most advanced automobile industries in the world. Given GM’s vast investment and willingness to engage in technological transfer in China, some analysts commented that GM was too hungry, and gave up too much to win the deal with SAIC. Regardless of the criticism, GM was determined that its venture in China was long-term, and was willing to invest in the development of China’s automobile market. Eight years into its partnership with SAIC, GM was still very optimistic. In mid-2004, it announced plans to double production capacity by 2007, and to relocate its Asia-Pacific headquarters from Singapore to Shanghai. 4 What factors contributed to SGM’s strong growth? What synergies existed in the GM -SAIC joint venture? Given the intense competition in China’s automobile industry, how best could SGM sustain its growth momentum in the future? 1 Smith C.S. & Blumenstein R. “GM Bets Big on a Market Littered with Casualties”, Asian Wall Street Journal, February 12th 1998. 2 “GM’s Vehicles Sales in China Rose 27% in 2004”, The Asian Wall Street Journal, January 7th 2004. 3 Ibid. 4 McGregor R. “General Motors Plans US$3 billion Expansion in China”, Financial Times, June 6th 2004. Emily Ho prepared this Case under the supervision of Dr. Zhigang Tao for class discussion. This Case is not intended to show effective or ineffective handling of decision or business processes. © 2005 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise (including the Internet) - without the permission of The University of Hong Kong. Ref.05/239C 1 For the exclusive use of Y. YOU, 2019. 05/239C Shanghai General Motors: The Rise of a Late-Comer The Automobile Industry in China Designated as a Pillar Industry It was nearly impossible for an ordinary Chinese citizen to own a car during the Communist era, when only party officials had the privilege to proudly ride in Red Flag limousines. These cars were produced by the state-owned First Automobile Works (FAW), which was set up in the 1950s with help from the Soviet Union. During the Cultural Revolution in the 1966-1976, imports of foreign auto equipment, required for technological advancement, were restricted because of rampant xenophobia. As a result, China’s ability to develop automobile technology and absorb imported know-how was limited for years. In the 1990s, as household incomes grew, Chinese officials shifted focus to making passenger cars, but were crippled by the poor management, old technology, incompetent workers and regional rivalries. In addition, each region wanted to develop the local automobile industry, which led to an upsurge of auto and auto parts companies, many of which were former army weapons manufacturing operations. To control the situation, national economic planners laid out a game plan that altered the industry landscape through mergers to result in three to four largescale motor vehicle conglomerates within 15 years. The automobile industry was then designated to be a pillar in China’s economic development. Aspirations soared far beyond the domestic horizon, with the Chinese government wanting domestic manufacturers to join the ranks of Toyota, GM and Nissan, in battling for global sales.