Assignment 1

Case Study: General Motors in China

Subject: International Management

Professor: Dr Kunal Ghosh

Dept: EMBA(2018-21), VGSOM, IIT Kharagpur

Submitted by:
Arup Kumar Pyne (18BM61K06)

Summary

The closing case describes the entry of General Motors into China. General Motors initially entered
China in 1997 via a joint venture with Chinese automaker, Shanghai Automotive Industry
Corporation (SAIC). General Motors believed that China would become an important market in
the near future. So far, the company’s hunch appears to be on the mark. China’s auto market was
strong even during the recent global recession giving General Motors something to cheer about
even as sales in the United States continued to fall. Today, the company sells more cars in China
than it does in the United States.

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QUESTION 1: GM entered the Chinese market at a time when demand was very limited. Why?
What was the strategic rationale?

Ans: GM entered the Chinese market at a time when the demand was very limited. The main
reasons for such strategy are as follows:

1. Although the market was tiny at the time, Gm was attracted by the enormous potential
in the country of more than 1.4 billion people that was experiencing rapid economic
growth.
2. The decision was made in order to set ground in an arena that GM’s competitors had
not – Gm felt it was crucial to team up with SAIC and establish operations before its
global rivals did.

QUESTION 2: Why did GM enter through a joint venture with SAIC? What are the benefits of
this approach? What are the potential risks here?

Ans: GM saw the potential of the Chinese market and the pool of benefits it could bring to the
company. The Chinese market was booming compared to US & Europe. SAIC on the other hand
was one of the early leaders in the Chinese automotive market. So it was always favorable for
GM to proceed with a joint venture with a Chinese local company in order to establish
themselves in the Chinese market.

The benefits of Joint Venture with SAIC are as follows:

1. The main benefit of making such a large investment in joint venture is to have
competitive advantage in the market – business would grow faster, increase
productivity and generate greater profits.
2. GM lack knowledge and connections in China. GM will be able to learn along side their
Chinese partner to understand the economic trends, economies of scale and Marketing
in China.
3. Also, the Chinese government regulations made it all but impossible for a foreign auto
maker to go alone in the country.
4. GM & SAIC gets access to better and more diversified resources. GM will get access to
new markets and distribution networks.
5. The liability is shared equally among GM & SAIC, making risk management easier

The major risk of Joint Venture with SAIC includes losing a lot of money if unsuccessful as well
as division of profits. Other risks are as follows:
1. Clash in the management styles and techniques of different partners, leading to
frequent conflict - the partners might have different objectives for joint venture
2. Ineffective resolution of these conflicts – time and effort to build the right business
relationship.
3. Risk of technology transfer from GM to SAIC.
4. There is no proper balance in levels of expertise, investment or assets brought into the
venture by different partner.

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QUESTION 3: Why did GM not simply license its technology to SAIC? Why did it not export cars
from the United States?

Ans: GM would not simply license its technology because they feared that there could have
been possibility of Technology transfer from GM to SAIC. This might gradually give SAIC an
upper hand over GM, which GM didn’t want to happen.
GM did not export cars from US because of the following reasons:
1. It would increase transportation cost.
2. Also, there was availability of cheap labor in China region. As compared, in US the labor
wages were much higher than China.
3. GM thought of installing plant at China to cater to the need of the local market region
which proved to be successful, thus, leading to increased sales in China region.

QUESTION 4: Why has the joint venture been so successful to date?

Ans: Joint Ventures allow firms to focus on their strengths. It allows the foreign firms to gain
knowledge on marketing and the economic trends of the country and at the same time focus on
the production and manufacturing operations of the products or services. For GM and SAIC it
turned out to be successful due to the following reasons:
1. Both the companies has established Pan Asian technical automotive center to design car
components for both china and Asian markets.
2. Sales figures exceeded GM’s expectations
3. Designing vehicles explicitly for the Chinese market & adapting to the taste of the
Chinese customers. Therefore, manufacturing vehicles as per the needs of the local
region customers.

QUESTION 5: As of 2013 GM appears to be increasing its strategic commitments to China,

building more factories and opening more dealers. Why is the company making these bets? Do
you think it is doing the right thing? What are the potential risks here?

Ans: The company is making these bets because it wanted to create an entry barrier for its
competitors – the main intention was to gain competitive advantage and ground in an arena
that GM’s competitors had not.

GM is doing the right thing because when US was entering recession in 2008 affecting the
economic condition around the world, China’s economy was booming. So, it was fair for Gm to
make these bets.

The main potential risks involved Chinese Government strict regulations which posed a huge
challenge and an unsuccessful venture would lead to huge financial loss for GM.

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