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General Motors Company's (GM) foray into China was a successful one.

Of all the leading auto markets, China was the highest growth market for GM as could be seen from the fact that it sold 2.35 million vehicles in FY 2010, 29 percent more than in 2009. This was the first time in the 102-year-old history of GM where it had sold more cars and trucks in China than in the US. Going forward, GM China had set ambitious plans to garner a market share of 14 percent and produce 5 million units by 2015. Its decision to launch a new brand, the Baojun 630, in 2011 was viewed as an attempt by the company to target first time car buyers living in Tier II and Tier III markets in China and also to compete against domestic car manufacturers in China. Some experts opined that GM China's changing strategy was a bid to cope with the change in the industry structure in the rapidly growing Chinese auto market. According to a September 2010 draft plan by the Ministry of Information and Industry (MII) in China, foreign automakers in China were required to transfer their technology to their Chinese partner. The plan was in stark contrast to the partnership deals the foreign automakers had with their Chinese partners. The partners had a 50:50 stake in the JV where the foreign partner could keep its intellectual property and technology with it while the local partner would offer it market access. The proposed plan received mixed reactions with some foreign automakers feeling that the move was a "technology shakedown" as they were forced to share their technology with their domestic partners and eventually their rivals. Moreover, industry analysts felt that low-cost brands such as Baojun could become a threat to GM's existing brands. They were of the opinion that the move to go downmarket to target the middle-class segment could jeopardize the brand image of GM which enjoyed the reputation of launching quality brands in the Chinese automobile market. This case is meant for MBA/MS level students as part of their Strategic Management/ International Business Curriculum. Issues: Understand the reasons for GMs success in China, and the growing importance of the Chinese market for GMs overall strategy. Discuss and debate whether the Chinese automobile industry was witnessing structural changes and what GM could do about it. Understand the threats to GM Chinas long-term success and how it could overcome these threats while taking advantage of the opportunities provided by China. Contents: Page No. 1

Introduction

Background Note GM in China Success in the Middle Kingdom Threat from Competitors An Opportunity or Threat for GM in Future? Change in China's Automobile Industry Structure? The Road Ahead Exhibits Keywords:

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Industry analysis, Structural changes in the industry, Intellectual property and technology , Technology shakedown, Internationalization, Multi-branding strategy , China's new industrial policy, China, the crown jewel in the GM Universe , Chinese Automobile Industry, Joint ventures, Partnerships, Competition, General Motors "GM's success in China is the result of our strategic approach to doing business in this country. The foundation is great product, a consistent focus on understanding and meeting the needs of local consumers, fantastic partnerships, and a dedication to bringing the latest industry technology to China." -Dan Akerson, CEO and Chairman, General Motors, in 2011 . "During 10 years of trying, China has become a big factory for foreign companies, and their Chinese partners didnt get advanced technology. Through this industrial policy they would like Chinese carmakers to get IP [Intellectual Property] in order to own this market." -Lang Xuehong, automotive analyst with Sinotrusti, commenting on the Chinese government's strategy to get intellectual property of car brands manufactured by foreign automakers in China, in 2011. In April 2011, General Motors China Group (GM China), the Chinese venture of Detroit-based automaker General Motors Company (GM), unveiled a new brand, the Baojun 630, at the Shanghai auto show. The launch was part of GM China's multi-branding strategy where the company aimed to launch local China brands to meet the changing needs of the market. With this brand, the company aimed to target first time car buyers living in Tier II and Tier III markets in China. This was also a bid to compete against domestic Chinese automakers such as Geely Automobileii (Geely), Chery Automobileiii (Chery), and BYD Co Ltd.iv GM's history in China dates back to 1929 when it set up

its dealership in Shanghai to sell Buicks, one of GM's entry-level luxury brands. In 1991, GM set up its first joint venture (JV) in China; however, the JV closed down after it produced some 300 vehicles. In 1996, GM set up its operations in China. In June 1997, Shanghai General Motors Co. Ltd.v (Shanghai GM) entered into a JV with Shanghai Automotive Industry Corp.vi (SAIC) to set up its first major operation in China. Though GM China captured a significant portion of the auto market in its initial years due to the early mover advantage, it soon lost out to global competitors like Volkswagen AGvii (VW), Honda Motor Companyviii(Honda), and Toyota Motor Corporationix (Toyota). In addition, the company also faced competition from local Chinese auto makers such as Chery and Geely. Despite competition from foreign as well as domestic automakers in China, GM China's success continued with the launch of several brands catering to the market. In 2009, it became the market leader with a market share of 13.3 percent, overtaking VW. Some experts felt that GM China's sales would offset the declining sales of its flagship North American business which had suffered losses due to the global economic slowdownx. Moreover, the sales from GM China were also expected to make up for the losses incurred by GM in the US. According to the China Association of Automobile Manufacturersxi (CAAM), auto sales in China exceeded 18 million vehicles in financial year (FY) 2010. Sensing the potential in the market, GM China and its rivals were making efforts to increase their penetration in the market. However, they had been facing increasing pressure from the Chinese government to jointly design cars for the China market, mainly targeted at middle class consumers. In addition, a draft plan proposed by the Ministry of Information and Industry (MII) in September 2010 required foreign automakers in China to transfer their technology to their Chinese partner as the country was gearing up to launch energy and hybrid vehicles by 2015. The plan was in stark contrast to the existing partnership deals the foreign automakers had with their Chinese partners. The partners had a 50:50 stake in the JV with the foreign partner being allowed to keep its intellectual property and technology with it and the local partner offering it market access. Experts pointed out that the auto industry in China would experience dramatic changes in the industry structure if the foreign automakers transferred their technology to their Chinese partners. Some foreign automakers felt that the move was a "technology shakedown" as they would be forced to share their technology with their domestic partners and eventually their rivals. In addition, the MII also planned to reduce the stake of the foreign partners to less than 50 percent.

GM wanted to launch small cars for the middle-class consumer segment hoping to tap the potential in the rapidly growing Chinese automobile market in which 13.8 million cars had been sold in FY 2010. But some analysts felt that low-cost brands such as the Baojun could become a threat to the company's parent brands if they competed against them. Moreover, they opined that the move of going downmarket to target the middle-class segment could jeopardize the brand image of GM which had the reputation of launching quality brands in the Chinese automobile market. Background Note The history of GM can be traced back to 1887. In 1917, GM was incorporated to form General Motors Corporation in Delaware. In 1918, GM started General Motors of Canada Limited and in the same year, United Motors Corporation (UMC) was made a part of GM. By the 1950s, GM accounted for more than half of all automobile purchases in the US. In the early 1960s, GM reported a market share of 60 percent for its US market. However, in the 1970s, the company faced competition from Japanese manufacturers such as Honda and Toyota whose cars were more fuel-efficient and priced much lower. Gradually, Honda and Toyota began offering cars in the luxury segment, capturing GM's market share in the process... GM in China Until the 1990s, GM mainly operated in North America and Europe. Plummeting sales in the US auto market and the slowing down of the economy in western Europe prompted GM to seek its fortunes in the emerging markets of Asia Pacific. Moreover, GM's sluggishness in coming out with innovative models and new product development paved the way for Japanese manufacturers to eat into GM's market share in the US auto market... Success in the Middle Kingdom GM China had its share of troubles when it entered the Chinese auto market. The company had to face some restrictions like the Beijing auto market demanding that GM China focus only on the expensive Buick Regals. In addition, GM's research went waste since the government restricted the kind of cars it could manufacture for the Chinese auto market. Moreover, the government regulations that changed at short notice and having to manage the size and complexity of its operations in China also added to its troubles.. Threat from Competitors

The Chinese auto market offered great potential to domestic as well as global players due to the strong economy. Moreover, affluent Chinese consumers were attracted to innovative car models from foreign automakers. Sensing the potential in the market, several global players were rushing into the market. Commenting on the potential of the Chinese auto market, Richard G Wagoner (Wagoner), the then chairman and CEO, GM, said, "It's not just because of the challenges in the other markets. It's a great growth opportunity. It has redefined what a great growth opportunity is. We thought that an industry of 300,000 units that can grow 15% a year is a great growth opportunity. But take a market that is 5 million units and growing at 30% or more. That's like an electronics industry. India and Russia have great opportunities, but I don't think they will grow this fast"... An Opportunity or Threat for GM in Future? While GM was heavily dependent on the Chinese auto market to bail out its flagship North American operations, some industry experts were of the opinion that GM China could one day be owned by Chinese automakers. David Cole, chairman of the Center for Automotive Research, said that was a distinct possibility since the Chinese had a lot of money and were looking at ways to invest it. Commenting on such a possibility, Bob Schulz, automotive credit analyst at Standard & Poor's , said, "Assuming there's no government restrictions on something like that, anything is possible"... Change in China's Automobile Industry Structure? After conquering the Chinese automobile market and ensuring that its business survived despite several experts suggesting that the company would be sold to some Chinese player, GM China continued with its penetration of the market. In May 2009, GM China announced its plans to launch a car targeting the middle class price conscious consumers in a bid to offer its products to consumers residing in Tier II and Tier III cities. Subsequently, the company made investments in research and design facilities with its Chinese partners and launched its first small car for middle class consumers, the Baojun 630. The car was showcased at the Shanghai auto show in April 2011... The Road Ahead In its 2010 annual report, GM stated that the company held the leading position in the BRIC (Brazil, Russia, India, and China) markets for FY 2010. According to GM, the BRIC markets collectively were expected to grow by 12 million vehicles by 2015, presenting the biggest growth opportunity for GM from 2010-2015. GM's North American operations were also expectAed to provide additional growth potential to the company as the market was recovering from the economic crisis...

Exhibits Exhibit I: GM China's JV in Chinese Auto Market Exhibit II: Vehicle Sales of GM JVs in China (US$ in millions) Exhibit III: A Note on the Chinese Automobile Industry Exhibit IV: Trefis Forecast for GM China

i] Sinotrust is a leading business information and consulting services provider in China. ii] Founded in 1986, Geely Automobile is the first private and independent automobile manufacturer in China. iii] Founded in March 1997, Chery Automobile is a local automobile manufacturer in China. iv] BYD Co. Ltd. is a China-based manufacturer of rechargeable batteries and automobiles. v] Shanghai General Motors Co. Ltd. is a JV between Shanghai Automotive Industry Corp. and GM. It manufactures and sells engines, vehicles, and transmissions. vi] Shanghai Automotive Industry Corp. is a Shanghai-based automobile manufacturer. vii] Founded in 1937, Volkswagen AG is a German automobile company. viii] Honda Motor Company Limited, headquartered in Tokyo, Japan, is one of the world's major manufacturers of automobiles, trucks, motorcycles, and scooters. Honda was founded in 1948 and started its assembly plant in the US in 1982. ix] Toyota Motor Corporation, headquartered in Toyota, Aichi, Japan, is one of the world's leading automobile manufacturers. It was founded in 1933. x] The world economy faced a severe financial meltdown characterized by record losses reported by a number of financial institutions due to sub-prime mortgage crisis in the US and crashing stock markets globally, beginning 2008. The financial meltdown had an impact on the real economy with many companies cutting jobs across sectors leading to a rise in unemployment rates and fall in consumer spending. The crisis spread to other economies worldwide in 2008 and early 2009.