1. Case Study: GM in China
Super Team B: Lee Albert, Mark Craven, Annemarie Daepp, Juhyung Kim, Albert Krikken, Ken Syme, Monica Trevett

2. Discussion Points The Business Environment GM Current Position
Opportunities and Threats
Recommended Future Strategies

3. Business Environment in Emerging Markets
Increased privatization and openness of many formerly bureaucratic closed economies
Removal of legacies and/or reduction of state interventionism
Systemic changes: privatization, enterprise restructuring, restructuring of banking and finance
Regional & global integration based on common principles of private property and free markets

4. Business Environment Risk Specifically in China
Protectionist Policy & Government Regulations
Monetary Policy
Violation of Intellectual Property
Underdeveloped Financial Practices
Underdeveloped Corporate Legal System

5. Governmental Constraints
Auto Industry Foreign Ownership – limited to 50%
Number of JVs allowed per vehicle segment - 2
Minimum investment size – not less than 2b RMB
plus R & D Operations w/ 500 M RMB input
Manufacturing license transfer restrictions – difficult market entry for non-automotive companies
Domestic sourcing and production – imported parts subject to tariffs
Lack of Enforcement of Intellectual property rights

6. The GM Chevrolet Spark and the Chery QQ

7. Global Market Chinese Market Mature market Sluggish growth Low margins
Consolidated
Immature market
Rapid growth
High margins
Fragmented

8. Competitive Environment in China
The government intends to strengthen the industry by encouraging further industry consolidation, though a detailed plan has yet to be issued.
In 2005, there were approximately 130 automotive manufacturers in China with the top five producers controlling about 60% of the market
Source: Xinhua’s China Economic Information Service “Profile of China’s automotive industry”

9. Strategic Market Analysis
Buyers/Suppliers: Low to medium market influence
Internal Rivalries: Significant pressure
Barriers to Entry: Foreign investment regulation and continued intervention post joining WTO
Substitutes: Population migration to cities, access to public transportation

10. Current & Anticipated Changes
Foreign run sales and service networks permitted
Reduced import tariffs on vehicle components (10%)
Import tariffs on complete vehicles will be reduced
Increased government investment in highway infrastructure
220 M RMB over next 5 yrs, expand national hwy to 50,000 km
Pollution reduction legislation
Automakers and Importers responsible for vehicle recycling and disposal

11. General Motors in China
Profit margins are high (10% in 2004, twice the global average), $ 2,267 per vehicle
GM has been aggressively investing in the rapidly growing vehicle market
Expected to grow by approximately 15% in 2006 and continue to grow until 2025[i]
GM increased its market share from 9.1 to 13% in 2005
25% of GM’s 2005 overall profits were from China
[i] As per statements by GM through various press releases in 2004 and Source:

12. Opportunities in China
China is one of the world’s fastest-growing economies (around 9.5% annually)
1.3 b people
Rapidly rising level of purchase power (annual per capita disposable income for urban residents rose 42% between 1998 and 2002)
Only a tiny fraction of this population owns a vehicle.
Labor costs are very low relative to the United States and Western Europe (10% of cost in U.S)
WTO allows foreign ownership of vehicle financing

13. Threats in China Changes in government policy Slower Growth
Increased Competition
Overcapacity
Reduced Margins
Intellectual Property Risks

14. Strategic Alternatives for GM’s Business in China
Alternative Fuel R & D
Convert existing excess capacity to exports

15. Factors in Favor of Alternative Fuel R & D
2nd largest oil importer
“China has six of the world’s ten most polluted cites.”
Government has set timelines for emissions standards
Immature infrastructure – opportunity to leap forward to clean-energy technologies
Access to skilled – low cost human capital

16. Factors Against Alternative Fuel R & D
Application of technology worldwide not readily accepted
Infrastructure not immediately ready to support advanced technologies
Conflicting demands on GM’s R&D resources

17. Factors Against Alternative Fuel R & D
Recommend that GM don’t pursue specifically for Chinese market
Risk is too high / Payback too long
GM Investment Funds.
However local, skilled low cost labor should be used to help global alternative fuel development
Capture benefit of Collaborative agreement with Shanghai’s Jiaotung University and Tongi University

18. Converting Existing Excess Capacity to Exports
Domestic and foreign manufacturers will invest more than $15 b by 2008
Competition in China reduces vehicle prices and profit margin
Capacity triples to 7 million vehicles
Most plants are operating at less than 50% capacity.
Estimated vehicle demand growth rate of 40% required to consume excess capacity
Predicted growth rates decline

19. Slowing Demand Growth Rate in China
Passenger vehicle Segment Forecast (in 2004)
Domestic Sales (thousand units)
Increase (%)
2004
2440
35.6
2005
2940
20.5
2006
3480
18.4
2007
4030
15.8
2010
5890
12.6
2011
6640
12.7
2012
7420
11.7
2015
10,300
11.4
2018
14,160
11.1
2019
15,640
10.5
2020
17,270
10.0
Source: Forin, Chinese Automotive Market Forecast 2010

20. Recommendations
Convert some existing capacity to dedicated export facility
Use Honda model as benchmark
Select multiple JV partners
Use of supply-chain leverage to co-locate key suppliers

21. Strategic Outcomes Competitive advantage for global markets
Opportunity to export low cost parts to global markets
Opportunity to buyout JV partners should regulations relax
Hedge against risk of future government policy change

22. Thank you. Xie Xie. Cheers!