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Case Study: GM in China

Iker Parada

William Bittock

Merina Shrestha

Byron Solorzano

Emmanuela Onuegbulem

Amberton University

Introduction

Globalization refers to the interconnections between peoples and societies, as well as the interdependence of government, economies and the environment (Daniels, & VanHoose, 2018). While globalization continues to lift many nations out of poverty through international free trade, it is not without its challenges, and the extent to which globalization can benefit a country depends on the economic policies that it implements. For example, while Jamaica and Singapore were very similar in terms of population and income per person in the early 1960s, today Singapore surpasses Jamaica in these two dimensions. Of note, the income per person in Singapore is seven times that of Jamaica. One of the major reasons for this difference was Singapore’s openness to unhindered international trade in goods, services, and financial assets, while Jamaica on the other hand, closed its economy to the outside world (Daniels, & VanHoose, 2018).

Similarly, despite a different political governance system, China has managed to rise in ranks as one of the top economies of the world, principally because of its adoption of a free market system. With regards to labor, many multinationals have found it cost effective to have operations in China. Furthermore, the growing population and increasing middle class with varied tastes makes China a huge and attractive market. Indeed, many multinationals with operations in China have been very successful and General Motors Corporation (GM) is no exception. In fact, GM China has at times raked in higher profits than GM North America, but doing business has not been without its challenges. The GM in China case study highlights a number of issues that GM has had to deal with in its expansion in China and they are discussed in the following section.

Problems

Interventionist policies

One of the problems the GM in China case study reveals is the presence of interventionist policies by the Chinese government. Prior to China joining the WTO, it had very high tariffs and import quotas for motor vehicles and their parts. The Chinese government also decided what kinds of vehicles foreign companies could manufacture, for which they required production licenses. With regards to foreign ownership, this was only allowed if there was a 50-50 joint ownership with a government-owned enterprise.

In 2001, China joined the WTO and even though many interventionist policies were phased out, there were still many that remained in place. For example, a minimum investment of US$241 million, which served as a market entry barrier, and the 50-50 joint ownership which remained. This was a concern for GM because joint ownership meant that both parties were involved in the decision making process. With very different political, economic and cultural values, this could slow down the decision-making process if both parties’ goals are not aligned.

A related concern is the lack of protection of intellectual property rights. The case study reports the result of a 2004 KPMG survey of foreign investors in China, which showed that 80 per cent feared that the violation of intellectual property rights was a significant threat to their businesses. GM is not exempt from this risk and is already at conflict with Chery, a local auto manufacturer. Chery copied GM’s designs for a new car (the Chevrolet Spark), manufactured it, and began to sell it sooner, and at a cheaper price than GM had anticipated. This was likely possible due to the fact that Chery is 20 percent owned by SAIC (Shanghai Automotive industrial Corp.), which is GM’s principal joint venture partner in China. Such risks could greatly undermine the profitability of multinationals investing in China.

Monetary policies

According to Daniels and VanHoose (2018), the post-world war II Bretton Woods agreement led to the creation of the International Monetary Fund (IMF) and the World Bank. The idea was that these institutions would help to have a better organized monetary system around the world, where the negotiations among countries would be conducted with an exchange-rate system that would facilitate international trade and payments. However, this system resulted in some unpredicted challenges as time passed. For instance, the exchange-rate system gave origin to the pegged exchange-rate system, whereby a country fixed the rate for its currency to that of a foreign currency, usually the US dollar, thus stabilizing the rate between both countries.

Although the pegged exchange rate system has its benefits, it also creates trade tensions between the countries because each one has as its goal the protection of their interest and wealth. In the case of China, the pegged system meant that the Chinese Yuan remained undervalued, which favored their exports and decreased imports, all with the aim of boosting employment levels and expanding their economy. For GM and other foreign investors in China, this was beneficial as the cost of production was lower than in the US. This translated to a greater amount of profit for GM and for China through the low exchange rate. However, with more profits at home (China), there was also an increased threat of higher prices and inflation in China.

On the other hand, the United States and other European countries put pressure on China to revalue the Yuan because its undervaluation was causing the loss of jobs in the United States due to increased offshoring. Although countries are allowed to change the par value with the approval of the IMF, China often modifies their policy at their convenience. In some cases, it is with WTO approval, but in other cases, China implemented arbitrary changes that do not follow regular monetary and fiscal policy measures. This is unlike free economies, such as the United States where the financial interventions to guarantee the internal economy are executed by the U.S Department of the Treasury. According to the website of the U.S Department of the Treasury, their function is to maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth and stability at home and abroad (https://home.treasury.gov). Unfortunately, the decision of the Chinese government to suddenly impose their own monetary policy would affect sales, general business conditions, supply, inventory levels, domestic and overseas profitability, and finally would have severe effect on foreign investment in China

Increasing competition

By 2004, GM was earning exceptionally high profits from its China operations, the proof was on page 37 of General Motors Corp.’s 2003 report to the federal government, for the first time ever, GM publicly revealed they made $437 million. However, in the same year there were over 200 domestic carmakers vying for the market and already had about 40% market share. These were government owned and the goal was to protect their interests from the foreign joint ventures. There were also foreign competitors intensifying price competition, already, over 2001-2004 period, prices had fallen 255, analysts expected prices to continue to fall at a rate around 10% a year.

Pollution, Population growth, Infrastructure

A burst of car use has made China the epicenter of air pollution and this issue is

becoming an important cause of death. In 2010, more than 2.1 million people died in Asia due to air pollution produced by diesel, and gases produced by cars and trucks (Vidal, 2012).

The above chart shows that China was responsible for 28% of the global carbon dioxide emissions from fuel combustion in 2015, almost two times more than the USA and almost six times more than Russia or India. There is no alternative or effort that can reduce the catastrophic results of pollution for Chinese people. Internal combustion engines (ICE) counted for over 90% of global car sales in the first half of 2019 (Munoz, 2019). Certainly, the electric car industry is growing in China but their share is less than 2% of the total vehicles in the country. Even if no gas cars are sold for the following ten years in the country, this would not be enough to mitigate the damage in health that combustion cars are making to the public. The GM in China case study was set in the early 2000s; pollution was an issue then, and continues to be so today. As the Chinese government strives to reduce pollution, GM must consider this factor not only in terms of how it might affect car sales, but also as an opportunity to develop eco-friendly cars.

Another problem is population. China never expected the problems of its aperture would be so atrocious for the environment. With almost 1.4 billion people improving their economic conditions and consequently wanting to own an automobile, China would need more highways, parking lots, gas stations and better infrastructure which will not be easy to construct in a short space of time. So, this will represent a challenge that GM and the car industry will have to deal with. For sure, the government will raise taxes in order to reduce the demand for cars and capitalize resources for infrastructure.

Recommendations

While GM has been successful in China, the rapid changes taking place there warrant another look at its strategy in order to maintain its competitiveness. Based on the above issues, a number of recommendations are proposed. While GM cannot pressure the Chinese government to change its joint venture requirements, and indeed, these joint ventures have benefitted both GM and China, it might be prudent for GM to diversify its risk by investing in other Asian countries. With lower minimum investment requirements, no joint venture requirements, labor intensive production capabilities, low wages, and in some cases, large populations, countries such as India and Thailand are potential locations for expansion. Such an arrangement may also reduce the risk of intellectual property infringement.