General Motors in China: Strategy, Policy, and Market Entry

Chinese Motor Vehicle Industry Structure

The motor vehicle industry in China had over 200 carmakers in 2004, with most of them being small Chinese firms. In addition to being small and domestic, these carmakers were solely owned by the Chinese government and held a market share of approximately 40%. As new joint venture firms emerged during this period, the Chinese government was reluctant to see its domestic motor vehicle manufacturers eliminated. Generally, this industry structure was dominated by small, government-owned firms that faced serious threats from new joint ventures, which attracted managerial talent and foreign technology.

The Chinese motor vehicle industry was modest in the global context even as it grew at heady rates (Teslik, 2007). Because of this modest structure, the industry produced great uncertainty regarding future prices: domestic companies had no shareholders demanding specific profit levels and did not seek to maintain market share by reducing prices. Small firms were also tempted to copy the designs and technologies being introduced by new joint venture companies.

As foreign companies continued to increase their investments and intensify price competition, the Chinese motor vehicle industry was expected to change significantly. Most anticipated changes were tied to reforms in automotive industry policy as the government relaxed its control over the sector. Through rapid economic growth, the country was expected to expand car sales in the domestic market as more Chinese consumers gained the means to purchase vehicles. By 2009, the industry structure was projected to feature fewer but more prominent brands and internationally competitive automotive groups, driven by self-reliant local brand development. The Chinese motor vehicle industry was further projected to become the largest vehicle market in the world by 2014 — growth fueled primarily by new joint venture investments and intense price competition, with prices falling at approximately 10% annually. These developments meant that local-brand vehicles came to represent roughly one-third of the market, with the remainder held by joint venture companies (Bursa, 2011).

As a result of these industry conditions in 2004, General Motors had to adopt strategies with significant implications for its business operations in China. The main strategy adopted by General Motors since 1992 was developing several joint ventures with Chinese government-owned enterprises, which enabled it to achieve outstanding levels of profit. One key implication of this strategy was that GM became the first foreign automaker in China permitted to provide car loans to buyers. While other ventures had applied for the same permission, General Motors received a head start because of its well-established relationships with government-owned businesses. Additionally, GM's strategy helped pioneer the entry of new joint ventures into the Chinese motor vehicle industry, contributing to the emergence of new market trends and a gradual decline in the share of local-brand vehicles.

Post-WTO Challenges: Government Restrictions and Intellectual Property

Before joining the World Trade Organization, China had imposed significantly high tariffs on motor vehicles and components, along with import quotas on certain products. Upon accession, China was granted a transition period for tariff reductions, and import quotas were eliminated by 2005. During this period, the government also enforced local content requirements to encourage the development of domestic component suppliers. The Chinese government further determined what kinds of vehicles overseas companies could manufacture and required foreign producers to obtain production licenses.

Through the WTO framework, overseas companies gained greater independence in production decisions and were largely free to distribute products of their own choosing by 2004. In addition to retaining the 50% domestic ownership requirement for all assembly enterprises, the Chinese government removed its joint venture requirement for engine manufacturing. Analysts predicted that these WTO-driven reforms would open significant new opportunities for foreign companies.

Despite these reforms, serious challenges related to government restrictions and intellectual property violation persisted. The reforms created tension because foreign companies sought to manage their operations in accordance with the interests of overseas stakeholders, while the Chinese government continued to assert some degree of direct control over the motor vehicle industry. The post-WTO environment made it more difficult for the government to exercise the same level of control relative to domestic investors, as general restrictions on overseas investors had been relaxed (Holweg, Luo, & Oliver, 2005).

A further concern was the risk of intellectual property violation: local firms could potentially copy the designs and technologies introduced by foreign companies. With the possibility of future elimination of the joint venture requirement and considerable difficulties in protecting intellectual property, General Motors could consider purchasing its domestic partners' interests in existing joint ventures as a way to manage these challenges. In previous years, GM had based its operations primarily on joint ventures with government-owned enterprises, but this strategy risked becoming less effective in the post-WTO environment. Buying out domestic partners could also prompt a broader conversation about privatization and whether the Chinese government should retain veto rights over key managerial decisions.

Chinese Macroeconomic Policies and Their Impact

As China's price level appeared to stabilize, the country experienced very rapid growth for five consecutive years without significant inflation. Since 1994, the Chinese government had maintained a policy of intervening in currency markets to restrict or prevent the appreciation of the renminbi against the U.S. dollar and other currencies. Policymakers argued that this currency policy was a primary factor behind large annual U.S. trade deficits with China and had contributed substantially to the loss of American manufacturing jobs (Morrison & Labonte, 2010).

China's economic policy was also blamed for disrupting the global economic recovery by encouraging other nations to intervene in their own currency markets in order to maintain competitiveness against Chinese firms. Some economists warned that these actions could worsen global economic imbalances and destabilize the international trading system. In response to concerns about inflation, the Chinese government introduced policies to limit demand in sectors that appeared to be overheating. The motor vehicle industry was among the main targets, as the government restricted loans available for vehicle purchases.

Facing threats from both inflation and unemployment, the Chinese government confronted a difficult choice regarding macroeconomic policy and the management of the renminbi's peg to the U.S. dollar. One possible direction was for China to allow its exchange rate to float while maintaining capital controls, which would reduce the risk of currency depreciation caused by private capital outflows. Alternatively, the government could maintain the status quo, allowing inflation differentials between China and the United States to adjust without changes to the nominal exchange rate. Regarding the renminbi's potential as a reserve currency, China would need to build a reliable political standing that attracts international investors — achieved through overcoming economic obstacles, developing its banking system, and adopting policies that embrace free capital flows (Jordan, n.d.).

These developments had significant implications for the motor vehicle industry and for firms like General Motors. Like other foreign investors, GM had benefited from some protection against competitive imports due to the undervaluation of the renminbi, which effectively functioned as a tariff supporting initial business ventures. New macroeconomic policy directions could force General Motors to revise its strategies in order to remain competitive in China. In particular, the company might need to sustain its joint venture strategy with government-owned enterprises as part of its response to renminbi revaluation.

References

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Holweg, M., Luo, J., & Oliver, N. (2005, August). The past, present and future of China's automotive industry: A value chain perspective. Retrieved from University of Cambridge website: http://www-innovation.jbs.cam.ac.uk/publications/downloads/holweg_past.pdf

Jackson, B. (2012, June 8). Is GM becoming 'China Motors'? Retrieved July 4, 2012, from http://www.factcheck.org/2012/06/is-gm-becoming-china-motors/

Jordan, M. (n.d.). Will the renminbi become the next reserve currency? Retrieved July 4, 2012, from http://www.project-firefly.com/node/10026

Morrison, W. M., & Labonte, M. (2010, December 30). China's currency: An analysis of the economic issues. Retrieved from Congressional Research Service website: http://fpc.state.gov/documents/organization/154184.pdf

"Online extra: Rick Wagoner on GM's Chinese future." (2004, June 20). Bloomberg BusinessWeek Magazine. Retrieved July 4, 2012, from http://www.businessweek.com/stories/2004-06-20/online-extra-rick-wagoner-on-gms-chinese-future

Prasso, S. (2011, November 22). China's auto industry responds to record growth. Retrieved July 4, 2012, from http://www.strategy-business.com/article/00084?pg=all

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