NEW AND IMPROVED: The first Baojun 630 passenger car from SAIC-GM-Wuling (SGMW) rolls off the production line in Liuzhou, Guangxi Zhuang Autonomous Region, on November 22. Baojun is SGMW's new passenger car developed locally using GM technology and will be sold across China (LAN LIUSHENG)
U.S. auto giant General Motors Co. is breaking records with its recent initial public offering (IPO). GM raised $20 billion on November 17 through the IPO, the biggest in U.S. history. The company sold a $500-million stake to its Chinese partner SAIC Motor Corp., cementing ties that have helped the American company boost sales in the world's largest auto market.
SAIC Motor announced that its wholly owned subsidiary SAIC Motor HK Investment Ltd. acquired 15.2 million ordinary shares from GM, which account for around 0.97 percent of GM's total equity, at a price of $33 per share, for a grand total cost of around $5 billion. The capital was raised by SAIC Motor HK on its own from the Hong Kong financial market.
SAIC Motor said on its website that the investment was made on the basis of the strategic partnership between the two parties and their confidence in GM's development prospects.
Since the completion of business restructuring in July 2009, GM has regained its cost competitiveness, and has made profits for three consecutive quarters this year. GM reported third-quarter net income of $2.16 billion, bringing the automaker's earnings of the first three quarters to $4.77 billion, topping that of the world's largest automaker Toyota Motor Group.
SAIC Motor is currently the leading manufacturer of passenger vehicles, the largest mini-vehicle maker, as well as the auto maker with the biggest sales volume in China. In 2009, SAIC Motor sold more than 2.725 million vehicles, continuing its leading position among the major auto groups in China.
As to why SAIC Motor bought less than 1 percent of GM's stake, Gu Feng, Chief Financial Officer of SAIC Motor, said a larger acquisition wouldn't matter since the company was not short on cash.
"But if we invested too much in GM, once a sharp fluctuation occurred, our balance sheet might not be so good looking. We believe the current investment is an appropriate number," Gu told the 21st Century Business Herald.
But analysts agree the company has other concerns. Relevant U.S. laws say, a stakeholder with more than 5 percent equity must reveal its company status and the procedure of share purchase will be much more complicated. SAIC Motor might not be willing to do so. Also, if the stake purchased surmounted a certain number, SAIC Motor might consider sending directors to GM's board, a move that is sure to upset the U.S. Government.
The Chinese market is coveted by all foreign players. China replaced the United States as the world's largest auto market after its 2009 vehicle sales jumped 46 percent to 13.6 million, ending the U.S. dominance of more than a century.
In the first 10 months of this year, auto sales in China topped 14.6 million, already supplanting the total vehicle sales in 2009, the China Association of Automobile Manufacturers says.
A powerful player
China is GM's biggest market by unit sales and GM's alliance with SAIC is the biggest auto-producing venture in the nation.
Three years ago, GM became the first multinational automaker to sell 1 million vehicles in China. The company said its 2010 sales in China would surpass 2 million, the first to break the 2-million threshold among all multinational players.
In spite of a sluggish international market, GM's presence in China is further strengthened by the country's booming auto sales.
GM and its Chinese joint ventures sold 1.976 million vehicles through October, a 35.5-percent increase from a year earlier, making it the most successful car alliance in China. That compares with second-ranked Volkswagen AG, which delivered 1.48 million cars through September.
Shanghai GM, the first joint venture between GM and SAIC, has been consumers' top choice in terms of quality and its high standard service since it started production in 1999. From January through October 2010, Shanghai GM sold over 840,000 vehicles, continuing its leadership in China's automotive market. SAIC-GM-Wuling Automobile Co. Ltd., which completed its assets restructuring in 2002, has taken the lead in the minibus sector for four successive years since 2007, and has become the only manufacturer in China with annual sales exceeding 1 million vehicles.
GM, Ford and Chrysler were among the hardest hit by the 2008 collapse in U.S. auto sales. Hundreds of thousands of jobs were lost by the Detroit three automakers and their suppliers, which had just begun to reap the rewards of years of painful restructuring when the financial crisis hit.
GM was delisted from the New York stock market after it filed for bankruptcy in June 2009. To save the company from collapsing, the U.S. Government injected $49.5 billion into the company in exchange for 60.8 percent of GM's common stocks and $2.1 billion worth of priority stocks and embarked on restructuring the century-old giant.
In the future, GM and SAIC will join to explore emerging markets. In 2009, they announced they would co-develop emerging markets in Asia. In the meantime, they have pledged to research and develop a new generation of energy efficient vehicles and to cooperate in developing new-energy vehicles.
Wang Liusheng, an analyst at China Merchants Securities Co. Ltd., argued that returning to Wall Street does not mean the company has totally shrugged off its previous burdens.
Wang said the money raised in the stock market will be primarily used to pay off the company's debts. The auto giant is still plagued with many problems. Due to a shortage of capital, its Opel brand is failing to conduct research and development of new autos and the proposed restructuring of the brand in Europe is encountering many obstacles.
Its huge pension issue is still an unresolved problem haunting GM. Before declaring bankruptcy in June 2009, GM had 260,000 employees, but the number of retired workers, who received $3,000 each month for the rest of their lives with high medical welfare, was almost double that of the current employees. Approximately $20.4 billion of GM's $63 billion debt was due to pensions it owed to retired workers.
In the meantime, how to restructure its product lines is a burning question. Surging oil prices have pushed consumers to turn to energy-efficient cars, like those produced by Japanese automakers, making GM less appealing.
"As an industrial behemoth, it is impossible for GM to achieve fast growth overnight. Return on investment is slow and low, and it's not worthwhile to make a long-term investment in the company," said Wang.