Cablegate: Shanghai Gm Relatively Immune From Gm Financial Woes, But

Published: Tue 23 Dec 2008 07:58 AM
DE RUEHGH #0574/01 3580758
R 230758Z DEC 08
E.O. 12958: N/A
SHANGHAI 00000574 001.2 OF 005
(U) Sensitive but unclassified. Not for dissemination outside
USG channels; not for Internet distribution.
1. (SBU) Summary: On December 18, the Consul General (CG) met
with Shanghai General Motors (GM) Executive Vice President
Robert Socia and other top executives to discuss the effects of
the economic downturn, general business environment issues and
the local fall-out from GM's financial troubles. Socia said
Shanghai GM has suffered little effect from GM's financial
turmoil in the United States and the JV will not be used to
collateralize any loan from the USG. The economic slowdown in
China has decelerated Shanghai GM's sales, but it has not
dampened their optimistic outlook on China's growth potential.
Although Shanghai GM currently does not have any major
intellectual property disputes, GM is still circumspect in
bringing some of its most sensitive technology to China. Socia
attributed the absence of IP issues and ability to have its
voice heard to its "strong" joint venture partnership with
Shanghai Automotive Industry Corporation (SAIC). The Central
Government is pressuring the auto industry to "green up," and
Shanghai GM is moving forward on plans for more environmentally
friendly technology. On the recent WTO ruling against China on
the auto parts case, Socia said that little will change for
Shanghai GM in its sourcing strategy, since cost reduction
pressures necessitate local sourcing regardless. End Summary.
Minimal Impact from GM's Financial Troubles
2. (SBU) When asked how Shanghai GM, a 50-50 joint venture
between General Motors and the SAIC, is affected by GM's
financial distress in the United States, Socia replied, "of
course there is some effect, but very minimal." He explained
that from a financial perspective, Shanghai GM is self-funding
and in fact sends dividends home to its U.S. parent. Shanghai
GM would also not be part of any collateral used to secure U.S.
Government loans. GM is focusing on ensuring that growth areas,
such as those in China, continue to grow. Socia declined to
predict what would happen to Shanghai GM if GM files Chapter 11
Bankruptcy, but he confided that Shanghai GM does have plans in
place if that were to occur. Socia said SAIC has been very
supportive and assured GM it will be there throughout the
Sales Slowing, But Shanghai GM Still Optimistic
--------------------------------------------- --
3. (SBU) Socia said that although Shanghai GM's sales growth
rate slightly declined in 2008, he is still optimistic about the
future. In 2008, GM initially projected 14.5 percent growth in
China over 2007, but actual numbers are showing only nine to ten
percent growth over 2007. Market share has also dropped on the
margins; in 2007 GM sold 1,031,974 units and held 12.2 percent
of the Chinese new automobile market. In 2008, total sales have
reached 1,120,762 units (with a few days remaining in the year),
or approximately 12.1 percent of the market. According to
Socia, August and September were the first two months of
negative growth in a long time. In October, there was a little
growth, and November sales were off by eleven percent. December
is shaping up to be a bit stronger than expected. According to
Socia, 2009 will likely not produce double digit growth, but the
market will still be in positive territory, especially after
China's stimulus package kicks in during the second half of the
4. (SBU) Socia further downplayed the slowdown in the Chinese
market, saying that as a result of slowing sales growth, the
company might have to make a "few adjustments" such as delaying
the introduction of a new model and delay ramping up from a 2
shift/2 crew schedule to a 3 shift/3 crew schedule. Currently
the Shanghai plant is running at only 50 percent capacity, which
would be a problem in other regions, but in China with its vast
potential, GM leadership is not alarmed. Socia said a little
extra capacity is okay, because they know it will eventually be
filled. Socia also cited a recent visit to a Shanghai GM show
room that was "packed" with people still interested in buying
vehicles to bolster his predictions.
SHANGHAI 00000574 002.2 OF 005
5. (SBU) Regardless of the recent slowdown, Socia believes
China's long-term auto market has vast potential. To make the
point, he noted that vehicle density in China is extremely low.
China has 24 cars per 1,000 people, compared with 800 cars per
1,000 people in the United States. Continued economic growth
and rising personal income in China drive the automotive
industry's growth here. In addition, a great deal of market
growth is coming from China's tier 2 and tier 3 cities. Socia
said GM has adapted GM's products, making them more durable and
spartan, to meet the needs of consumers in these cities.
According to Socia, the response has been tremendous. Besides
auto sales, Socia says GM also sees a great deal of potential in
after sales services, used car sales, financing, and insurance.
However, the key to tapping these markets lies in GM's
relationship with SAIC. GM is so convinced about China's market
potential that it opened a new factory in northeastern China on
December 17. (Note: The new plant is operated by GM China and
its joint venture partners SAIC and Shanghai GM. End note.)
Global Sourcing from China - Down USD 9 Billion
--------------------------------------------- --
6. (SBU) Socia refrained from commenting on the impact of the
global downturn on GM's parts sourced from China since parts are
handled by a separate division of GM. However, he said the fall
in overall U.S. automobile sales from 18 to 8 million units this
year and GM's sales decline therein has definitely hurt Chinese
auto parts manufacturers. The downturn in sales did not begin
with the financial crisis, but began much earlier in the year as
fuel prices soared in the United States. In a separate
conversation, GM China's Global Sourcing Account Manager Hugo
DeCampos said that automotive components sourced from China for
GM's facilities around the world were down from USD 10 billion
in its original 2008 forecast to a little under USD 1 billion.
DeCampos confirmed there was a slowdown of sourcing from China
that started early in the year from the United States and
quickly spread to Europe and other regions. Chinese auto parts
manufacturers are really struggling now and some have begun to
close their doors.
Shanghai GM's Biggest Challenge: Stiff Competition
--------------------------------------------- ------
7. (SBU) Socia said that as a result of China's enormous auto
sales potential, both foreign and domestic automakers are
aggressively pursuing the market, which creates fierce
competition. This leads to a "great deal of pressure on the
pricing side," which will continue for the near future. To
illustrate his point, he explained that from January 2004 to
April 2008, the average sale price per new auto in China dropped
27.6 percent in real terms. In other parts of the world, GM has
been able to marginally raise prices; however, in China price
increases are impossible. (Note: China currently has about 100
car manufacturers, of which 11 to 12 produce 80 percent of the
total production volume. End note.) Socia said that the only
companies that Shanghai GM considers as significant competitors
are Toyota and VW. He added that Chery Auto (headquartered in
East China's Anhui Province) has "fallen off" his list of
worries because it has not done well, and he no longer considers
the company a threat. (Note: In a 2007 conversation, GM
Shanghai officials described Chery Auto as the only local
Chinese company that could produce in significant volume and
threaten GM market share. See 2007 reftel. End note.) Despite
price pressures, the Chinese are also some of the most
sophisticated and demanding auto consumers in the world. Socia
noted that in China, the company has had to put more work into
their auto interiors than they have in other countries to win
IPR Protection Not an Issue, But Still Cautious
--------------------------------------------- --
8. (SBU) Socia said that Shanghai GM did not face any
significant IPR issues at this time. He attributed this to the
"close relationship with SAIC," noting that SAIC helps resolve
any IP issue that might come up. However, SGM is still cautious
SHANGHAI 00000574 003.2 OF 005
about bringing some of its more sensitive intellectual property
to China. For example, it limits some of the technology it
provides to the Pan Asia Technical Automotive Center (PATAC),
which is a joint venture
design and
engineering center between General Motors
Shanghai Automotive Industry Corporation
founded in 1997. (Comment: While GM may have
hesitations about bringing its most sensitive technologies from
the United States, it is moving full speed on developing new
technologies inside China. In October 2007, GM launched the GM
Center for Advanced Science and Research (CASR), part of a new
USD 250 million GM corporate campus in Shanghai, which is to be
home to GM's operations in China as well as its Asia-Pacific
headquarters. The center will carry out advanced research
projects in partnership with the Chinese Government, industry
partners and academic institutions with a specific focus on
energy-efficient and environmentally friendly transportation.
This effort is part of GM's strategy of "in China, with China,
for China." End comment.)
9. (SBU) Socia said GM does not have any problems having its
views heard on regulatory issues. It has three channels to make
its views known to Chinese regulators: directly, through
Shanghai GM, or through SAIC. In Socia's view, the most
effective was to work through SAIC because its executives have
the best relationships and networks, but sometimes it may
utilize all three channels in coordination. He emphasized that
GM has a solid relationship with SAIC, and both sides have put a
great deal of thought as well as capital into the JV.
China Creating "Green" Pressure for Auto Companies
--------------------------------------------- -----
10. (SBU) The Chinese Government is putting a great deal of
pressure on the automotive industry in China to "green up,"
according to Socia. There is a big push to boost fuel saving
technology as well as curb fuel consumption through a fuel tax,
consumption tax, and a purchase tax. The Government is adopting
Euro IV and Euro V emission standards to improve air quality and
is considering recycling regulations for autos. Safety
regulations are also being tightened, with higher requirements
for roof strength and child restraints. GM Asia Pacific Public
Policy Director David Tulauskas added that China is drawing on
the top environmental and safety standards from around the world
and has accomplished the same regulatory environment in a decade
that has taken many western countries fifty to sixty years to
11. (SBU) GM's strategy to lead in the "drive to green" in
China rests on two pillars - produce more fuel efficient
vehicles, and ensure a corporate level "green system," with
green social responsibility, according to Socia. Shanghai GM is
following GM's trajectory in developing more
environmentally-friendly vehicles with the most advanced
technology. The company plans to offer a hybrid vehicle in
China within the next two years. It is also developing E flex
electric vehicles and is on the path to develop and introduce
fuel cells with zero emissions. In addition, Shanghai GM
ensures that all of its plants in China uphold the strictest
environmental standards; its new plant in northeastern China
employs state-of-the-art environmental technology. The company
also ensures that its 120 suppliers are also "greening up" their
own facilities. Socia noted that Shanghai GM has partnered with
an environmental protection foundation to identify and fund
environmental research projects.
WTO Ruling Against China on Auto Parts Will Change Little
--------------------------------------------- ------------
12. (SBU) According to Socia, little will change for Shanghai
GM in its sourcing strategy as a result of the WTO ruling
against China on the auto parts case. Upwards of 90 percent of
the parts used by Shanghai GM are locally sourced. (Note:
Shanghai GM sources most of its parts from firms with which it
SHANGHAI 00000574 004.2 OF 005
has joint ventures; most are existing business partners in other
countries. End note.) Shanghai GM sourcing may become a bit
more flexible, but fierce competition and a relentless push to
cut costs in China, rather than the auto parts component rule,
forced Shanghai GM to maintain high local content anyway to
ensure "just in time delivery" and avoid hefty transportation
costs. Also, the quality of most local components is now
sufficiently high to meet Shanghai GM's standards. (Note:
During a June 2007 visit, Shanghai GM leadership said the
content threshold was difficult to reach with new high-end
products because components were not available locally. End
note.) Tulauskas added that although it is yet to be seen
whether China will come out with a new policy on components
sourcing, a high level Ministry of Commerce official assured him
that if China lost on the WTO auto parts dispute settlement
case, China would modify its rules and practices to comply with
the WTO ruling.
Labor Turnover Slowing - The Upside to the Downturn
--------------------------------------------- ------
13. (SBU) GM China Group Human Resources Director Shannon
DiPietro said that the economic slowdown in China has helped
staunch the rapid staff turnover; however she noted that
Shanghai GM already had a relatively low turnover rate. The
current annual attrition rate is three percent - roughly two
percent quit of their own volition and one percent is fired.
She attributed this to Shanghai GM's highly competitive pay.
Although the JV has not had to lay off any workers, it has taken
more precautions in hiring new people, ensuring that every
person added is fulfilling an essential task. According to
DiPietro, thus far labor costs have been unaffected by the Labor
Contract Law, because Shanghai GM was already following most of
the provisions before that law was implemented. However, the
law could become more of an issue if an extended downturn
necessitates letting workers go. Socia also noted that although
Shanghai GM is "unionized," the PRC government-sponsored trade
union has little effect on business since the union's emphasis
is on "total harmony."
14. (SBU) Shanghai GM Manufacturing Director Julian Blisset
said that the cost of labor in Shanghai is roughly double that
of northeast China, where GM opened a new plant on December 17.
He added that the high cost of labor in Shanghai is one of the
reasons GM will not expand its manufacturing beyond current
operations in the city. The average age of its Shanghai GM
workers in Shanghai is around 27 or 28. Absenteeism is less
than one percent, the lowest of any GM plant around the world.
Only five percent of the workers on the assembly line are
female, but this appears to be a self-selection issue. The
average education level of a line worker is a high school or
technical school diploma. For senior management or engineers
there are higher educational requirements. The plant has
increasingly "localized" its staff; for example, Shanghai GM
currently only has one expatriate production staff member.
Since Shanghai GM only focuses on line and general assembly, all
other jobs (such as cleaning) are outsourced.
15. (SBU) In 1997, GM was one of the first foreign firms to
begin producing automobiles inside China by establishing a 50-50
joint venture with SAIC. GM vehicles first rolled off Shanghai
assembly lines in 1999. However, the JV experienced slow growth
until 2002 when the company saw a large jump in sales after
China entered the WTO and the market was liberalized. Shanghai
GM soon became the first JV to sell over 500,000 vehicles in
China. Shanghai GM now produces several new models each year,
and in 2008, it launched a new Excelle, a new CTS and a new
Buick Regal. (That last model went on sale in China on December
21.) China is now GM's second largest market after the United
States. With the opening of the new plant in northeastern
China, GM in China now has eight assembly plants, four power
train facilities, an engineering and design center, an
automobile financing JV, AC Delco and On Star operations, and a
warehousing facility. As part of its strategy of strong network
development, the company has also established a wide range of
SHANGHAI 00000574 005.2 OF 005
dealerships that are fully franchised. GM currently has a total
of seven joint ventures and 21,000 employees in China, 12,000 of
whom are employed at its Shanghai GM JV in Shanghai.
View as: DESKTOP | MOBILE © Scoop Media