Question

Q General Motors in China In November 2018, General Motors, America's largest home-grown auto- mobile manufacturer, announced it would close three assembly plants in the United States, laying off about 5.600 employees. All of these plants made passenger cars that had fallen out of favor with U.S. consumers. who preferred to purchase sports util- ity vehicles and pick-up trucks. Jvdwort/123RF President Donald Trump, who has made the revival of traditional U.S. manufacturing industries one of his major goals, quickly tweeted that he was "Very disappointed with General Mo. tors and their CEO, Mary Barna, for closing plants in Ohio, Michigan and Maryland. Nothing being closed in Mexico & China. The U.S. saved General Motors, and this is the THANKS we get! We are now looking at ewiting all @GM subsidies including for electric cars. General Motors made a big China ber years ago when they built plants there and in Mexico)-don think thar bet is going to pay off. I am here to profect American Workers!" In an interview with the Wall Street Journal, Trump offered the observation that think GM ought to stop making cars in China and make them here." Trump was right that GM had made a major beton China. GM has been operating in China since 1997 when it established a joint venture with SAIC Motor, a Chinese state-owned automotive design and manufacturing com pany, GM has a 50 percent ownership stake in the joint venture, which is known as SAIC-GM. In 2018, GM and its joint venture partner built and sold some 3.64 million vehicles in China, up from 1.2 million in 2011 and 0.4 million in 2006. By comparison, in 2018 GM sold 2.95 million vehicles in the United States. China is now the world's largest auto- mobile market. It's been the largest market for GM since 2012. Despite the size of the Chinese market, there is still lots of room for growth. There are around 173 vehicles per capita in China, compared to 833 per capita in the United States. GM sells models in China under the Chevrolet Buick, GMC, Cadillac, Holden, Baojun, Wuling, and Jiefang brands, GM exports almost nothing from the U.S. to China, although it does export one China-built model, the Buick Envision, to the American market. GM says it can not build the Buick Envision economically in the U.S. because the Chinese market accounts for 80 percent of the model's global sales. Like many automakers, GM believes it needs factories close to its customers in order to reduce supply chain costs and design vehicles that best suit local market de mands. GM also wants to be in China because the coun try is leading the shift away from gasoline engines toward battery powered electric motors. Sales of electric vehicles in China are four times higher than in the United States and growing faster. To foster the growth in electric vehicle production, China has been providing generous subsidies to local producers (including SAICGM) and consumers. GM has pledged to invest heavily in electric vehicles and plans to launch 20 electric models in China by 2023 In addition, there have long been tariffs on imports of motor vehicles into China. Local production avoids these. In 2018, China increased tariffs on imports of Donald John Trump Theme November 27, 2018 https://twitter.com Chow AIL

Answer 1

(1): The long term prospects for the Chinese market are very bright. As stated in the case China is already the world’s largest automobile market and with a low penetration of just 173 cars per person the country still has tremendous scope for growth.

(2): Yes, it does make sense for GM to produce automobiles for the Chinese market in China. This is because China is the largest market for GM and hence it is imperative for GM, both from operational perspective as well as financial perspective, to have production in China. By producing cars in China for the Chinese market GM is able to save the cost of production, avoid import tariffs; ensure supply chain viability and operational feasibility.

(3): In case GM tried to serve the Chinese market by exporting production from USA then GM’s market share in China will most likely fall. This is because manufacturing in USA will increase the production costs, increase costs associated with supply chain and will increase end costs due to the 40% import tariff that China imposes on cars being imported from USA. The buyers in China will start buying cars of other brands that are available at lower prices.

(4): GM went into a partnership with a state-owned company in China because of two main reasons. First of all it gave GM the benefit of having a partner with deep local knowledge. This enabled GM to make cars as per local requirements of buyers in China. China is a different market from USA and having a partner gave GM the ability to get going right from the very beginning. Another benefit of partnering with a state-owned company is that in an autocratic country like China having a state-owned partner will mean more support from the government. In terms of downside GM loses some of its operational freedom as it is bound by constraints of its partnership.

(5): The case taught me that import tariffs do not create a win-win situation and hence high tariffs are detrimental to the development of global markets. The benefit of tariffs is that the importing country generates revenue from tariff that is charged on the imports. The disadvantage is that other countries may retaliate and this may give rise to a trade war. The recent trade war between USA and China is taking place due to tariffs only.