Question

GM Is Building Cheap Cars for China’s Masses (Bloomberg, May 2018)… GM-SAIC joint venture strategy is to design car explicitly for the Chinese market.  Why did GM not simply license its technology to SAIC? Why didn’t it export car from the US? As of 2018, GM appears to be increasing its strategic commitment to China, what are the benefits of this approach? What are the potential risks?

Answer 1

GM will not simply license its technology to SAIC because licensing will lead to fixed profit for the firm which will be equal to price at which the technology is sold. On the other hand, forming a joint venture with another company which is a domestic company of China will increase the magnitude of profits on per car basis. Simply licensing will reduce the prospects of profits and will also not lead to the brand name of the company as the product will be sold by the name of SAIC.

It did not export car from the United States of America because total cost of production in the USA plus the transportation cost of exporting the good to China will exceed the cost which the company incurs by producing the good in China as China has low labor cost and this reduces cost of producing the good in China which will also increase profits in China.

Increasing the strategic commitments to China will help GM to sell the product in the country smoothly and also at lower prices. If it has to import some goods from USA, it can be imported for a lower tariff. This will help the company in the long run. Some of the risks arise from the fact that if GM is not able to meet those commitments then it will lead to loss of the sales market and also the brand name of the company in the United States.