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GM IN CHINA
PGSM



ASSIGNMENT 2 MGT620 INTERNATIONAL BUSINESS MANAGEMENT
NAME OF LECTURER: DR. IAN MACKECHNIE









SUBMITTED BY
Xxx
MBA-



MBA-F1305-0348 December 6, 2013
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PGSM MBA-MGT620 INTERNATIONAL BUSINESS MANAGEMENT
Assignment 1

1. Significant Challenges and Approaches to overcome
As GM Management, there is a series of significant challenges in vehicle
sector of China. The first one is high tariffs on motor vehicles especially for
importing the cars (even the imported parts or cars with major assemblies will
be taxed as imported vehicles). Then, GM will face the very costly importing
the cars (and even on its imported quality parts such as engines). The second
challenge is the regulation of China Government on car financing as cutting
the loans for purchasing motor vehicles because of restraining demand to
cover the inflation. This will affect the business of fast-growing industry by
inhibiting the customers and the vehicle sales will drop off.

The third challenge is ownership requirement as foreign ownership is
maintained at 50%. Although this challenge alone may not significant, the
subsequent challenges combined together and become significant. The
consequence of foreign investment rules in Chinas vehicle sector (June
2004) that the Government is imposing technology development in domestic
companies and aims the owner of vehicle production technology will be &
50% of all sales come out will be from domestic companies in 2010. The
combination of these three challenges (50% ownership limitation, sharing of
techniques and allocation of ownership) seems too supportive for domestic
producers. However, it increases market entry barriers for foreign investors
especially for hi-tech and quality-oriented productions.
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Following to third (combined) significant challenge, the last one for doing
business in China is violation of the Intellectual Property Right (IPR). Due to
violation of IPR, there is high risk of losing potential profits & customers and
the most important issue is technological piracy.

It is a quite challenging and difficult to overcome all the challenges
completely. However, there is also a series of approaches that might
overcome the significant challenges except for changing the Governments
Regulations directly. Whatever the regulation is, but the investor needs to
build constructive relation with the Government both at central and local level.
Then, registering the trade marks, copy rights and IPR at local levels could
prevent the violation of IPR and counterfeit productions. According to
export.gov, China has IPR enforcement system and specific authorities for
copyright, patent, trademark, trade secret and unfair competitions. Another
way of protecting piracy and IPR violation is advocating the shareholders and
social educating the customers on brand awareness on quality production.

As a member of WTO, the Governments restriction on ownership limitations
will be changed after exemption period. For restriction on the imports, GM can
import important parts (tax rate on parts is lower than that of the whole
vehicle) and manufacture the vehicle in China which relieves high taxation
and more profitable. For overcoming of another challenge that cutting car
financing, the produced vehicles can be minimized at production cost
(because of cheap labor) and the pricing can be at affordable ranges.

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2. Chinese Currency and GMs Strategy
Although the economic growth of China increases annually because of
hyperactive consumers, exports and foreign investments, there is not much
inflation in its currency. The reason is that the Government does not want the
rapid growth of GDP for pegging the Chinese Currency to USD in order to
stimulate exports, maintaining the domestic demands and creating domestic
job opportunities. However, as the consequences of pegging the currency
(Rmb) to USD, the economy of China becomes more growing, tends for more
inflation and increases in unemployment rate (which turns to cheap labor).

For the strategy of GM, there will be three options 1) importing the vehicles
into China market, 2) producing the vehicles in China for exporting to other
countries and 3) importing the parts for assembling vehicles in China. The first
option is not achievable for the reason that pegging the Rmb (devalued
currency) to USD makes the imports very costly and GMs vehicles become
more expensive to China market. The second option to produce vehicles in
China will make the products (more) cheaper for GM in exporting to other
countries because of cheap labor for production and high profitability for
exporting. However, this option does not consider on the quality of locally
supplied parts. If the suppliers couldnt meet the quality for parts, there is still
the third option that imports the important parts for assembling vehicles in
China. Although the imported parts would be at expensive, the labor for
assembling is still cheaper. This option not only overcomes the currency
policy of China but also maintains the quality of produced products and
therefore is most relevant strategy for GM.
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3. Transferring the Production to China
China as a country of growing at population and GDP (Exhibit 2), the market
attractiveness is stronger for businesses entry and investment especially for
vehicle industry, fast-growing business. However, there are major challenges
for vehicle sector due to Government restrictions and interventions besides
being a member of WTO. Pegging the currency (Rmb to USD) and
maintaining exports sector (positive account balance in Exhibit 2) are the main
concerns. And the consequences as cheap in labor market and high tariffing
on imports (either whole vehicle or parts) are the secondary concerns but with
opportunities.

Therefore, YES, the production of vehicles should be transferred to China
because of the above concerns (threats and opportunities). Pegging the
currency (devalued Rmb) will be threats for importing cars into China when it
becomes opportunity for exporting from China to other countries. Another
opportunity for production or assembling the vehicles is availability of cheap
labor in China. In combining, the production of vehicles can lead to cost
leadership and by adding the issue of pegging the currency, there will be
double benefit in exporting those produced vehicles.

In addition to these situations, R&D
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expenses will be tax deductible in China
(Exhibit 4) which will encourage the R&D activities and its development.
Therefore, R&D activities related to product developments which are critical
either for distributing local market or for exporting to global market in effective

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Research and Development
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ways and less cost. By production vehicles in China, a major player in car
production, more market shares can be seized by taking these advantages.

Then, it is relevant for GM to manufacture cars in China and export to the rest
of market globally. This will be taking advantages of GM by producing
cheaper vehicles for seizing the local and global market shares along with
R&D activities for meeting the different needs of the market.



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4. Short-term and Long-term Analysis on Motor Industry
The motor industry becomes the fast-growing industry in China during 1999 to
2003 by means of sale volumes and profits earned by automakers (4.4 million
vehicles in 2003). This is supported by economic growth (7-9% increase in
GDP annually) and the top level (20%) of Chinas population would be able to
afford for automobiles. These factors are driving China to become worlds 2
nd

largest vehicle market attributed by cheaper cars production and vehicle
financing for production. Even in first quarters of 2004, GM with domestic
ventures reaped net profit at $875 million in China which is 15 times more in
profitability than in North America.

However, in 2004, there are already over 200 automakers in China including
ventures jointly with foreign investors and domestic firms without venture
partners (which are relatively small firms). The different strives among
automakers at large scale or small scale results intensifying in price
competition (the vehicle prices come to drop 25% during 2001 to 2004).
Besides their competition, there are also short-term and long-term constraints
of customers for buying vehicles and the vehicle sales also drop sharply.
Therefore, the result for motor industry is double forcing to be cost lead. From
demand side, the customers, they become choosing less expensive
automobiles as they no longer have confidence to choose whatever the
vehicle price is. This is firstly based on prominent drop of vehicle price and
secondly on oil shortages & high price of gasoline gas. In addition to the
situation, the China Governments restriction for automobile financing loads
the customers in losing their consumer confidence.
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Apart from these financing and pricing problems, there is a problem in
infrastructure and environment. There is no proper highway system in China
and it inhibits the further growth of automobile sector. This situation against
the existing car ownerships makes the traffic into congestion. And the air
pollution is also an environmental problem making China at 16 out of 20 most
air-polluted-cities in the world.

For recovering these situations that is dropping car production, sales and
profitability, there are approaches for short-term and long-term achievements.
For short-term recovery, the vehicle production should be minimized the
production cost with eco-friendly versions. In order to minimize the production
cost for foreign investors, the assembled parts should not be imported as it
will make the cost higher. However, getting the local supply for qualified parts
is still challenging point. And it may need trainings to or strong agreements
with domestic firms for long-term continuous supply for quality products.
There is no consideration for labor as it is cheap in ordinary nature in China.
Another production aspect is the industry should focus on production of mini-
version vehicles in order to adapt with the congested traffic situation. The
purpose of production should emphasize to transportation rather than luxury
products which tends to be more quality and pricier ones. On the aspect of
environment, the production should also have attention on eco-friendly driving
which means the vehicles with less fuel consumption (and less carbon
emission) or with fuel-substituents (biofuel and electricity) or the hybrid
(combination of different types). And thus the automobiles produced under
these considerations will become eco-friendly and mini-version vehicles for
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transportation (non-luxury) purpose with less in price and suitable for
congested traffic. Then, this will be a stimulation to recover motor industry
again.

For long-term approaches to go onwards in motor industry, the trend would
depend on the individual style rather than the brand equity. According to
Arthur D. Little in Future of Mobility in 2020, the largest vehicle markets are
targeted in triad
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and BRIC
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along with the consumer trends and future
mobility types. Along with the globalization, limitation to use on natural
resources, environmental deviations (commitment on reducing CO
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emissions) and the growth of economy shapes the consumers requirements
and demands. Therefore, the critical part of an industry is tracking and
focusing on the consumers preference at macro-scale. And the R&D activities
are important as long-term approaches.

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Triad = NAFTA, EU and industrialized East Asia
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BRIC = Brazil, Russia, India and China