Strategic Management

Shanghai General Motors Case

SUDHIR PANDURANGA Blue (605):

SOUTHERN METHODIST UNIVERSITY

EDWIN L. COX SCHOOL OF BUSINESS

Strategic Management - BA 6331 FALL 2011

1. Why did GM enter the Chinese market in the current era? (Capabilities? Competition? Market size and

growth rate?) GM was one of the last entrants to Chinese market that was allowed under the Chinas long-term industrial development plan. GM considered China as huge market for auto industry and also saw an entry point to the Asia Pacific region. GMs presence in China was dated back to 1922 where GM had its Manila branch moved to Shanghai and sold a Buick model sold to Chinese emperor. GM was willing to make a vast long-term investment and to do technological transfer in China to establish an entry into Chinas market and help build one of the worlds strongest and most advanced automobile industries in China. Jack Smith, GM, Chairman and CEO had a made a promise in 1994 he would bring GMs best technology to China. GM had estimated that average net profit margin in China was around 10% which was twice as compared to global average of around 5%. They earned a profit of $2,267 per vehicle in China compared to GMs earning of us $145 in US. GM also had the capability to establish auto components production including an assembly site in China. Their goal was setup domestic supply system that could support auto plants. GM did not have the first-mover advantage and they had lost the advantage to Volkswagen which was attracted by Chinas government to upgrade their local automotive industry and reduce large-scale imports of automobiles. GM was dealing with an increasingly competitive environment and was challenged by the influx of imported car. It had to be competitive globally. GM knew that having competitive product was inadequate and there were many automobile companies that produced equally good products in the market. GM knew they had to build a holistic supply chain that would help customers when they want service and having auto parts manufactured locally and having it readily available. GM had its own distribution, sales network and supply chain similar to US. China accounted had about 1.5% of the total number of cars in the world accounting for 20% world population and China had the same number of cars per person as US did in late 1910s. They low-

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ownership accounted for the growth in auto industry which accelerated in 2001 and by 2004 the sales was 5.1 million units. It was around 1.5 million in 1995. 2. Why did the joint venture between SAIC and GM, as well as GMs relationship with the Chinese government, function so smoothly? SAIC was a state-owned business. It was supported and closely linked to the policy makers. SAIC had close relationships with local authorities, central government and banks. It had the power to exercise influence over the course of the Shanghai automobile industry cluster which helped development of the automobile industry in China. Partnering with SAIC helped GM was win-win situation and helped GM make inroads into auto market. Having a partnership with SAIC helped GM set up a three-way (Chinese-Chinese-Foreign) joint ventures with SAIC. The partnership helped GM to acquire Yantai Body Works so that GM could become a production base for economy models in China while concentrating on making Buick models. In Nov 2003, when CBRC announced their decision to open auto financing markets to foreign markets it helped GMAC, GMs auto finance arm form a venture with Shangai Automotive Group, a subsidy of SAIC to apply for auto financing business license which would help boost car sales and translate into lucrative business. The joint venture also helped to pursue development and commercialization of hybrid and fuel cell vehicles in China. GM had promised to make technological exchanges to Chinese Government in order to become a significant player in Chinas auto industry. China government benefitted from the partnership in terms of absorption of advanced technology that was bought into the market. It pressurized other competitors to bring in newer models and technology. 3. How did GM innovate in the value chain functions to improve its market position? GM understood that having competitive products was not sufficient to be competitive. They knew that they needed to have a distribution system that helped to take care of customer needs when they have vehicle problems. They had a control over marketing, distribution and sales network in China. They had a supply chain similar to the one in US. GM had built several of their pilot car to fine-tune the
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equipment and train its employees. This way they ensured that the processes and training were paying off. The sourcing department had adopted of SGM had adopted GMs global Production and Supply Chain departments similar systems and processes and also participated in global sourcing programs to increase sourcing choices. SGM also implemented a quality process controls that were some of the industry-firsts in China and met with world standards. They not only built manufacturing plants in China but also auto components industry that could help supply chain technology. The Shanghai manufacturing plant to identical to most other plants in developing countries but also was equipped with state-of-the art technology which helped them quickly replicate cars that were built in other countries. GM product structure was classified four tiers: high, medium-high, medium and low-end which helped them target different customer segments. SGM employed third party logistics to deliver cars to dealers and distribution centers in Chinas major cities. GM had a product-tracking and inventory management system that helped they keep track of sales and stock levels and quick replenishments to avoid stockouts. SGM had an e-commerce website which attracted prospective customers everyday which enabled to customers to pick and choose options packages, dealers and order online.

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