Back in January, GM announced it wanted to buy back the 1% it had sold to its partner, Shanghai Auto (SAIC). In the post I wrote at that time, here was my prediction:

The only way I can see this happening is if GM were to agree to set up the sales organization that SAIC had first proposed, which may be possible now that the US government is no longer a majority owner in GM (though still technically the controlling owner).

As it turns out, this is exactly what is happening.  According to an article (free registration required) from Automotive News China:

Company CEO Dan Akerson told the Journal that the partners plan to split Shanghai GM into two units: sales and operations.

General Motors would have a 50 percent share of the operations unit, which would make product decisions. SAIC would retain a 51 percent share of the sales unit, which would allow the Chinese automaker to book the joint venture's revenue.

The remaining question, which the partners have not yet answered, is what consideration is changing hands. How much is GM paying to SAIC for the 1% of the manufacturing operation?

As for the ongoing implications, GM once again presumably has an equal say in SAIC-GM board meetings.  This is good for GM because they will have leverage in charting the direction of the firm, appointing executives, and planning production.

However, this new sales organization, of which SAIC will now own 51%, will funnel a bit more cash toward SAIC for the foreseeable future.  What's that worth?  According to my very rough, back-of-the-envelope math, possibly as much as $150 million a year in sales -- that's every year in perpetuity.*

If my math is even close to correct -- cut my figure in half and assume $75 million a year in sales -- that will very quickly add up to a lot more than the $85 million or so GM originally got for selling that 1% to SAIC in 2009.

Of course, SAIC and GM could just tell us what this will cost and people like me wouldn't have to do voodoo math. I'm sure GM's shareholders would like to know.

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* My back-of-the-envelope math.  According to the WSJ, GM gets about $30 billion in revenue a year from China.  Last year, SAIC-GM sold 1.2 million vehicles and SAIC-GM-Wuling sold 1.3 million (data here).  Again, very roughly, taking GM's 49% of SAIC-GM and GM's 44% of SAIC-GM-Wuling reveals that about 52% of GM's China revenue came from SAIC-GM.  Even more roughly, 52% of GM's $30 billion is $15.6 billion and 1% of that is $156 million.

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General Motors announced today that it has signed a memorandum of understanding with the China Automotive Technology and Research Center (CATARC) in which CATARC will reportedly...

...manage GM’s fleet of demonstration Volts and will assist GM China in meeting certain objectives.

These [objectives] will include gaining the support of key decision makers crafting vehicle electrification policy in China.

Who is CATARC?  From their English website:

China Automotive Technology and Research Center (CATARC) was established in 1985 response to the need of the state for the management of auto industry and upon the approval of the China National Science and Technology Commission. It is now affiliated to SASAC.

As a technical administration body in the auto industry and a technical support organization to the governmental authorities, CATARC assists the government in such activities as auto standard and technical regulation formulating, product certification testing, quality system certification, industry planning and policy research, information service and common technology research.

CATARC is "affiliated to SASAC" (State-owned Assets Supervision and Administration Commission) which is essentially the organization that holds the shares of central state-owned enterprises.  CATARC is also a major regulatory organization in that all automobiles need to be tested by CATARC before thex may be certified for the road in China.

Since part of GM's purpose is to gain influence over policymakers, this relationship with an organization that is part of the central government cannot hurt.  But there is more to CATARC than meets the eye.

Not only is CATARC an auto industry regulator that is essentially owned by the central government, but it is also a competitor of GM's through its ownership in the Tianjin Qingyuan Electric Vehicle Company (Qingyuan).  According to Qingyuan's website, the company both develops and produces clean energy vehicles and components, which sounds remarkably like something that GM does.

Qingyuan's "principal shareholder" is CATARC, and another of Qingyuan's shareholders is the Tianjin Lishen Battery Company, a producer of lithium-ion batteries for electric vehicles, which is, of course a competitor of LG Chem, the manufacturer of the battery in the Chevrolet Volt.  (Lishen, incidentally, makes the li-ion battery for the Coda electric car.)

So what does all of this mean?  Am I saying that GM has handed its intellectual property over to CATARC so they may copy at will?  Not exactly.  CATARC, after all, also has a reputation to protect, so I am doubtful that they would so blatantly copy GM's Volt technology.  But how certain can GM be that its technology will not find its way, through CATARC, into the hands of Qingyuan, or Lishen, or any of the dozens of Chinese automakers who bring their cars to CATARC for testing?

GM is no stranger to having its IP copied in China.  Back in 2003, GM discovered that Chery had somehow obtained the plans to the Chevrolet Spark, and used them to develop the QQ which Chery got to market several months ahead of the Spark.  And when GM went to its partner, Shanghai Auto, to complain about this miscreant that had been copying its technology, only then did GM learn that Shanghai Auto was also a part owner of Chery.  (Long story short, GM sued, then settled out of court with Chery, which admitted no wrongdoing, and Shanghai Auto got rid of its shares in Chery.)

In all honesty, I find it hard to blame Chinese automakers for copying foreign technology and designs.  After all, this is what all developing countries do when they are trying to catch up.  All developed countries -- including the US -- at one time or another, copied other countries' technologies with reckless abandon.

I do, however, blame foreign automakers (and manufacturers in pretty much any industry) for sometimes naively risking their shareholders' valuable IP for a share of the Chinese market.  The goal of the Chinese automakers is to win -- as it should be.  But foreign automakers need to understand that the ultimate goal of China's automakers is to no longer need them.  When Chinese partners say their aim is for a "win-win," this means they get to win twice.*

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* I don't know for certain whether I was the first person to say this about the concept of "win-win", but I had not heard it before I tweeted it from my hotel room in Shanghai in January of 2010 (as documented by @rudenoon on his blog).  :)

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… noted Jeremy in the last post to IP Finance. SMEs in the automotive sector may be interested in a recently completed study which maps the IP business models behind ten cases of US patent, trade secret and trade mark litigation brought by the most prolific US patent applicants in the field of braking technology. The study’s author runs the Engineering Intellectual Property Research Unit at Cranfield University’s School of Engineering.

The study shows that the predominant IP monetisation mechanism in the field of braking is that of “monopoly provision”, i.e. using IP to exclude competing suppliers. There is only one instance of a patent licensing relationship, that being with a company already related to the patentee, suggesting that SME developers of braking technology may struggle to license into prolific US patent applicant companies.

As regards the IP mix that such SME developers might employ, the study confirms that trade secret protection is not used above raw material / component-level manufacture. It also illustrates the risk of third party patent infringement associated with trade secret protection.

The greatest threat of infringement litigation appears to come from competitors at a similar level on the value chain, the study also showing that neither the small size of an SME nor the large size of a company’s patent portfolio can guarantee immunity from suit.

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As recently reported e.g. in the Guardian, Korean electronics company LG has sued German car companies BMW and Audi for importation into Korea of cars incorporating LED lights that allegedly infringe LG's patents.

The LED lights in question are made by Osram, which itself is reported to have sued LG and Samsung in the Korean courts for infringement of patents relating to the technology used to make white LEDs.

It would be interesting to know the commercial logic behind LG’s move: although BMW is the most popular imported car brand in Korea, the Guardian article notes that imported cars account for less than 10 percent of the Korean market. Moreover, the 16,579 BMW cars reported as being sold in Korea in the first eight months of this year are a small fraction of the 1,021,927 sales reported on the BMW website for a similar period.

Balancing this is the significantly lower cost to LG of litigating on their home turf. The Korean litigation would also appear to have generated publicity that has reached far beyond Korea’s borders. Is this publicity a signal of LG's willingness to litigate in more significant markets if a settlement is not reached?

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EVO Electric, a spin-out from Imperial College London previously referred to here and here, has recently ret up a joint venture company with GKN Driveline, the world’s leading supplier of automotive driveline components.

Press releases suggest that EVO has licensed its IP to the joint venture company while GKN has contributed financing, engineering and commercial resources. The new company aims to capture a share of the rapidly growing market for hybrid and electric vehicle systems and, in the words of EVO CEO David Latimer, “will be pivotal in establishing EVO as a key player in the fast-growing global market for electric drive components”.

It will be interesting to see how much value EVO realises through this joint venture manufacturing business model. Company documentation suggests that EVO could simply sell its share in the joint venture company to GKN at some point in the future: EVO has already sold 25% of its own shares to GKN as part of the deal, GKN indicating the total value of its investment at closing to be £5 million consideration in cash.

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