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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On Tuesday (3 April 2012) major media outlets reported that Chinese Premier Wen Jiabao was getting ready to take on China's giant state-owned banks. He was quoted in an article in the Wall Street Journal:

Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly...To break the monopoly we must allow private capital to flow into the finance sector.

Setting aside the fact that there are too many banks in China for any one to have a monopoly (let us not forget that the "mono" part of monopoly means "one") Wen's criticism was definitely warranted. China's top five banks account for more than 55 percent of loans in China's banking system.

On Tuesday I posted this WSJ article on Facebook and offered the comment that, "what Wen really means is that the dominance of the big state-owned banks needs to be broken so that privately owned banks are better able to compete for lending business. There are plenty of banks in China. The problem is that the biggest are state-owned and are managed according to political, not economic, principles."

But that isn't the whole problem. The other part of the problem is that, as long as China's major industrial firms are also state-owned, they will be considered by bankers to be a better credit risk than private firms, and they will absorb most of the funds available for lending.

It isn't that private firms are necessarily a poor credit risk.  Indeed, some (possibly most) private firms are better managed than state-owned enterprises (SOEs), but unlike the SOEs, the private firms aren't backed by the full faith and credit of the central government. Consequently, China's private sector continues to be starved of funding.

On Thursday (5 April 2012), George Chen of the South China Morning Post wrote an article entitled "Bankers Reject Wen's Criticism." (Sorry, SCMP is behind a paywall.)  Some of the quotes in this article are simply golden. It's almost as if China's bankers wanted to help me make my argument. One unnamed senior bank executive was quoted:

I don't think it [Wen's comment] is a fair comment. Because we're a state-owned bank, much of our business and loans are to support whatever the government needs, for example to support the growth of many state-owned enterprises. We must listen to the government, which already gives us a lot of orders and guidelines.

Right there you have an explicit admission that "the government" wants the banks to support the SOEs. Of course, we already knew that, but it's nice occasionally to have insiders admit as much.

What I find strange about this response from a senior banker is that he apparently does not associate Wen Jiabao with "the government" -- which is odd since the Premier's job description is "Head of Government."

What this tells us is, first, that Wen Jiabao's views, if they were ever considered to carry any weight, are no longer deemed worthy of respect. Even though he'll be Premier until next March, in the eyes of many, he's already a lame duck.

Second, if the Premier isn't calling the shots, then someone else -- whoever this senior banker considers to be "the government" -- is calling the shots. And whoever that is (and I'm sure it's a faction of the senior leadership) is still not interested in opening up China's industries to free and fair competition from the private sector.

In my forthcoming book, I make what I believe to be a very strong case for the fact that China's insistence on state dominance of its major industries is stifling the country's innovative capabilities. This latest episode with the banks just further confirms my belief that the powers that matter have yet to see a connection between state dominance and China's continued reliance on copying of foreign technology rather than development of its own.

Wen Jiabao gets it, but he already has one foot out the door.

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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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