From ‘Government’ Motors to ‘Shanghai’ Motors?
Saturday, October 2, 2010
President Obama has a delicate balancing act to manage in the upcoming General Motors initial public stock offering.
Word recently leaked that China’s Shanghai Automotive Industry Corporation (SAIC or Shanghai Motors) was considering taking a stake in General Motors when it has an initial public stock offering (IPO) in November. Instantly, the blogosphere lit up with furious reactions—the original GM bailout was deeply unpopular (67 percent of those polled by Rasmussen opposed it, 21 percent supported it) and many bloggers said allowing a government-owned Chinese company to buy part of GM added unbearable insult after an already unconscionable waste of taxpayers’ money. As one commenter put it: “If the Obama administration permits this, it will be the last nail in our coffin. We might as well stop teaching English in our schools and only teach Chinese.”
Aware of the potential backlash, the U.S. Treasury Department, godfather to GM and steward of the government’s current 61 percent ownership of the company, has scrambled to clarify the terms of the upcoming IPO—without tipping the government’s hand on the highly sensitive question of the potential SAIC bid. Treasury officials declared that they were seeking investors from “multiple geographies,” with a particular focus on North America, and that they expected “a large and diverse group of institutional investors to be offered an opportunity to participate,” including mutual, pension, and hedge funds. The government stated that it would not involve itself in allocation to specific buyers and it recently reduced the amount of the first offering, down to $8–10 billion from $15–20 billion. Wisely, GM and the Treasury have scheduled the IPO after the midterm elections in early November.
Allowing a government-owned Chinese company to buy part of GM was considered by some as an unbearable insult after an already unconscionable waste of taxpayers’ money.
Still, if and when it comes, the SAIC bid will be a “tricky sell,” as one commentator put it. Before rendering judgment on all of this, a little background and history: Truth is, GM and SAIC have had a highly successful joint-venture partnership in China for over a decade. So successful that in 2010, for the first time, GM is on track to sell more cars and trucks in mainland China than in the United States—up to 2.5 million. Further, recently GM and SAIC established a 50–50 joint venture to make and sell small cars throughout Asia, beginning in the burgeoning Indian market but expanding throughout the region in future years. This allows GM to tap into SAIC’s small engine expertise and gives SAIC access to GM’s substantial distribution network. It also eases the way politically for Chinese entry into the Indian market.
In addition, substantial foreign investment in, and ownership of, domestic automakers has been commonplace for many years. Ford bought and then sold Swedish Volvo and British Jaguar. GM bought and has now sold Sweden’s other national car, Saab; it still owns Korea’s Daewoo Motors. And after dithering during the crisis, GM crucially decided to retain control of Opel, its longstanding German partner and repository of highly prized engineering prowess. Italy’s Fiat next year will take a major stake in Chrysler. The government of France retains a minority ownership in Renault, which in turn owns more than 40 percent of Japan’s Nissan Motor Corporation. Public sovereign wealth funds (SWFs) also are important players: for instance, the investment arms of Abu Dhabi and Kuwait own pieces of Daimler AG and Renault-Nissan, respectively. And so it goes.
GM and the Treasury have scheduled the IPO after the midterm elections in early November.
Here in Washington, President Obama has a delicate balancing act to manage. Obama has repeatedly stated that he wants to get out of the automobile business as quickly as possible: thus, the pressure to get on with the IPO. But in the process of divesture he must attempt to get the best possible return for the $50 billion U.S. taxpayers ponied up in the 2009 bailout. While generally the betting on the street is that the GM IPO will be popular with investors—a stripped down, more efficient GM is strategically organized to compete in many national markets—doubts remain that it has shed its lethargic, hidebound corporate culture or that its new leadership (with no auto backgrounds) is up to the task of restoring GM competitiveness.
In this highly uncertain economic climate, it will be important for GM and the government to seek out and convince so-called “cornerstone investors,” such as large hedge funds, SWFs, and even big, government-controlled corporations such as SAIC. Depending on the size of the IPO, these “confidence building” stakes could amount to hundreds of millions of dollars.
In 2010, for the first time, GM is on track to sell more cars and trucks in mainland China than in the United States—up to 2.5 million.
There are also exquisite ironies and dilemmas for the United Auto Workers, which was given 17 percent of the GM stock. Clearly, confidence-building investment by SAIC and other big players, combined with future GM success in the huge Chinese market, would assure greater worldwide profits and increase value of the UAW’s stockholdings. This is important for the UAW, as the performance of its GM stock holdings will be central to continuing the level of health benefits that the union assumed responsibility for in the 2009 GM bankruptcy deal.
On the other hand, the UAW and other U.S. unions have been strongly hostile to foreign investments by U.S. multinationals and have pushed the Obama administration to penalize such strategies by American corporations. One fear for the UAW is that the GM-SAIC alliance will soon import sizable numbers of cars into the United States. While this is possible, GM’s strategy to date has been to build and sell locally, whether in Europe, Asia, or the United States.
In addition, the growth potential in the Chinese market—with its 1.3 billion population and 35 cars per 1,000 people versus 850 cars per 1,000 in the United States—render any near-term drive to export to the United States unlikely.
In the end, from a purely financial or economic perspective, there is little to fear from an SAIC bid and potentially much to gain for on-the-hook public stakeholders and for prospective future private investors. Moreover, SAIC has sensibly made it known that it will keep its investment small—less than 10 percent of the IPO—aware, no doubt, of the huge backlash five years ago when a sister Chinese company, CNOOC, tried to buy an entire U.S. oil company, Unocal.
But of course, with China and the United States at this point, financial and economic factors are not dispositive. Though there are no plausible direct national security risks from this investment, the IPO and future GM stock offerings will play out against larger political and diplomatic events and trends. Growing economic friction over currency and intellectual property issues, combined with China’s bolder demands on the South China Sea and Taiwan, obduracy over North Korea and Iran, and humiliation of America’s ally Japan, may well create an atmosphere in which even a small investment in a U.S. icon ultimately just won’t fly.
Claude Barfield is a resident scholar at the American Enterprise Institute.
FURTHER READING: Barfield asks, "Where Is America in Asia's Future?" Hiwa Alaghebandian issues the government a "Homework Assignment," Scott Shane explores "Why Small Businesses Aren't Hiring" and Alex Pollock explains why "It's Easier to Be Brilliant than Right."