Joint Venture Proposal for NewChin Corporation
Submitted by General Motors Corporation
Why General Motors Corporation?
1. Market Leader.
General Motors has the largest market share of cars and trucks worldwide. We are also the world~s largest producer.
General Motors is the leading car and truck producer in the US, which is widely regarded as the most competitive and the largest single market.
GM is the biggest company in the world in terms of revenue.
2. Variety of Products
GM has the largest number of brands of any company:
3. Quality Products
GM has secured a #1 ranking among top ten volume manufacturers in overall customer satisfaction on the prestigious J.D. Power Early Buyer Survey for cars and trucks in the US. This award is particularly important considering that the US is widely regarded as the most open, most competitive, and least profitable market in the world.
4. Proven Track Record Internationally
GM sells cars and trucks in 170 countries and has manufacturing, assembly, or component operations in over 50 countries.
We have the largest global reach of any automotive manufacturer.
*We have a successful on-going joint venture with Toyota
Finally, GM has an existing joint venture with another Chinese company: Shanghai Automotive Industry Corporation.
5. Environmentally Conscious
GM is concerned about our world~s future. We have developed the GM Impact, an electric vehicle, that is slated to go into mass production in the near future. It would be the first such electric vehicle that would be competitive with gasoline-powered cars and the first is going to be produced in volume quantities.
Currently, GM has one of the world~s most efficient cars in the Geo Metro. This economical car is rated as having the highest gas mileage by the Envioronmental Protection Agency (EPA), a US federal government agency.
6. Offering a range of significant related services
~ Delphi Automotive Operations:
~ Hughes Electronics:
~ Close relationship with Electronic Data Services (EDS):
~ General Motors Acceptance Corporation
Our Proposed Car
The Geo Metro fulfills all the technical characteristics desired in your RFP.
1. Fuel Economic and High Mileage:
The Geo Metro is the most fuel efficient car according to the EPA.
EPA Mileage Estimates:
Manual: City = 44 mpg Highway = 49 mpg
Range in Miles:
City = 466 mi Highway = 519 mi
2. Low maintenance and Reliable:
The Geo Metro in China would enjoy the same full-service warranty as it is offered in the US. We offer such a long warranty to demonstrate that we believe in the quality and engineering of our products.
3. Low Emissions:
The Geo Metro is 50 state-certified in the US, passing even the California emissions laws, generally known as being the most stringent in the world.
4. Low Cost:
The model we propose is the Geo Metro Hatchback 3-Dr 5-speed Manual, whose total cost of production is $7,643. It is the lowest cost car sold in the US.
The Geo Metro is a car engineered with safety in mind. There are standard dual air bags for both driver and passenger, which increase the probability that both will survive unharmed in a serious accident. The US government has certified that the Geo Metro gets a good rating for both driver and passenger safety in crash tests. This car also meets the strict US Federal guidelines on side-impact standards for 1997, today. Furthermore, it is the only car in this class to offer daytime-running lights, a feature that will reduce the probabilty of accidents.
Crash Test Results as rated by the National Highway and Traffic Safety Association, a US Federal governmental department.
6. Performance and Standard Features:
Plant Production Capacity:
1. Initially, a production capability of 100,000 cars per year. Over the next five years, production capacity will have the option to expand to 200,000 cars per year.
As a joint venture between two private firms, we both want to see this venture become successful and profitable. We realize that as a recently privatized corporation you have pressures to increase exports with any foreign partner you deal with. However, we also have several reasons for setting production capacity at these numbers.
First, the domestic market is not big enough to accomodate such capacity as stated in the RFP.
There were 158,000 imported cars sold in China last year, which accounts for 30% of the total market for cars which is estimated at 528,000. A start-capacity of even 100,000 units would account for nearly 20% of the market. This is excessive compared to the more mature automotive markets in Latin America and Europe, where GM has market shares of 16.3% and 11.3% respectively. GM~s market share in Asia rests at 9.3%.
However, even though 100,000 units might seem excessive given our current market share in Asia, that is the point at which significant economies of scale would be realized. Car sales are estimated to grow to 860,000 by the year 2000. At that point, as a percentage of domestic sales, our 100,000 unit capacity would be appropriate.
At GM, we have had significant experience in dealing with production capacity levels both in our internal domestic operations, with our international subsidiaries, and joint ventures with other automakers. In order to remain competitive, this joint venture must keep its overhead to a minimum. Excess capacity relative to potential market share is high with the original suggest capacity levels. Therefore, excess capacity hinders profitability.
Second, export restrictions would hinder the competitiveness of this venture and would threaten long-term profitability.
General Motors is committed to having a leading position in China. Inflexible export restrictions would reduce the competitiveness of this venture.
To make a small car affordable and profitable for the Chinese market today, GM has to have a global platform. We have to leverage the best of all our global resources - both material and human. And we'll do it through resource leveraging and development of an international team. We can best act as a valuable resource to NewChin and be a more useful partner if we are given flexibility.
There are several other factors to consider in setting production capacity outside of the size of the domestic car industry.
First, employee training would require several years and until that time we might not be able to produce more than 100,000 cars.
Second, the introduction and transfer of significant amounts of technology is inherently risky. It is safest to start on a smaller scale and then increase once we are working on a firm foundation.
Third, there are general economic and political risks. The appeal of working with NewChin lies in your greater expertise in dealing with Chinese government and a deeper understanding of the Chinese car market, and Chinese culture.
The recent repeal of tariff-exemptions on machinery for factories could add as much as 40% to the cost of the venture. The repeal of tax rebates to countries using local materials in the manufacture of exports are down to 9%, making exports from China less competitive. Existing price floors Price floors also reduce demand by
The growth in capacity would reflect both the growth of the domestic auto industry as well as the stability of the venture. Furthermore, part of the rush to invest in China is its appeal as a low cost country to produce and has the potential to be the largest potential market.
We propose a partnership with NewChin as a contractual joint venture with owership stakes at:
However, ownership can be divested from profits in the short-term, which can be negotiated. Essentially, GM would put 60% of the equity financing, and therefore, deserves a majority ownership stake.
NewChin, as a recently privatized auto manufacturing concern, will obviously benefit greatly from a joint venture with GM. There be significant transfer of technology, expertise, and general know-how. Such a venture will substantially raise the technical skills and standards of NewChin~s labor force and that of the country as a whole. NewChin will now have a means of acquiring state-of-the-art technologies. This venture will provide well-paying jobs that will increase the number of the middle-class. Initially, we propose that all wages for all workers in this venture will be set at least 50% of the per-capita income. GM, with its range of businesses can provide NewChin with the opportunity to develop an overall package to develop infrastructure.
As late as 1994, there were only some 40,000 privately owned vehicles in China. Overall, there is only about 1 car per 700 people in China. Some 30% of China~s population earns under a dollar a day according to income estimates by the World Bank. Only some 11% of Chinese roads are paved. Major infrastructure investments have to be made. Only GM will have both the expertise and financial resources to have the staying power to be a force in the Chinese car market.
We propose a 16 member Board of Directors.
This structure is optimal because of GM~s greater expertise and experience in automotive manufacturing. A GM majority in the Board of Directors will allow GM to choose management to optimize both production and profitability. Also, GM must have day-to-day control over management of operations of the plant.
Contributions toward total capitalization:
1. 40% Equity
2. 60% to be borrowed in the form of bonds by our joint venture and backed by the full faith and credit of the Chinese government.
1. In the municipality of Tianjin
Local Component Standards:
GM and the auto industry in general has benefitted greatly from the free movement of capital, labor and other inputs across national borders. In order to ensure that our joint venture is competitive, it should be allowed to globally source its parts. We understand that NewChin has historically made auto parts. This joint venture will make full use of that capacity as long as its competitive. However, the purpose of the venture is to make and sell cost-effective compact cars with GM~s quality control and technology; something that won~t happen if we are restricted to use either overly expensive parts or those of inferior quality.
Amendments to the RFP:
Repatriation of Profits:
GM will be allowed the option to repatriate all of its profits at any time in the form of Foreign Exchange Certificates (FEC~s).
Due to the long time horizons of the car industry, forward contracts guarunteeing fixed exchange rates between the Yuan and the Dollar will be required of the Bank of China. GM proposes a fixed rate for a 2 year forward contract at 8.7 Yuan to the Dollar.
Dispute Settlement Forum:
Any and all disputes will be settled under US courts and laws.
NewChin agrees to a nondisclosure agreement stating that they will not reveal any sensitive GM technical or product knowledge.
NewChin agrees to a noncompetitive agreement stating that they will not enter into the Chinese car market for a period of five years following any break-up of this joint venture with GM.
Furthermore, the joint venture with GM will be exclusive. NewChin agrees that they will not enter into any kind of information sharing or any type of joint venture with any other joint venture with any other auto manufacturer.
1996, GM Team Designed and Maintained
by Zan Kuang.