Balancing the give and take in GM's Chinese partnership

The Wall Street Journal (Shanghai) - The next generations of General Motors Co.'s GM 3.19% Cadillacs will have softer corners, dashboards with more gadgetry and plusher rear seats. The U.S. auto maker is tweaking the iconic American brand to make it more palatable to Chinese buyers and GM's Chinese partner, even though Cadillac hasn't sold strongly here.

The redesign speaks to the growing influence of the partner, SAIC Motor Corp., 600104.SH -0.24% on GM's global

strategy. Since pairing up with SAIC 15 years ago in a joint venture, GM has become the dominant foreign player in China, the world's second-biggest economy and busiest auto market. Along the way, GM helped rear SAIC into a full-fledged auto maker, with top-tier designers, engineers and marketers.

SAIC now wants to move onto the world stage, and GM must decide how much it wants to help.

Chinese law requires that foreign auto makers have local partners, and how GM manages its relationship with SAIC is crucial. The American auto maker needs SAIC to begin assembling Cadillacs in China so it can attack a luxury car market dominated by German car makers.

A successful partnership could lift GM's profits for years. But there is a risk for GM, too: SAIC could use GM expertise and technology to transform itself into a global auto powerhouse that challenges the American car maker down the road.

"Why do you rob a bank? Because that's where the money is," says GM Chief Executive Dan Akerson. "Why go to China? Because that's where the customers are." He called the SAIC partnership his company's most important relationship around the world.

This summer, SAIC opened North American headquarters in Birmingham, Mich., just 20 miles from GM's Detroit base. After years of explosive growth, China's auto market is cooling off. Yi Lu, president of SAIC USA Inc., called the growing importance of selling cars abroad a "significant factor" in the decision to go to Michigan. SAIC currently sells no cars in the U.S.

This isn't SAIC's first foray outside China. A decade ago, it took a small stake in a venture GM had in Korea. In 2010, as GM was still limping out of bankruptcy, the U.S. auto maker agreed to a joint venture with SAIC in India.

But SAIC wants more from its American friend.

The Chinese company wants to set up operations in Latin America and Europe, two markets where GM has longtime operations. And China wants access to advanced electric-car technology, which GM wants to safeguard.

GM has yet to decide how far it will go. "It's kind of like a marriage," Mr. Akerson said. "We have a good and viable relationship and partnership. But to make it work, you have to have needs on both sides of the table, not just wants."

GM, which sells some vehicles with SAIC in Latin America, is considering expanding the partnership there. Mr. Akerson has discussed with senior executives the possibility of expanding with SAIC into Southeast Asia, according to people close to the company. But GM has no plans to follow on SAIC's request for help in setting up a dealership network in Europe for one of its brands, a person close to GM said.

A spokeswoman for SAIC in Shanghai said that the companies "have established a good and enduring relationship based on a foundation of mutual benefit." The venture, she added, "is a model for successful cooperation in China and even the world."

GM can ill afford to alienate SAIC. Last year their partnership, called Shanghai GM, sold 2.5 million cars and trucks in China. It posted $30 billion in revenue, and $3.2 billion in profit, of which GM received about $1.5 billion. GM reported profit from all its operations of $7.6 billion last year.

And GM is still waiting to get the blessing of Chinese authorities to regain control of a 1% stake in Shanghai GM that will boost its ownership back to 50%. GM used the asset to get SAIC's help in obtaining a $400 million line of credit in 2009 when GM desperately needed cash.

Other Western companies with presence in China are facing similar challenges as the powerful Chinese partners they helped create want to expand overseas after building muscles at home.

Canada, which both transferred bullet-train technologies to China, are confronting Chinese rivals on overseas markets including the U.S., Saudi Arabia and Brazil. After being an apprentice to Russian and French nuclear engineering companies, China is now eying exports of nuclear reactors.

GM's first move into modern China was a dud. By the time GM decided to get into the market, in 1992, Beijing had just shut the door to new passenger-car joint ventures; Volkswagen AG and French car maker made the cut.

But China was still allowing foreigners to build trucks, so GM signed a deal with the Shenyang Jinbei Automotive Co. to build small Chevy pickups, based on the S10, in an aging northern industrial town.

No one wanted the trucks. They were too expensive for farmers to use as work vehicles. City dwellers, who looked down on their counterparts from the countryside, had no taste for pickups, says Michael Dunne, an analyst and longtime consultant to auto companies in China. Within a few years, the experiment failed.

Shanghai GM, the venture with SAIC, started in 1997. Partly owned by the Chinese government at the time, SAIC (formerly Shanghai Automotive Industry Corp.) was looking for a partner to build sedans. GM beat out Ford Motor Co. F 0.42%

GM and SAIC split the $1 billion cost to launch a venture to build large cars aimed at China's institutional and state-owned enterprises. Today, GM's share of its operations in China has a market value of $9.2 billion, Morgan Stanley analyst Adam Jonas estimates.

GM felt it got burned early when SAIC cut a side deal in the late 1990s to build sedans with Volkswagen, according to Mr. Dunne. GM had entered the Shanghai GM venture believing it would have a monopoly in that segment, he said. The maneuver stunned then-CEO Jack Smith, but GM believes the price was ultimately worthwhile, Mr. Dunne said. GM declined to comment on the situation.

The first Shanghai GM vehicle came out in 1999, a Buick Century sedan fancier and more modern than almost anything on the road. Since then, GM's China presence has grown to include 11 joint ventures, most of them with SAIC. In 2010, Shanghai GM launched its first local brand, Baojun, a line of small, inexpensive cars for first-time buyers.

As the venture has matured, so has SAIC, which went into the partnership with big dreams but little know-how. Today, the companies operate much more like equals.

At a factory near GM's China headquarters in suburban Shanghai, plant manager Dave Gibbons spends most of his working hours alongside his SAIC counterpart, Yong Qing Wang. They work the same hours, eat together and have adjoining offices.

SAIC managers and workers have become so adept at adapting China's manufacturing expertise to autos that their suggestions on improving factory operations are being implemented in GM's U.S. plants, Mr. Gibbons said.

"We are learning from them now," says Mr. Gibbons, noting that GM factory workers in China are college educated, and many have advanced degrees.

This spring, when GM officials came to China to show off future vehicles in their global lineup, SAIC executives successfully pushed for design tweaks, based on their view of what appealed to Chinese customers, according to people with direct knowledge of the meetings.

GM also has tapped SAIC's deep pockets. In 2010, the companies launched a joint venture in India, a market that GM couldn't afford to tackle alone. The venture is GM's only business in India, producing no-frills microvans with a goal of expanding into Southeast Asia and other emerging markets.

"If we would have been flush with as much cash as today, maybe we would have gone a different way," Mr. Akerson, the GM CEO, said.

SAIC has made clear it won't stop reaching. Chairman Maoyuan Hu, an economist who once ran an SAIC tractor factory, has set ambitious goals. SAIC has acquired engine technology from South Korea and designs from Britain's now-defunct Rover brand to launch its own high-end brand in China: Roewe.

But as far as SAIC has come, it remains largely reliant on more established partners for expansion outside of Asia.

Mr. Akerson sees this need as a critical bargaining chip for GM.

He and other GM executives use every opportunity to reinforce ties with SAIC. Mr. Akerson makes regular trips to China and sits on the boards of a technological university and a research institute there. Last year, he moved GM's monthly board meeting to China for the first time.

In April, ahead of the Beijing Auto Show, a jet-lagged Mr. Akerson and several of his top lieutenants patiently sat through a nearly three-hour news conference, conducted in Mandarin and formatted in the style of a reality dating show.

High on Mr. Akerson's China agenda is the high-end market, one that has so far eluded Shanghai GM. Although GM sells more cars in China than in the U.S., its profits there are smaller than in markets where it sells pricier vehicles and doesn't have to share its earnings with a partner.

GM is pinning its hopes on the Cadillac brand to pad its profit margins and go up against rivals like BMW and Mercedes, which rule the market with cars that can sell for more than $100,000. GM is targeting young and first-time luxury buyers who aren't set on a German model.

One looming challenge: The Chinese don't much like Cadillacs. Some locals refer to the cars using a term—ben zhong—that means "dumb and heavy," said Mr. Dunne, the consultant. GM sold 30,000 Cadillacs in China last year, accounting for 1.2% of its sales there. Cadillac sales were up 73% from the year before, driven largely by the new SRX sport-utility vehicle, which sells for $67,000 to $90,000. But the brand has a long way to go.

Wang Kaidi, a 22-year-old manager of a clothing store in Linyi, said his dream car is a Touareg, a Volkswagen SUV. He knows about Cadillac but says the cars aren't "cool enough" for the younger crowd.

At Liu Guilin's Cadillac dealership outside Beijing, customers are treated to chair massages, a movie in a private theater on the store's second floor and something GM couldn't legally offer in the U.S.: Cuban cigars. Business is picking up, Mr. Liu says, but Cadillac's sharp lines and American proportions still clash with Chinese tastes. "I wish they had less angles, were softer," the auto dealer said.

GM said no to a dramatic overhaul of Cadillac's look when SAIC suggested nixing the car's vertical taillights, according to people with direct knowledge of discussions between the two. But the next Caddy will have toned-down edges. And other GM models will have back seats with better sound insulation because well-to-do Chinese are often chauffeured.

Those changes will show up on vehicles sold in the U.S., as GM shifts away from country-specific models and toward a global product plan.

Having softened the edges on car design, GM is holding tight to its more valuable technology.

Beijing is eager to tap into foreign auto companies' clean-energy technologies. But GM doesn't want to share all its research with its Chinese partner, even when it is coming out of China-based laboratories.

At its newly built technological complex in Shanghai, GM researchers are tinkering with the chemical makeup of the lithium-ion batteries that power electric vehicles such as the Chevrolet Volt in an effort to make them go farther and cut the batteries' cost.

The lab taps local universities for equipment and talent, and it is largely staffed by Chinese scientists.

"We did this alone because we want 100% ownership of intellectual property of the technology we develop there," says Tim Lee, chief of GM's international operations. "It's ours."