The other day on Facebook, Greg Anderson (a/k/a G.E. Anderson, PhD) commented on an article regarding GM moving its international headquarters from Shanghai to Singapore.  Greg, who wrote the book Designated Drivers: How China Plans to Dominate the Global Auto Industry (Wiley, 2012) and runs Pacific Rim Advisors (a political risk and business strategy consultancy) questioned why GM had ever set up in Shanghai in the first place.

Since G.E. Anderson knows the foreign auto business in China as well as anyone, my interest was immediately piqued and I asked him to expound on his views via a China Law Blog post.  Greg graciously accepted and the below is his post.

 

On November 13 General Motors announced it would be moving its international headquarters from Shanghai to Singapore.  At first, this move seems curiously strange.  Why move from the world’s largest vehicle market to what must surely be one of the world’s smallest?

Anyone who has spent time in both China and Singapore will immediately understand why GM would make such a move.  Among the obvious reasons are no more hassles of dealing with China visas, both for executives based there, and for other GM execs based throughout the region who needed occasionally to travel to Shanghai to meet with their bosses.

Singapore offers GM cleaner air, safer food, an unthrottled internet, an independent judiciary, an easily convertible currency, less risk to intellectual property and corporate communication, and a business environment that is designed to support and encourage international administrative and financial functions.

Given such a list of reasons to move, one might wonder why GM moved its international headquarters to Shanghai in the first place.  As it turns out, the answer to this question is more interesting and it provides a lesson on how not to approach the China market.

First it is important to understand what exactly will be moved.  GM will not be moving any of its auto manufacturing or research and development operations out of China.  GM China (which I will use as shorthand for GM’s manufacturing and R&D joint ventures in China) has been very successful in China and remains in a neck-and-neck battle with Volkswagen as the top-selling brand of passenger vehicles.

GM China would never consider moving out of China – at least not if GM wished to continue selling its cars in China.  The rules in China are designed to ensure that every global automaker establishes manufacturing and R&D operations in partnership with Chinese state-owned enterprises.  Importing cars into China is discouraged by tariffs of at least 25 percent on all imported vehicles.  Wanna sell cars in China?  Unless you’re Ferrari or Maserati, you really have to be there.

But GM’s international headquarters (the entity that is moving) doesn’t sell cars; it merely oversees country-based divisions that build and sell cars.  This raises the question of why an administrative division, which could theoretically be located anywhere in the world, would have wanted to subject itself to the vagaries of doing business in China.

The decision to move this administrative function to Shanghai came in 2004.  At the time this office served as GM’s Asia-Pacific regional headquarters, and GM senior management decided to move it from Singapore (to which it is about to return).  According to GM’s then Chairman and CEO Rick Wagoner, “Establishing our regional headquarters in Shanghai recognizes how important China has become to our plans to expand our global industry leadership…Having a strong presence in this dynamic and growing market is not an option anymore.  It’s a necessity.”

But GM already had a “strong presence in this dynamic and growing market.”  Until 2004, GM China had operated very successfully under the leadership of Phil Murtaugh who had built GM China from a startup to what was by then a $6 billion business.  According to numerous accounts*, Murtaugh had become quite adept in winning the trust and respect of his Chinese joint venture colleagues — a feat not easily accomplished, as any China expatriate can attest.  The situation worked well for Murtaugh because his bosses were a six-hour flight away in Singapore, and he was allowed the local autonomy to run his division.

Unfortunately for Murtaugh (and GM, as it turned out), his formerly distant boss was moving into an office just down the street in Shanghai.  Murtaugh reportedly chafed under the close scrutiny, and within a matter of months, he quit GM, a company where he had worked for more than 30 years.  Not that GM has performed poorly since Murtaugh left — indeed, it has maintained a large share of the market — but GM lost a long-time employee who appeared to understand China well and thrive in its uncertain environment.

Back in 2004 expectations of China’s continued reform and opening were still pretty high.  The reform momentum that had begun under former Premier Zhu Rongji had not yet been stopped in its tracks by then newly installed President Hu Jintao.  Perhaps by making this move GM was looking forward to a day when China’s ownership restrictions would be loosened and GM could build a global export base in China, taking advantage of China’s competent and experienced labor force.

Of course, those ownership restrictions remain firmly in place, thereby ensuring that China cannot become an export base for foreign automakers who have no desire to share 50 percent or more of their  profits with a state-owned partner who brings nothing to the table.  It makes sense to build cars in China, but only for the purpose of selling them to Chinese buyers.

Fast forward to today, and GM must have been asking itself why it was voluntarily subjecting its International HQ to the difficulties of business in China when, by definition, all of its business interest lay outside of China.  (GM China was carved out of the International HQ earlier in 2013.)  GM is now moving this regional headquarters, now called “Consolidated International Operations” or CIO, back to Singapore.

Adding a wrinkle to this story is that fact that CIO has, since August of this year, been led by none other than Stefan Jacoby, former CEO of Volvo.  Jacoby had been appointed to run Volvo after it was bought by Li Shufu’s Geely Holdings in 2010, but Jacoby apparently had quite a difficult time of it.  Amidst swirling rumors that Volvo’s Swedish management were not getting along with the company’s new Chinese owners, Jacoby suffered a mild stroke in 2012 and shortly thereafter resigned his position.

Whether a recovered Jacoby has been instrumental in the decision to move his part of GM from Shanghai back to Singapore, it is not difficult to imagine that he might prefer to conduct business far away from the probable source of his earlier health issues.  Jacoby’s preferences aside, there are plenty of other good reasons to move as enumerated above.  Compared to Shanghai, Singapore is rather boring, but sometimes boring is good:  Singapore is a much easier place to live and conduct business.

Perhaps somewhat ironically, GM seems to have decided to move its International HQ out of China at just the time that the prospects for real reform are beginning to improve.  Though the communique resulting from the Chinese Communist Party’s recent Third Plenum does not offer specific policy details, some China observers see Chinese President Xi Jinping’s consolidation of power as a possible prelude to greater reforms in coming years.  (To be fair, many observers have also expressed disappointment in the lack of concrete plans for reform.)

In hindsight, it seems GM became overly excited about China as Hu Jintao began to halt the reform momentum inherited from his predecessors (following Jiang Zemin’s retirement from the Central Military Commission in 2004).  And now that Xi Jinping may be preparing to implement some big changes in China’s economy, GM is bailing out.

 

* One of the best accounts is Michael Dunne’s American Wheels, Chinese Roads (Wiley, 2011).