VZCZCXRO3161
RR RUEHCN RUEHVC
DE RUEHGH #0574/01 3580758
ZNR UUUUU ZZH
R 230758Z DEC 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7474
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE
RHEHAAA/NSC WASHINGTON DC
RUEHGV/USMISSION GENEVA 0039
RUEHGH/AMCONSUL SHANGHAI 8088

UNCLAS SECTION 01 OF 05 SHANGHAI 000574 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM, EEB/TPP/IPE 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, ALTBACH 
IPR OFFICE - RMEYERS; AND OCG - SMCCOY 
DOC FOR ITA/MAC - DAS KASOFF, MELCHER, SZYMANSKI, COUCH, LEHRMAN 
TREASURY FOR OASIA - DOHNER/HAARSAGER/CUSHMAN 
LOC/ COPYRIGHT OFFICE - STEPP 
USPTO FOR INT'L AFFAIRS - LBOLAND 
GENEVA PASS USTR 
 
E.O. 12958: N/A 
TAGS: ECON EIND KIPR ELAB WTRO CH
SUBJECT: SHANGHAI GM RELATIVELY IMMUNE FROM GM FINANCIAL WOES, BUT 
NOT FROM CHINA'S ECONOMIC SLOWDOWN 
 
REF: 07 SHANGHAI 328 
 
SHANGHAI 00000574  001.2 OF 005 
 
 
(U) Sensitive but unclassified.  Not for dissemination outside 
USG channels; not for Internet distribution. 
 
¶1.  (SBU) Summary:  On December 18, the Consul General (CG) met 
with Shanghai General Motors (GM) Executive Vice President 
Robert Socia and other top executives to discuss the effects of 
the economic downturn, general business environment issues and 
the local fall-out from GM's financial troubles.  Socia said 
Shanghai GM has suffered little effect from GM's financial 
turmoil in the United States and the JV will not be used to 
collateralize any loan from the USG.  The economic slowdown in 
China has decelerated Shanghai GM's sales, but it has not 
dampened their optimistic outlook on China's growth potential. 
Although Shanghai GM currently does not have any major 
intellectual property disputes, GM is still circumspect in 
bringing some of its most sensitive technology to China.  Socia 
attributed the absence of IP issues and ability to have its 
voice heard to its "strong" joint venture partnership with 
Shanghai Automotive Industry Corporation (SAIC).  The Central 
Government is pressuring the auto industry to "green up," and 
Shanghai GM is moving forward on plans for more environmentally 
friendly technology.  On the recent WTO ruling against China on 
the auto parts case, Socia said that little will change for 
Shanghai GM in its sourcing strategy, since cost reduction 
pressures necessitate local sourcing regardless.  End Summary. 
 
Minimal Impact from GM's Financial Troubles 
------------------------------------------- 
 
¶2.  (SBU) When asked how Shanghai GM, a 50-50 joint venture 
between General Motors and the SAIC, is affected by GM's 
financial distress in the United States, Socia replied, "of 
course there is some effect, but very minimal."  He explained 
that from a financial perspective, Shanghai GM is self-funding 
and in fact sends dividends home to its U.S. parent.  Shanghai 
GM would also not be part of any collateral used to secure U.S. 
Government loans.  GM is focusing on ensuring that growth areas, 
such as those in China, continue to grow.  Socia declined to 
predict what would happen to Shanghai GM if GM files Chapter 11 
Bankruptcy, but he confided that Shanghai GM does have plans in 
place if that were to occur.  Socia said SAIC has been very 
supportive and assured GM it will be there throughout the 
ordeal. 
 
Sales Slowing, But Shanghai GM Still Optimistic 
--------------------------------------------- -- 
 
¶3.  (SBU) Socia said that although Shanghai GM's sales growth 
rate slightly declined in 2008, he is still optimistic about the 
future.  In 2008, GM initially projected 14.5 percent growth in 
China over 2007, but actual numbers are showing only nine to ten 
percent growth over 2007.  Market share has also dropped on the 
margins; in 2007 GM sold 1,031,974 units and held 12.2 percent 
of the Chinese new automobile market.  In 2008, total sales have 
reached 1,120,762 units (with a few days remaining in the year), 
or approximately 12.1 percent of the market.  According to 
Socia, August and September were the first two months of 
negative growth in a long time.  In October, there was a little 
growth, and November sales were off by eleven percent.  December 
is shaping up to be a bit stronger than expected.  According to 
Socia, 2009 will likely not produce double digit growth, but the 
market will still be in positive territory, especially after 
China's stimulus package kicks in during the second half of the 
year. 
 
¶4.  (SBU) Socia further downplayed the slowdown in the Chinese 
market, saying that as a result of slowing sales growth, the 
company might have to make a "few adjustments" such as delaying 
the introduction of a new model and delay ramping up from a 2 
shift/2 crew schedule to a 3 shift/3 crew schedule.  Currently 
the Shanghai plant is running at only 50 percent capacity, which 
would be a problem in other regions, but in China with its vast 
potential, GM leadership is not alarmed.  Socia said a little 
extra capacity is okay, because they know it will eventually be 
filled.  Socia also cited a recent visit to a Shanghai GM show 
room that was "packed" with people still interested in buying 
vehicles to bolster his predictions. 
 
SHANGHAI 00000574  002.2 OF 005 
 
 
 
¶5.  (SBU) Regardless of the recent slowdown, Socia believes 
China's long-term auto market has vast potential. To make the 
point, he noted that vehicle density in China is extremely low. 
China has 24 cars per 1,000 people, compared with 800 cars per 
1,000 people in the United States.  Continued economic growth 
and rising personal income in China drive the automotive 
industry's growth here.  In addition, a great deal of market 
growth is coming from China's tier 2 and tier 3 cities.  Socia 
said GM has adapted GM's products, making them more durable and 
spartan, to meet the needs of consumers in these cities. 
According to Socia, the response has been tremendous. Besides 
auto sales, Socia says GM also sees a great deal of potential in 
after sales services, used car sales, financing, and insurance. 
However, the key to tapping these markets lies in GM's 
relationship with SAIC.  GM is so convinced about China's market 
potential that it opened a new factory in northeastern China on 
December 17.  (Note:  The new plant is operated by GM China and 
its joint venture partners SAIC and Shanghai GM.  End note.) 
 
 
Global Sourcing from China - Down USD 9 Billion 
--------------------------------------------- -- 
 
¶6.  (SBU) Socia refrained from commenting on the impact of the 
global downturn on GM's parts sourced from China since parts are 
handled by a separate division of GM.  However, he said the fall 
in overall U.S. automobile sales from 18 to 8 million units this 
year and GM's sales decline therein has definitely hurt Chinese 
auto parts manufacturers.  The downturn in sales did not begin 
with the financial crisis, but began much earlier in the year as 
fuel prices soared in the United States.  In a separate 
conversation, GM China's Global Sourcing Account Manager Hugo 
DeCampos said that automotive components sourced from China for 
GM's facilities around the world were down from USD 10 billion 
in its original 2008 forecast to a little under USD 1 billion. 
DeCampos confirmed there was a slowdown of sourcing from China 
that started early in the year from the United States and 
quickly spread to Europe and other regions.  Chinese auto parts 
manufacturers are really struggling now and some have begun to 
close their doors. 
 
Shanghai GM's Biggest Challenge:  Stiff Competition 
--------------------------------------------- ------ 
 
¶7.  (SBU) Socia said that as a result of China's enormous auto 
sales potential, both foreign and domestic automakers are 
aggressively pursuing the market, which creates fierce 
competition.  This leads to a "great deal of pressure on the 
pricing side," which will continue for the near future.  To 
illustrate his point, he explained that from January 2004 to 
April 2008, the average sale price per new auto in China dropped 
27.6 percent in real terms.  In other parts of the world, GM has 
been able to marginally raise prices; however, in China price 
increases are impossible.  (Note:  China currently has about 100 
car manufacturers, of which 11 to 12 produce 80 percent of the 
total production volume.  End note.)  Socia said that the only 
companies that Shanghai GM considers as significant competitors 
are Toyota and VW.  He added that Chery Auto (headquartered in 
East China's Anhui Province) has "fallen off" his list of 
worries because it has not done well, and he no longer considers 
the company a threat.  (Note: In a 2007 conversation, GM 
Shanghai officials described Chery Auto as the only local 
Chinese company that could produce in significant volume and 
threaten GM market share.  See 2007 reftel.  End note.)  Despite 
price pressures, the Chinese are also some of the most 
sophisticated and demanding auto consumers in the world.  Socia 
noted that in China, the company has had to put more work into 
their auto interiors than they have in other countries to win 
customers. 
 
IPR Protection Not an Issue, But Still Cautious 
--------------------------------------------- -- 
 
¶8.  (SBU) Socia said that Shanghai GM did not face any 
significant IPR issues at this time.  He attributed this to the 
"close relationship with SAIC," noting that SAIC helps resolve 
any IP issue that might come up.  However, SGM is still cautious 
 
SHANGHAI 00000574  003.2 OF 005 
 
 
about bringing some of its more sensitive intellectual property 
to China.  For example, it limits some of the technology it 
provides to the Pan Asia Technical Automotive Center (PATAC), 
which is a joint venture 
  design and 
engineering center between General Motors 
  and 
Shanghai Automotive Industry Corporation 
  founded in 1997.  (Comment:  While GM may have 
hesitations about bringing its most sensitive technologies from 
the United States, it is moving full speed on developing new 
technologies inside China.  In October 2007, GM launched the GM 
Center for Advanced Science and Research (CASR), part of a new 
USD 250 million GM corporate campus in Shanghai, which is to be 
home to GM's operations in China as well as its Asia-Pacific 
headquarters.  The center will carry out advanced research 
projects in partnership with the Chinese Government, industry 
partners and academic institutions with a specific focus on 
energy-efficient and environmentally friendly transportation. 
This effort is part of GM's strategy of "in China, with China, 
for China."  End comment.) 
 
¶9.  (SBU) Socia said GM does not have any problems having its 
views heard on regulatory issues.  It has three channels to make 
its views known to Chinese regulators:  directly, through 
Shanghai GM, or through SAIC.  In Socia's view, the most 
effective was to work through SAIC because its executives have 
the best relationships and networks, but sometimes it may 
utilize all three channels in coordination.  He emphasized that 
GM has a solid relationship with SAIC, and both sides have put a 
great deal of thought as well as capital into the JV. 
 
China Creating "Green" Pressure for Auto Companies 
--------------------------------------------- ----- 
 
¶10.  (SBU) The Chinese Government is putting a great deal of 
pressure on the automotive industry in China to "green up," 
according to Socia.  There is a big push to boost fuel saving 
technology as well as curb fuel consumption through a fuel tax, 
consumption tax, and a purchase tax.  The Government is adopting 
Euro IV and Euro V emission standards to improve air quality and 
is considering recycling regulations for autos.  Safety 
regulations are also being tightened, with higher requirements 
for roof strength and child restraints.  GM Asia Pacific Public 
Policy Director David Tulauskas added that China is drawing on 
the top environmental and safety standards from around the world 
and has accomplished the same regulatory environment in a decade 
that has taken many western countries fifty to sixty years to 
develop. 
 
¶11.  (SBU) GM's strategy to lead in the "drive to green" in 
China rests on two pillars - produce more fuel efficient 
vehicles, and ensure a corporate level "green system," with 
green social responsibility, according to Socia.  Shanghai GM is 
following GM's trajectory in developing more 
environmentally-friendly vehicles with the most advanced 
technology.  The company plans to offer a hybrid vehicle in 
China within the next two years.  It is also developing E flex 
electric vehicles and is on the path to develop and introduce 
fuel cells with zero emissions.  In addition, Shanghai GM 
ensures that all of its plants in China uphold the strictest 
environmental standards; its new plant in northeastern China 
employs state-of-the-art environmental technology.  The company 
also ensures that its 120 suppliers are also "greening up" their 
own facilities.  Socia noted that Shanghai GM has partnered with 
an environmental protection foundation to identify and fund 
environmental research projects. 
 
WTO Ruling Against China on Auto Parts Will Change Little 
--------------------------------------------- ------------ 
 
 
¶12.  (SBU) According to Socia, little will change for Shanghai 
GM in its sourcing strategy as a result of the WTO ruling 
against China on the auto parts case.  Upwards of 90 percent of 
the parts used by Shanghai GM are locally sourced.  (Note: 
Shanghai GM sources most of its parts from firms with which it 
 
SHANGHAI 00000574  004.2 OF 005 
 
 
has joint ventures; most are existing business partners in other 
countries.  End note.)  Shanghai GM sourcing may become a bit 
more flexible, but fierce competition and a relentless push to 
cut costs in China, rather than the auto parts component rule, 
forced Shanghai GM to maintain high local content anyway to 
ensure "just in time delivery" and avoid hefty transportation 
costs.  Also, the quality of most local components is now 
sufficiently high to meet Shanghai GM's standards.  (Note: 
During a June 2007 visit, Shanghai GM leadership said the 
content threshold was difficult to reach with new high-end 
products because components were not available locally. End 
note.)   Tulauskas added that although it is yet to be seen 
whether China will come out with a new policy on components 
sourcing, a high level Ministry of Commerce official assured him 
that if China lost on the WTO auto parts dispute settlement 
case, China would modify its rules and practices to comply with 
the WTO ruling. 
 
Labor Turnover Slowing - The Upside to the Downturn 
--------------------------------------------- ------ 
 
¶13.  (SBU) GM China Group Human Resources Director Shannon 
DiPietro said that the economic slowdown in China has helped 
staunch the rapid staff turnover; however she noted that 
Shanghai GM already had a relatively low turnover rate.  The 
current annual attrition rate is three percent - roughly two 
percent quit of their own volition and one percent is fired. 
She attributed this to Shanghai GM's highly competitive pay. 
Although the JV has not had to lay off any workers, it has taken 
more precautions in hiring new people, ensuring that every 
person added is fulfilling an essential task.  According to 
DiPietro, thus far labor costs have been unaffected by the Labor 
Contract Law, because Shanghai GM was already following most of 
the provisions before that law was implemented.  However, the 
law could become more of an issue if an extended downturn 
necessitates letting workers go.  Socia also noted that although 
Shanghai GM is "unionized," the PRC government-sponsored trade 
union has little effect on business since the union's emphasis 
is on "total harmony." 
 
¶14.  (SBU) Shanghai GM Manufacturing Director Julian Blisset 
said that the cost of labor in Shanghai is roughly double that 
of northeast China, where GM opened a new plant on December 17. 
He added that the high cost of labor in Shanghai is one of the 
reasons GM will not expand its manufacturing beyond current 
operations in the city.  The average age of its Shanghai GM 
workers in Shanghai is around 27 or 28.  Absenteeism is less 
than one percent, the lowest of any GM plant around the world. 
Only five percent of the workers on the assembly line are 
female, but this appears to be a self-selection issue.  The 
average education level of a line worker is a high school or 
technical school diploma.  For senior management or engineers 
there are higher educational requirements.  The plant has 
increasingly "localized" its staff; for example, Shanghai GM 
currently only has one expatriate production staff member. 
Since Shanghai GM only focuses on line and general assembly, all 
other jobs (such as cleaning) are outsourced. 
 
Background 
---------- 
 
¶15.  (SBU) In 1997, GM was one of the first foreign firms to 
begin producing automobiles inside China by establishing a 50-50 
joint venture with SAIC.  GM vehicles first rolled off Shanghai 
assembly lines in 1999.  However, the JV experienced slow growth 
until 2002 when the company saw a large jump in sales after 
China entered the WTO and the market was liberalized.  Shanghai 
GM soon became the first JV to sell over 500,000 vehicles in 
China.  Shanghai GM now produces several new models each year, 
and in 2008, it launched a new Excelle, a new CTS and a new 
Buick Regal.  (That last model went on sale in China on December 
21.) China is now GM's second largest market after the United 
States.  With the opening of the new plant in northeastern 
China, GM in China now has eight assembly plants, four power 
train facilities, an engineering and design center, an 
automobile financing JV, AC Delco and On Star operations, and a 
warehousing facility.  As part of its strategy of strong network 
development, the company has also established a wide range of 
 
SHANGHAI 00000574  005.2 OF 005 
 
 
dealerships that are fully franchised.  GM currently has a total 
of seven joint ventures and 21,000 employees in China, 12,000 of 
whom are employed at its Shanghai GM JV in Shanghai. 
CAMP