General Motors to sell half of India unit to Shanghai Auto

General Motors has reached an agreement with Shanghai Automotive Industry Corporation (SAIC) for setting up a 50-50 joint venture that will take over GM’s Indian assets. GM will also sell a 1% stake in the existing equal JV with SAIC in China.
This will be in exchange for cash and an increased stake in a second, three-way Chinese venture (SAIC-GM-Wuling Automobile, where SAIC has 50.1%, GM 34% and the city of Liuzhou holds the rest), people with a knowledge of the deal said.

It was not immediately clear the amount of net cash that would change hands in the complex deal because a series of interlocking transactions will take place, people close to the deals said. “It’s a big deal, it’s a good deal,” one person said.

GM will make an announcement Friday about the two carmakers’ cooperation.

The India venture, to be set up in Hong Kong, will make and sell minivans, mini-trucks and small cars to tap demand for low-cost vehicles, one person said. GM and SAIC have been in talks about introducing light commercial vehicles in India, where economic growth is spurring demand for small trucks, GM India’s managing director Karl Slym said in September.

“GM doesn’t have the low-cost products, but SAIC has experience in products that are very cost-effective in China,” said Yale Zhang, a Shanghai-based director at auto consultant CSM Asia.

“The price would be very competitive in India as well.” SAIC spokeswoman Zhu Xiangjun declined to comment. Calls to Johan Willems, a Shanghai-based GM spokesman, weren’t answered.

SAIC suspended trading in its shares on the Shanghai stock market on Thursday pending a major announcement, but declined to release details. GM said in a statement that it was constantly in discussions with SAIC on various issues, but also did not disclose any details.

GM’s Chinese JV with SAIC makes a range of GM cars. Under the deal, GM would sell a 1% stake in the venture to SAIC, raising the Chinese automaker’s share to 51%, although GM would retain equal voting rights in company decisions and have an option to buy back the stake later, people with knowledge of the transaction said.

The stake sale will also help the GM-SAIC JV to stay comply with the Chinese accounting rules that come into effect from January 1, 2010. The rule will only allow companies to consolidate earnings from ventures in which they have majority control. By holding a 51% stake, SAIC will be able to reflect earnings from the venture in its performance, the person said.

GM has been searching for several years to find a way to increase its stake in Wuling, with Nick Reilly, the president of GM’s Asian and Pacific operations, mentioning this as a goal at the Beijing auto show in 2006.

Yale Zhang, the director of greater China vehicle forecasting at CSM Worldwide, a big auto consulting company, said Wuling was a natural choice to expand in India because it sold some of the world’s lowest-cost light vehicles. Its $4,000 minivans and pickups have been extremely successful in less prosperous areas of China.

Wuling has little knowledge of the Indian market, however, and GM can provide that, Zhang said.