Summary
This article reports that General Motors has made a significant agreement with its Chinese partner SAIC Motor Corporation. These partners are planning to design new vehicles for global markets, such as a new generation of electric vehicles; the cost for research and development will be shared between the two. The SAIC officials have also expressed an interest in acquiring 5% of GM’s shares, but this was not confirmed by the GM officials. In addition to that, GM is expected to give more detail of its plan to sell shares to the public for the first time since it emergences from bankruptcy in 2009. If GM’s IPO (Initial Public Offerings) put its value higher than $66 billion, it’s likely for taxpayers to break even on the 2009 bailout. Thought some analysts forecasted GM shares would end up being worth between $64 billion and $80 billion, recent reports suggest its shares would only worth around $40 billion.
Connection
In chapter 2, we have analyzed different transactions. If the transaction for developing new vehicles is to take place now under the condition that GM’s partner agrees to share the cost for research and development of new vehicles, GM will have less expense and a higher profit (only if everything else stays the same). So we will debit expense and credit accounts payable because there will be less fees to pay; fees that are associated with new developments. If GM is to issue share now, the accounts that will be affected will be cash and common shares. We will debit cash and credit common shares, since there will be more cash for the company and shares are issued to the public.
Reflection
The agreement between GM and its Chinese partner will not only benefit GM, but its partner as well. The Chinese corporation, SAIC Motor Corporation, may have enough money to develop new vehicles, but they don’t necessarily have the technology and experience to do so. On the other hand, GM has the technology and experience, but GM lacks in cash. So when the two sign the agreement, it benefits both of them. When a new vehicle is developed, the Chinese corporation can manufacture it in its own factories and sell it within China or around the globe under the well-known brand name, General Motors. GM will also be able to gain profits from the sales of this new vehicle and they will have a stronger tie with the Chinese corporation, which manufactures many of their cars.
By signing this agreement, the production of these cars will cost much less if they are produced in China rather than in the US, the country where most of the GM factories are. Despite this, GM will also have to take into account the transportation expense to get the vehicles overseas. GM cannot afford too many expenses, especially after their near bankruptcy not too long ago. If GM had decided to work alone on this project, it could be disastrous if it fails to produce results. The cost of the research and the production of these vehicles would be very expensive, especially for a company just coming of bankruptcy. This agreement provides a sort of safety net for GM, splitting the impact between the two companies if the project were to be unsuccessful.
ReplyDeleteYour summary did not mention the stake held by Treasury in GM and that GM is planning to repurchase the $2 billion-shares held by Treasury. However, I agree with you on most of the points that you made in your connection and reflection. By signing this agreement, GM can expand their sale to the largest auto-market in the world - China. For a company suffering from lots of debt, establishing a partnership with other company can split the risk and increase the probability of succeeding. However, GM has to take account of the problems associated with tariff. If GM and SAIC succeed in developing a new vehicle and manufacturing this vehicle in the factories in China, GM has to pay a huge amount of tariff. Chinese government has established a tariff-system to protect its economy, so a tremendous tax will be imposed on the new vehicle developed by GM and SAIC to restrain its sale within China.
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