Operations of General Motors and Chrysler Group LLC in China - Research Paper Example

 Introduction The United States has often accused China and its international corporations of employing unfair tactics such as undervaluing their currency thus hindering fair trade. The case of American motor companies General Motors and Chrysler Group LLC companies' operations in China is a case of massive exploitation that border unfairness of terms of trade and proves that in the bilateral trade relations between the US and China, China is not always the villain. The General Motors Company’s profitability flopped as was the case with many large luxury products during the 2008 global economic recession. However, with a financial boost from the United States government's Troubled Asset Relief Program the giant firm has since gotten back to its feet and even announced a 4.7 billion dollar profit in 2010. With the increased profits, the company can effectively carry forward losses from the previous periods hence reducing its future earnings' tax liability. Other foreign companies have also invested heavily in manufacturing their products in China with Transportation Equipment Manufacturing being the second largest urban employer in the country, employing 2,745,303 in 2010. The launching of Chevrolet Corsa Plus in ChileIn September 2006 was a milestone in the General Motors operations in China. The model that had a 1600cc engine became the vehicle produced by the Shanghai GM for a foreign market. Following its success, more brands have been produced in China for sales outside China. Financial analysts have however questioned the company's quick recovery from its appalling financial position to its current state of profitability even with the financial loan from the US government. The company's operations in the Far East, particularly in China have been associated with this quick growth where analysts have cited cheap labour, taxes and shipping costs in China and hence low cost of production as the reason behind the success of its operations in China and the decisions to manufacture most of its merchandise in the country. The company carries its operation in China through its subsidiary Shanghai GM which is a joint venture with a Chinese Motor company SAIC Motor. Sales of General Motors vehicle in China rose by 28.8 percent to 2,351,610 units in 2010, the highest ever recorded annual car sales rise anywhere in the world. GM has set up a car research partly financed by a 250 million Us dollar corporate campus based in Shanghai with an attempt to develop 'electric vehicles ,gasoline-hybrid cars and alternative fuels, engines and new technologies'. The company intends to double its China manufactured vehicle sales to about 5 million units by 2015. SAIC-GM-Wuling has established the low-cost brand Baojun to compete with other domestic rivals, Geely, Chery and BYD Cars were priced at about 10,000 US dollars The Chrysler Group in Asia manufactures its popular brand Dodge through Soueast Motors of China for assembling its minibuses and other products for its Asian market. The company has since moved from assembling motors for the company to actual manufacture of the same. There are various reasons why manufacturing in China is a better option than exporting the finished products. While it is arguable that the factors have always existed in China, the economic development in the country has fuelled the same. Labor The availability of both professional and unskilled Labor and its cost are the biggest pull factor towards manufacturing in China. Though on a steady upward rise, Chinese labor has been the cheapest among all developed nations over the past several years. However, even with the pay hikes, Chinese workers remain some of the lowliest paid in the region with a 2011 U.S. Bureau of Labour Statistics estimating hourly industrial wages in China in the manufacturing sector to be far lower than Japan. It may be extremely difficult to compile accurate data on the cost of labour in China due to the country’s vastness and many industries. However the statistics that take into account easily comparable indices, the study places China, Asia’s biggest economy and the world’s second behind Japan, South Korea, Philippines, Malaysian and Singapore at 1.40 dollars an hour which is slightly above India. A similar study carried out by static brain in 2009 placed the Average Annual Salary Urban + Rural at $4,397, Average Annual Salary Urban at $7,947 and the Minimum Annual Salary at $1,500. These figures are the main reason for these big American motor companies, opting to manufacture where the cost of labor per unit is almost double that in China. The deal is made better by the fact that China has highly qualified and capable workers hence the quality is not compromised. The 2011 U.S. Bureau of Labour Statistics findings are shocking. They place the average hourly compensation of Chinese industrial workers at$ 1.36. However, this compensation may not be as little as it seem from a Chinese perspective as the cost of living is much lower than elsewhere in big economies. In Japan which borders China and is the third largest economy in the world, workers are paid an average of $27.80 per hour. In Taiwan, industrial workers get an hourly average of $8.68. This makes China remain the best place for manufacturing in the Far East. The research however show a rapid rise in the cost of labor. This situation therefore may however be short-lived. Analysts compare the trend in motor industry and other manufacturing industries conclude that the cost of labor in China may rise to a point that the countries that favor manufacturing in China reverse to their earlier trends or cut their sales in Asia. Asia, they claim is an ideal example of a country in rapid development where the earlier phases are marked with exceedingly cheap labor. As costs continue to rise in China, manufacturing plants in Asia will opt use labor from other less developed Eastern countries such as Bangladesh, Cambodia and Vietnam. Manufacturing firms in the Far East in industries such as textile and toy production have already started opting to use labor from these countries which is relatively cheaper. However, motor manufacturing requires heavy investment and firms like GM and Chrysler Group LLC as well as industries that deal with electronics may not be comfortable to invest heavily in these countries whose development projection is uncertain and with a history of political instability. The level of literacy in these countries is also low and skilled labor may be hard to solicit. Also the level of transport network and electric grids cannot allow for such large corporations to manufacture effectively in these countries. Soliciting labor elsewhere in Asia may therefore not be an option for GM and Chrysler. Economists claim that China is an example a very common phenomenon. Usually, an economy that is built on low-wage manufacturing increases its wage as it progresses from a cheap emerging market toward becoming a rich developed country. China, however cannot be treated as a normal economy per se since the country has a massive 1.3 billion population. Most of these are rural and by the standards of an economy of its size, poor. The loss of its low wage economy could have great economic impacts on the rest of the world. Taxation The taxes in China are also quite low and corporations find better than elsewhere. The Tax Items and Tax Rates that affect corporations directly are the Value Added Tax (VAT). There are three stages of rates for VAT: Taxpayers who sell or import goods, or provide services of process, replace and repair, the tax rate is 17%. For taxpayers who sell or import grains, coal gas, edible vegetable oil, natural gas, coal or charcoal and other products that are used daily in the household such as newspapers, agricultural chemicals, magazines, agricultural machinery, chemical fertilizers, etc., the taxpayers pay 13%. Taxpayers exporting goods, except for special cases stipulated by the governing council have a rate 0. Enterprises and individuals who are engaged in production and/or provision of taxable labor service that have an annual sales volume of RMB 1 million or less, and those engaged in retail and wholesale that have an annual sales volume of RMB 1.8 million and below, and those that the tax authority classify as small VAT payers pay a tax of 6% based on a tax-in-price basis. Business Tax There are 9 taxable items from which Business Tax is charged, the taxes vary from 3% to twenty percent. Land Appreciation Tax This is the appreciation amount is balanced from the proceeds that are received by the taxpayers real estate transfer, after deduction of the sum prescribed by law as deductible items. Enterprises Income Tax Enterprises with foreign investment pay an income tax that ranges that is computed at 3% Foreign enterprises with no establishments or address in China but derive profits, rent, interest, royalties and other such income from sources in China, or which, has an establishment or has an address China but whose income is derived and the income is not connected effectively with the establishment or address, pay a 20% withholding tax on such income. Other taxes that have as big an effect on these businesses are Urban Real State Tax, Stamp duty, License Fare of Vehicles and Vessels, Individual Income Tax (IIT) Customs Duty are also as low with Import Tariff charged on all imported goods are at their normal C.I.F. The custom is authorised to determine all the taxable price in cases where the C.I.F. isn't quotable. Tariff rates are usually set in a name list that is detailed includes some special cases where tariff on some imported goods. Export Tariff Export products that are produced by the FIEs are exempted from export tariff. Bonded Commodities The import goods that are deemed as raw materials, parts and components, fuel, accessories and packaging materials used for FIEs in production of export products, are classified as bonded commodities and hence are supervised by customs. These taxes are much lower than in other large economies and comprise around 17% of the total production costs, much lower than the United States. Market The Chinese motor market in China is another pull factor that has made corporations opt to produce there. It is estimated that about 5 million vehicles a year are sold in China. This figure is much higher than the auto market in Britain and France combined. Local brands produced by foreign corporations are becoming exceedingly popular and some companies are worried that certain brands such as, Baojun manufactured by SAIC-GM-Wuling may eventually out do and threaten their parent brands if the competition with other more established brands continues. Shanghai-GM-Wuling sold a record 1.23 million units in 2010, majority of which were commercial vans and trucks. Of these, about 700000 was a van that went by the brand name of Sunshin. In 2003, China rose to become the second largest market for General Motors. Over two hundred thousand were sold in the country. This represented an 81.6% percent increase from the previous year sale. Shanghai GM achieved a 13 per cent market share in mainland China in that year which was only superseded by the Volkswagen Group China in relation to all foreign motor companies. In Mid 2005 Shanghai GM’s new assembly plan was completed. The facility which is based in Pudong district, Shanghai, doubled its capacity of production to 320,000 vehicles. Shanghai GM then achieved the feat of being China’s top passenger vehicle producer in 2006, where their sales reached 413,400 vehicles. By 2011, Shanghai GM’s sales had risen to 1,200,355 vehicles in their China. Shipping Shipping products made from China is cheap and effective. This is because china has already established herself as a leading exporter and hence the systems are already in place. This coupled with low import- export tariffs make shipping from China more preferable than shipping from other parts of the world. Conclusion Many large manufacturing corporations favor China for their production due to a combination of a number of factors including but not limited to low-cost labor, low taxes and tariffs, low shipping cost and a large domestic market. This is projected to continue for sometime until China’s development reaches a point that the said factors will not allow for this. At this juncture, large motor companies will be forced to look for alternative production centers. References Just How Cheap is Chinese Labor? http://www.businessweek.com/stories/2004-12-12/just-how-cheap-is-chinese-labor Read More