GM’s intellectual property smokescreen?

“Transferring GM’s jewels to Russia via Opel”

The media report that General Motors was loathe to sell (a full or partial stake in) its European Opel operations to the Magna consortium because it is concerned that this will provide a conduit via which GM’s intellectual property (“IP”) might end up in the hands of GAZ, a competitor to the Chevrolet brand in Russia. Today the media report that GM has agreed to sell to the Magna-led consortium, but that there are conditions attached to the sale. I find this approach somewhat strange, and wonder whether it is a smokescreen.

We also read media reports that Ford is concerned about the possibility that a Chinese company (Geely being the most commonly quoted) might buy (a stake in) Volvo Cars as a mechanism by which to acquire automotive IP. Furthermore, Ford is reported to have concerns about Magna, which is one of Ford’s major suppliers too, owning a rival to Ford’s European operations (although Reuters reports that Magna co-CEO Donald Walker recognizes the need for “a clear barrier between the parts and car companies”).

For many years, the greater portion of automotive IP has not been developed and owned by the OEMs. Most IP sits in the supply chain. The OEMs work with the suppliers to define requirements for new parts, and the suppliers develop the IP as part of their work in producing these new parts (in fact, the failure to take advantage of this situation is one key reason behind the weakness of many suppliers, but that’s a story for another blog post).

The skills and knowledge in the OEMs revolve around:

  1. Supply chain management – managing a cascaded supply chain of hundreds of suppliers providing tens of thousands of components is an enormous challenge. There might be some program management IP here, but very little automotive product IP.
  2. Sales and marketing – the OEMs have done a great job of keeping their suppliers’ brands out of the general public’s awareness. Whereas, for example, Dell and HP have been unable to resist the “Intel Inside” initiaitive, the OEMs do not have to contend with “Denso Inside” or “American Axle Inside” or “Bosch Inside” slogans. As a result, only the automotive afficionados are interested in the source of components when buying a car.
  3. Channel logistics – predicting demand, having the right models, with the right attributes (engine size, color, extras, etc.), in the right place at the right time. The performance of the Detroit 3 in this respect might also be the subject of another blog post.

So why do I think this is a smokescreen?

  1. It is very difficult to protect product IP – your competitor only needs to purchase your product and dismantle it to discover 99% of the product IP that is embedded in it. Process IP is another matter, of course, but …
  2. Russian tax laws make it advantageous for OEMs to supply CKD/SKD kits that are reassembled in Russia (whether this is the approach taken for Chevrolet and/or Opel vehicles, I don’t know), making it easier to determine the later-stage process IP. Furthermore, more assembly process IP can easily be obtained by luring away two or three key personnel.
  3. Opel is the technology source for GM’s small car platform, which possibly represents GM’s future growth strategy. Does GM want to risk this strategy by releasing ownership of the technology to another industrial player?
  4. Without Opel, GM ceases to be a global company. In particular, Russia is a market with a huge potential. And if GM loses control of Opel, what prevents the new owner targetting Russia and seriously affecting Chevrolet? At present, GM has the opportunity to ensure that Opel and Chevrolet present complementary product ranges in the Russian market; a new owner for Opel is likely to ensure the establishment of competitive product ranges.
  5. By selling to a financial buyer, GM has the opportunity to buy back into Opel at a later stage when its finances are in better shape. Would an industrial owner be prepared to sell (at a realistic price)?
  6. Magna, as the owner of Opel, will obviously become the preferred supplier to Opel. With Opel and the remainder of GM sharing many components (especially for the new small car platform), this gives Magna immense additional leverage over the remainder of GM.

Why might GM have a point?

In the interests of balance, here are some reasons why GM and Ford might be right to be concerned.

  1. Shanghai Automotive Industry Corp (SAIC) bought the rights to the 25 and 75 models when MG Rover Group collapsed (it bid for the entire group but lost out to Nanjing Automobile). SAIC then transferred the assembly from UK to China where the same cars are assembled at a lower cost (see this Reuters blog). GM and SAIC have a joint venture, so maybe GM has seen at first hand some of the tricks used to transfer IP.
  2. A Magna-owned Opel may be less concerned about IP for Opel components being utilized for parts destined for other OEMs, because the benefit still accrues to Magna

2 comments

  1. TheVoice says:

    VoxSapiens update:

    This 16 September Reuters article – http://www.reuters.com/article/newsOne/idUSTRE58G0AD20090917 – includes a very interesting admission that the suppliers are getting the upper hand …

    “The fact is the balance of power has somewhat shifted,” General Motors Vice President Carl-Peter Forster told a dinner Wednesday evening that was organized by the American Chamber of Commerce in Germany on the occasion of the Frankfurt auto show.

    The head of GM in Europe and the likely candidate to run Opel said carmakers needed to reevaluate their strategy.

    “We all had the vision that the OEMs (original equipment manufacturers) should just assemble bits and pieces, do a little bit of marketing, a little bit of design and all the rest would be done by suppliers,” he said.

    “That was a nice vision. It sounds very lean, but the profit making opportunity is also shifting to the ones that have the technological knowhow. That is in very many cases now the supplier industry,” the GM Europe president told the dinner.

  2. motormouth says:

    Geely is in the news again about this issue. Reuters reports that Geely is talking to Magna about a partnership for Opel. So both Ford and GM might be concerned about Geely taking IP to China.

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