GM and the China Chery the Continuing Saga

SHANGHAI November 20, 2003; Dow Jones reported today that global auto giant General Motors Corp. said its partner in China has severed ties to a company making minicars that look suspiciously like GM's Chevrolet Spark.

However, officials at SAIC-Chery Automobile Co., which GM is investigating for alleged intellectual property right infringements, said they aren't aware of any changes in their shareholders.

Thursday morning, Xue Hao, the spokesman for GM's partner, Shanghai Automotive Industry Corp. (Group), said there was no change in SAIC's 20% stake in Chery, but by early afternoon had changed that statement to "no comment."

If GM's statement is true, it is unclear why SAIC and Chery are staying silent.

It is also unclear why GM is aggressively repeating SAIC no longer has ties with Chery.

"By the way, SAIC doesn't own Chery. They don't own any part of Chery. Those reports (that they do own part of Chery) aren't correct. At one time they did, ( but) they've sold their stake," said GM China Group's chief executive Phil Murtaugh during a round table discussion with reporters in Beijing this week. He was responding to questions about GM's investigation of Chery's subcompact car, the QQ.

Chery, founded in 1997 in China's Anhui Province, joined with SAIC in 2001 and launched the Chery, a cheap compact car model. That immediately landed it in trouble with Volkswagen AG , SAIC's other partner.

In June last year, Volkswagen's Asia-Pacific region president, Bernd Leissner, admitted that Volkswagen had a dispute with SAIC in early 2001 after discovering SAIC had supplied Volkswagen parts to Chery's Chery, which was made to rival Volkswagen's Jetta.

"Like in a good marriage...we had a little fight," Leissner said.

Unlike Volkswagen's dispute, however, GM's trouble with Chery has attracted wide media attention, locally and internationally. Some speculate the ensuing embarrassment may have pushed GM to pressure its partner out of Chery.

SAIC itself acknowledged last month the relationship between it and Chery was facing some difficulty.

Chen Hong, vice president of SAIC and president of GM Shanghai, said the relationship was at a "critical stage," adding that while Chery was still using SAIC in its name, many people "estimate that this issue will be settled soon."

Chery, whose car sales are among the fasted growing in China's booming automarket, is also 80% owned by three companies run by the Anhui provincial government and two companies run by the municipal government of Wuhu where Chery is based.