You take the back seat

GM: After 10 years of driving hard in China, General Motors has decided to give way. The US carmaker is to sell a crucial 1 per cent stake in its Chinese joint venture to partner SAIC Motor for $85 million, ceding control of its operations in the world's most promising auto market. It's a climb-down, but a smart one.

Giving up the wheel in Shanghai GM is no small decision. GM's 12-year old 50-50 venture with SAIC has around 8 percent of the market for passenger vehicles, and is growing fast. Output is expected to double from last year to almost 1,000,000 units by 2016, according to JD Power estimates.

The Indian pay-off makes it worthwhile. GM, which is only a bit player in that promising market, will set up a new venture with SAIC. The Chinese producer will also be able to help GM source the 225,000 low-cost vehicles it hopes to sell to India in the next couple of years. A more empowered SAIC may also be able to secure cheap financing from state-owned Chinese banks. Cash-strapped GM would struggle to find the necessary firepower.

GM retains its exposure to Chinese growth, through its 49 per cent shareholding, and keeps its hold over key technologies. Day-to-day management is likely to remain the same. As a 50-50 partner, Shanghai Auto already had the right to approve or reject the budget and nominations to the management board.

For SAIC, meanwhile, the benefits may be cosmetic at first. With 51 per cent of the venture, it can consolidate the whole of Shanghai GM's revenues, powering SAIC up the international league tables. SAIC also wants extra security in case GM is ever forced to sell its stake to raise cash, according to a person familiar with the situation.

GM shouldn't be too blasé about giving up control. While the US carmaker can buy the stake back later, the undisclosed terms may not be attractive when the time comes. But GM's shareholders should not be too upset about giving up dreams of eventual control for more of what GM lacks in its home market: fuel-injected growth.