Now facing bankruptcy, GM has an opportunity to shift its operations to China, its fastest growing and most profitable market. The company is already attempting to move its manufacturing operations to the Asian powerhouse, and that has given rise to speculation that it will move its headquarters as well.

Of course, if GM – which has already received $15.4 in government loans – were to pick up stakes, the political fallout would be epic. What could be more “un-American” than a 101 year-old American automotive company that’s being propped up by taxpayer dollars moving to a communist nation?

But the reality is that American consumers aren’t buying GM vehicles and Chinese consumers are. That means if the company is going to remain viable, China, not America, is GM’s land of opportunity.

GM CEO: Bankruptcy ‘Probable’

GM still has two weeks before the government imposed deadline to demonstrate sustainable viability expires on June 1. But even GM Chief Executive Officer Fritz Henderson has admitted that bankruptcy is “probable” at this point. And in the minds of analysts, it’s almost certain.

“[Bankruptcy] is looking like a real high probability,” Brett D. Hoselton, an analyst with KeyBanc Captial Markets, told the New York Times. “Chrysler is the best indicator at this point of where we’re heading with GM.”

GM reported a first-quarter net loss of $5.98 billion, compared to a loss of $3.3 billion a year earlier. Revenue fell to $22.4 billion, a 47% drop from 2008. The company burned through $10.2 billion in cash in just three months. GM has now lost $88 billion since 2004.

Last year, GM lost its crown as the world’s largest carmaker to Japan’s Toyota Motor Corp. (NYSE ADR: TM). And a company that 40 years ago produced one out of every two vehicles sold in the United States, has seen its U.S. market share slide to just 19%.

On Friday, GM notified 1,100 of its 6,000 U.S. dealerships that it is terminating their contracts, and it plans to cut its network down to 3,600 dealers by next year.

“This company is sick,” Charles Ballard, an economics professor at Michigan State University told Michigan NBC television affiliate WILX 10, “they’re likely going to file for bankruptcy.”

Investors are equally pessimistic. GM stock has plunged 70% since the Obama administration announced it would give the company 60 days to restructure outside of bankruptcy court. GM has lost 94% of its equity value in the past year.

Is China the Right Cure for GM?

So if GM is sick, what then is the medicine? Many analysts believe it’s a healthy dose of China.

While its U.S. sales have plunged, sales in China continue to grow exponentially. In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the U.S., a 36% decline from a year ago.

And while global car sales continue to plunge, auto sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.

And unlike the United States, there is actually a strong demand for GM model cars. In China, where the company is neck and neck with Volkswagen for the market-share lead, GM set a monthly sales record of 151,084 vehicles in April. That’s a 50% increase from its April 2008 results.

“Within 10 years, this will be our largest market in the world,” Kevin Wale, president of GM China, told TIME magazine.

GM has been so successful in China it is reportedly negotiating plans with U.S. lawmakers that will send the carmaker’s production overseas, the U.K.’s Telegraph reported.

GM will start shipping cars to the United States from Shanghai in 2011. The company plans to export slightly more than 17,000 vehicles in the first year before ramping up to 50,000 by 2014.

Backlash from GM’s China Plan

While many carmakers import components from China to save on labor costs, GM would be the first company to import whole cars from the Mainland.

Of course the plan doesn’t sit well with unions.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.

Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.

Two weeks ago, GM CEO Henderson said his company would cut an additional 21,000 factory jobs, close 13 plants, eliminate about 2,600 dealerships and close its Pontiac division. GM aims to shed 23,000 jobs – 38% of its workforce – by 2011.

But the company expects to open a new factory in mainland China within the next few years and continues to build upon its 21,000 Chinese employees.

“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told NBC’s WILX. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”

On the other hand, GM argues that it is only logical to produce cars where they’re going to be sold.

“GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the Associated Press.

Plus, GM already imports cars from other countries, just not China. The Chevrolet Aveo and Pontiac G3 come from South Korea. The Pontiac G8 comes from Australia. The Saturn Astra comes from Belgium, and the Vue from Mexico.

Harvard Business School professor Clayton Christenson – who was also a consultant to Richard Wagoner, the architect of GM’s China strategy – told TIME that inexpensive, Chinese-made Chevys, exported to the United States could be the “disruptive” force the company needs to resuscitate North American sales.

“It’s exactly the right thing for them to do,” Christenson said.

While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, TIME reported.

MSU professor Charles Ballard says that while the notion of outsourcing more jobs to China may not be pleasing, it is also in GM’s best interest.

“I think everyone needs to keep in mind that if this company fails, that’s the worst case scenario,” Ballard said. “It would be really good for the people of Michigan and for Lansing for GM to become a viable company. Right now, it’s not.”

And perhaps that’s the root of the issue. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the two diverged. Now, they’re too far entangled for there to be an amicable solution to this problem, and the Obama administration is left with a political powder keg.

The government stepped in to fire former GM chief Richard Wagoner, but it doesn’t want to be too heavy-handed in its treatment of the private sector. It has already spent months sidestepping questions about whether or not it would nationalize U.S. banks.

“We didn’t think in America that the President could fire the CEO of a private company,” one Chinese executive told TIME. “For us Chinese it was very confusing.”

But if the Obama administration lets GM move ahead with its plans, it must confront the unpleasant reality that it is subsidizing the outsourcing of U.S. jobs with taxpayer money.

“Production location is a corporate decision, but when it’s on the taxpayer dime, there are different sensitivities, so the notion of billions for a rescue package and offshore production, I think, could be politically combustible,” Harley Shaiken, a professor at the University of California at Berkley who specializes in labor issues, told the AP.

Source: General Motors Leaves U.S. Workers by the Wayside as it Accelerates Operations in China

Major department stores like Takashimaya Co. Ltd., Sogo Co. Ltd. and Mitsukoshi Ltd. are gearing up. In places like Tokyo, Osaka and Kyoto, they’re seeing a new wave of power shoppers at their counters – the Chinese.

A few short years ago, this was unthinkable.

Yet, as my wife and I strolled through downtown Kyoto, we saw it too. Most major department stores have added Chinese signage to the usual Japanese and English placards.

We heard it, as well, from Chinese shoppers who were tromping through the Shijo-Kawaramachi shopping district loaded down with bags sporting the latest designer logos. It’s much the same in Tokyo’s uber-rich Ginza district as well where Mitsukoshi has recently hired store-based interpreters fluent in Mandarin.

I can’t say I’m surprised.

According to the Japanese Department of Tourism, a record high of nearly a million Chinese tourists came to Japan last year. China’s Ministry of Public Security estimates that 34.5 million Chinese headed for foreign destinations in 2006 – up from a mere 4.5 million a year earlier. By 2011 that figure is expected to top 80 million with Hong Kong, Macau, Vietnam, South Korea and Japan predicted to account for 85% of all Chinese tourist destinations according to Euromonitor International.

And they’re spending big bucks, too.

CNN reporter, Kyung Lah, interviewed one group of mainland Chinese tourists recently that had spent $50,000 dollars on clothing and makeup alone on a 3-day trip. Not surprisingly, most of that was on designer brands from Prada Group, Gucci Group NV (PINK: GUCG), Christian Dior SA, and Shiseido Co. Ltd. (OTC: SSDOY).

Which jibes with my personal experience as indicated by Chinese and Japanese I’ve spoke with over the years. Whereas most of them used to only dream about traveling, an increasing number are actually doing it. My good friend Jun Hao and his wife have hit most of Europe’s major cities and a good deal of the United States, too.

Getting back to Japan, however, it may surprise you to learn that most Chinese feel very comfortable there. A fact that stands in stark contrast to how relations between the Japanese and Chinese are often portrayed in the Western media.

It’s now a common sight in Tokyo to see Chinese who are shopped out make a beeline for Toyota Motor Corp.’s (ADR: TM) showrooms. Obviously, they’re not buying Toyota’s in Japan, but boy are they anxious to buy Toyota’s in China.

And a visit to the showroom is just what the doctor ordered for young, cosmopolitan Chinese yuppies… or “Chuppies” as they’re called.

Not only do they feel more international for having done so, but Chinese tourists tell me they find Japan quite welcoming. And warm, which is another one of those words than can be translated a variety of ways.

Not one citizen of China or Japan that I’ve recently spoken with believes that the political past between their respective countries would prevent an economic future.

Investors looking to capitalize on the blossoming relations between the two countries and the tourism trade specifically need to look no further than Japanese department stores, Chinese credit card companies and, ironically, Toyota to get in on the action.

Of course, there are obvious choices when it comes to computerized travel providers and airlines.

But the value there may be harder to extract given there’s not a clear value proposition and the industry remains largely fragmented… for now. And that’s part of what makes Money Morning’s growth “because” of China – and Japan – investing strategy the way to go for now.

Source: Japan Makes Way for China Tourist Money

That’s why here at Money Morning we’re more interested incompanies that can secure a lot of smaller contracts on a consistent basis – and that can transform those deals into predictable, double-digit growth.

We refer to these modest-contract specialists as the “Masters of the Small Bid.”

Let me explain…

As we’ve stated, the companies we’re targeting aren’t characterized by headline-grabbing mega-contract wins, but by their proven ability to land smaller, more-stable deals. You see, by spreading their risk across many smaller deals rather than just swinging from the heels every time, the companies we follow are able to generate a consistent stream of earnings – despite a slowing economy, a wrenching credit-crisis and damaged investor confidence.

In short, our “masters” have kept themselves in front of paying customers at a time when other firms are simply worried about having customers.

Let’s look at several strong examples.

A Sample of Strong-Bid Masters

It’s no coincidence that our first example – defense-contractor and aerospace expert Lockheed Martin Corp. (LMT) – has been around for decades, and is a proven survivor. Remembered as the designer of the P-38 Lightning fighter of World War II fame – an aircraft so deadly that Nazi leaders ruefully dubbed the twin-boomed airplane “The Fork-Tailed Devil” – Lockheed Corp. went on to build the graceful Lockheed Constellation airliner in the 1950s and the cutting-edge F-117A Nighthawk Stealth Fighter in the 1980s.

A disastrous foray into commercial jetliners – in which only 250 airplanes were sold, even though the program lasted from 1968 until 1984 – would have likely bankrupted many companies. But Lockheed’s been a survivor. Indeed, back in the 1990s, to keep pace with a wave of defense-sector consolidations that created a smaller group of bigger players, Lockheed linked up with Martin Marietta Corp. to form Lockheed Martin.

Lockheed Martin re-established its fame with the so-called “Skunk Works” advanced-technology unit, and even today remains a defense-sector heavyweight. But it’s also a Master of the Small Bid. For proof, just look at some recent deals.

Lockheed roared into April, landing a $50 million contract for the U.S. Navy on April 1, and a $234 million Air Force contract on April 2. A week later, the company landed a deal a day for four straight days, in the process rolling up $725 million in total business from the U.S. Army, the Turkish military, and Japan’s Mitsubishi Heavy Industries Ltd.

The rest of the month saw still more action as the Navy signed on Lockheed for a one-year, $15.5-million contract for continued program management and engineering services for the United Kingdom’s Trident II D5 Fleet Ballistic Missile (FBM) program. The company closed the month in a decisive manner with two more major deals on April 30. The National Aeronautics and Space Administration (NASA) signed a $39.5 million contract modification with Lockheed Martin Space Systems to implement an employee-retention program, while the Navy supplied a contract boost worth up to $190 million to supply tooling and special test equipment for its new F-35 Joint Strike Fighter.

Not a bad month’s work. And it’s certainly representative of how Lockheed generates a predictable earnings stream. Because of deals such as these, the company’s share price rose nearly 8% in the month of April alone. In May we’ve been seeing even more deals, and the stock is advancing again.

Clearly, small deals can have a big impact on a company’s bottom line.

The Gamer That Doesn’t Play Games

At a time when other gamers are worrying about the next best thing, Japan-based Konami Corp. (ADR: KNM) retooled one of their most successful releases, Metal Gear Solid, adapted it for mobile phones, and then built up a lot of buzz as they pushed it out to customers of the Verizon Wireless unit of Verizon Communications Inc. (VZ).

Not only did Konami save a lot of money because it wasn’t developing a new platform from scratch, it also kept its audience smaller to produce bigger returns per person.

While the pumped-up adolescent males soak up this stealth shooter game, Konami hasn’t forgotten to take care of the over-moneyed and under-served teenage-girl market with its recent new game, “Diary Girl.” The Nintendo Co. Ltd. (OTC ADR: NTDOY) Nintendo DS game provides girls of all ages the ability to interact with friends, while also organizing a calendar and address book in their own, password-protected electronic journal.

A month ago, Konami announced an agreement with Win Systems International Holdings Inc., to use Konami content in certain of Win’s pending lottery and gaming projects in Europe and Latin America.

Deals like this have caused Konami’s shares to seek higher ground. With a 19% gain over the past three months, the only thing that could help this company even more is if it had a highly awaited Sony Corp. (ADR: SNE) PlayStation 3 game coming in the near future – which just happens to be the case. Metal Gear Solid 4, the highly awaited PlayStation 3 game, will debut June 12.

Last week, several key Chinese officials, typically not known for their candor, conspicuously noted the need to both stimulate domestic consumer spending and to bring down roaring inflation. While at first blush these two goals might appear mutually exclusive, China’s leaders do have a “magic bullet” that can hit both targets at once.

The Easy Way vs. The Hard Way

A stronger currency, commensurate with China’s increased economic strength, will simultaneously tamp down inflation and enable Chinese consumers to buy more goods and services. However, for reasons not entirely clear to me (or few others, for that matter), China’s leaders are resisting this simple-and-beneficial solution.

By prodding China’s citizens to spend more, the country’s leaders say their goal is to decrease the nation’s dependence on exports. If China’s consumers, who currently save 50% of their incomes, saved less, more of the nation’s production output would be consumed domestically and China would be much less vulnerable to downturns in its overseas export markets.

Without a vibrant domestic market, over-leveraged Americans will apparently remain China’s most important customers.

A strengthened yuan would lower the real costs of goods for domestic consumers and allow the Chinese themselves to compete more evenly with consumers in other nations to whom they currently send the fruits of their labor. As goods become more affordable in China, the Chinese will naturally consume more. A rising yuan would therefore kill two birds with one stone: It would reverse recent consumer-price increases and it would induce Chinese consumers to buy their own products.

If the Chinese were to follow such a sensible path, the consequences here in America would be immediate and severe. By allowing China’s currency to appreciate, that country’s monetary authorities would no longer need to buy and remove as many dollars from the open market, producing an immediate reduction in the demand for U.S. Treasuries, mortgage-backed securities and other U.S. dollar-denominated debt. The result in America would be a simultaneous increase in both consumer prices and interest rates. Such developments would only compound the problems already rippling through our economy.

To spur domestic spending absent such currency rebalancing, Beijing must instead rely on the nominative, simulative effects of inflation. By further expanding its money supply and allowing those increases to be passed on to workers in the form of higher wages, China will ensure that its consumers will have more yuan to spend and, hence, will use that cash to buy more “stuff.”

Such a policy, however, while having a strong impact, will only solve one problem by aggravating the other.

The Savings vs. Spending Debate

By penalizing savers through the erosive effects of inflation, China would discourage savings and jeopardize one of the true sources of its rising standard of living. Contrary to the economic hocus pocus propagated on Wall Street, in Washington and at American universities, economies grow not as a result of consumer spending, but as a result of savings. So-called “underconsumption” is the true source of prosperity because it engenders capital formation, which lies at the root of sustainable economic growth.

Here, too, the implications for Americans are dire. In effect, China’s consumers are spending only half their incomes and are lending much of the rest to us; so we’re effectively enjoying the “current” consumption that China’s frugal consumers have opted to defer.

That’s a big help right now. But think about this: As China’s consumers spend more, America’s consumers will simply be forced to consume less.

Low prices and rich consumers are a potent concoction that is sure to soothe China’s roaring economy while raising the living standards of its hardworking citizenry. It’s a simple solution that only an economist can miss.

Source: As China’s Consumers Start Spending More, U.S Consumers Will Begin to Feel the Global Economic Squeeze

In this week’s Outside the Box we continue with what I mentioned a few weeks ago: agricultural needs are going to be a new and important force in the world and when coupled with energy may shift the balance of power in the world in strange a different ways.

When, as Niels points out, Afghanistan poppy farmers are shifting to wheat farming, the world is truly a different place. I think you will find the research he has done to be truly worth a few minutes of your thinking time.

And as a preface, I was reminded a little while ago that a Financial Times headline story last Friday mentioned that China is buying African farmland and building massive amounts of railroads and infrastructure to get grains to the market. I have long been bullish on African farmland. This week’s OTB will tell you why.

“There is nothing so disastrous as a rational investment policy in an irrational world,” John Maynard Keynes. You just know that something is astray when Afghan poppy growers begin to switch from opium to wheat.

According to the Independent newspaper here in the UK, that’s exactly what is now happening. I have no desire to enter into a pound for pound risk/reward analysis of producing wheat versus opium. However, the consequences of the rapid rise in energy and agricultural commodity prices are far reaching and perhaps not as well understood as they should be. That is the content of this month’s letter.

The Silent Tsunami

My story begins with Al Gore. While most of us lulled ourselves into the belief that he was onto something when he tried to convince us that global warming (or climate change, as I prefer to call it) was the most formidable challenge facing this planet, a silent tsunami¹, also known as the global food crisis, began to develop and is now threatening to undermine global political and economic stability, the latter of which has been key to the benign financial markets we have all benefited from in recent years.

According to the World Bank, just over 1 billion people live on one dollar or less per day. People in the poorest countries in the world spend 80% of their income on food. So when you and I have hardly noticed that the bread we pick up from the local bakery has doubled in price over the past year, it is because only 10-15% of our budget is spent on food items². In many emerging economies the number is much higher. Chinese consumers spend 28% of their income on food. In India it is 33%. If you want to know how much it is in your country, go to:

http://www.ers.usda.gov/briefing/cpifoodandexpenditures/data/2006table97.htm.

There are three food staples in the world today which dwarf all other food ingredients in terms of importance. They are (in alphabetical order) corn, rice and wheat. As you can see from chart 1 below, they have all experienced rapid price appreciation since last summer. What is it that has driven this price explosion and what does it mean to financial markets? As with most things in life, there is no simple explanation; a number of factors have conspired to create a situation which is exceptional but also destabilising and hence dangerous.

It Is The Bio-Fuel Policy Stupid!

The explanation given by most commentators is the bio-fuel policy currently being pursued by the Bush administration in Washington. The policy is driven by a desire to unlock the United States from its rising dependence on imported crude oil. The problem, as Bush and his government have been slow to recognise, is the stupidity of the policy in its current form. Let’s back that claim up with some hard facts.

In the United States, corn (better known as maize over there) is the primary ingredient in ethanol production although wheat and soybeans are also used. According to a recent UN report, it takes 232 kg of corn to fill an average 50 litre car tank with ethanol – enough corn to feed a child for an entire year. It is estimated that almost 20% of total US corn production will go towards ethanol this year and the number is set to rise to 45% by 2015³.

The problem with corn is that it is low on carbon hydrates, which is where the energy comes from. Instead, American ethanol producers rely heavily on fertilisers with the energy being extracted from the nitrogen in the fertiliser. This is an inefficient and very costly approach – in particular in an environment of rising energy prices because crude oil and/or natural gas are major ingredients in fertiliser production. 33,000 cubic feet of natural gas are required to produce just 1 ton of ammonia!

So what does all this mean? According to estimates from Goldman Sachs, the cost of ethanol from corn is now over $80 per barrel, it is about $145 from wheat and over $230 from soybeans. Other countries recognised this problem a long time ago and use crops with higher carbon hydrate content. In the Philippines they use coconut oil and the Brazilians use sugar cane. Goldman reckons that the cost of one barrel of ethanol based on sugar cane is about $35. So why not import sugar cane from Brazil instead of using corn? One simple answer: Brazilian farmers do not vote at American elections. Idaho farmers do.

Are Investors To Blame?

There is no question that the US bio-fuel policy which, by the way, is now being copied in other parts of the world including the EU, has to take its share of the blame. But it is by no means the only reason for the food crisis. The next culprit on my list is our very own industry – investors of all kinds. In recent years there has been rising demand for commodity-linked investment products from investors all over the world. Pension funds, hedge funds, mutual funds and private investors have all allocated more and more to commodities and, in recent months, demand growth has been explosive, as is evident from chart 2 below. It is estimated that the aggregate value of commodity-linked index funds now exceeds $200 billion, a very significant number in a not very large market.

“Chimerica stocks are Chinese companies,” says Tom. “They do business in China, with Chinese management, Chinese employees, and Chinese currency. They make products for Chinese consumers.

The key is that these Chinese companies list on US stock exchanges.

Chimerica stocks list in the US because they can’t list in China or Hong Kong. “Going public” in China takes about three years. But in America, it only takes about six months. According to Barron’s, “Even now, for every company that goes public [in China] there are probably a hundred in the queue, and a lot of companies want money sooner rather than later.”

How does this happen?

A shell company is a stock without a business. The business has no assets or operations, but it still has a name and a stock symbol. To list in America, Chinese companies find an American shell company and back themselves in. Lawyers call this a “reverse merger.”

Why are Chimerica stocks good for investors?

According to Barron’s, they sell for an average 10 times earnings. The price-to-earnings ratio of the Shanghai Composite – China’s main stock exchange – is 27. Chimerica stocks are cheap because Chinese investors cannot open brokerage accounts in the United States to buy these stocks. American investors don’t know about them. Analysts don’t cover them.

Tom has put together a list of these stocks, which can be found here: Tom Dyson’s list of Chimerica stocks.

The buyer? An anonymous Chinese billionaire.

According to the report: “The anonymous Chinese entrepreneur bought a mix of vintages of Romanee Conti, a Burgundy wine and considered to be among the world’s most exclusive with only 450 cases produced each year.”

China is booming, despite the recent sell-off of Chinese stocks, but how do US investors profit from the China story without getting burnt?

Tom Dyson reckons he’s found the answer: ‘Chimerica’ stocks.

“Chimerica stocks are Chinese companies. They do business in China, with Chinese management, Chinese employees, and Chinese currency. They make products for Chinese consumers.

“Chimerica stocks are the best way to invest directly in China. According to Barron’s, they sell for an average 10 times earnings. The price-to-earnings ratio of the Shanghai Composite – China’s main stock exchange – is 27. Chimerica stocks are cheap because Chinese investors cannot open brokerage accounts in the United States to buy these stocks. American investors don’t know about them. Analysts don’t cover them.

“I’m not ready to invest in China right now. The Chinese stock market is down 44% from its highs in October 2007 and is still in a downtrend. When the market turns around – which should happen later this year – I’ll pick my China investments from this list…”