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How Mercedes Trumped Chrysler In China


International Business: TRADE

HOW MERCEDES TRUMPED CHRYSLER IN CHINA

For Mercedes-Benz, it has been a roller-coaster ride for business in China. A year ago, the German carmaker's growth prospects in the huge market looked bleak. First, it lost an important venture to produce diesel engines in northern China to a German rival. Then, Mercedes executives learned in August that the Chinese had chosen Chrysler Corp. for the $1 billion minivan deal that Mercedes was striving to win. "It was a low point," recalls Bernd Gottschalk, head of Mercedes' commercial vehicle division.

Now, they're celebrating in Stuttgart. After touring a Mercedes plant on July 12, Chinese President Jiang Zemin handed the hotly contested minivan deal to the German auto giant, snubbing Chrysler and placing Mercedes among the privileged few in the world's most important emerging market. As Jiang rode in a replica of the first Benz car ever made, Daimler Benz Chief Executive Jurgen E. Schrempp declared "a major success for both sides."

CAUTIONARY TALE. Souring relations between Beijing and Washington over Taiwanese President Lee Teng-hui's May visit to the U.S. may have clinched Beijing's decision. But as details of the talks emerge, it's clear that other factors, such as technology transfer and export terms, were crucial.

Indeed, the story of the tangled minivan negotiations reveals just how tough it is for Western companies to do business with the Chinese. China is playing the world's biggest auto makers off against one another--a tactic that extends to such industries as telecoms, electronics, and aviation. It is trading access to its market for pledges from General Motors, Volkswagen, Ford, and others to transfer everything from auto-part technology to R&D.

This practice presents a dilemma to the multinationals: How deeply should they cooperate in key industries with a country that has weak protection of intellectual-property rights and lofty ambitions of its own?

Chrysler and Mercedes-Benz, it turns out, answered that question differently. When Beijing demanded that Chrysler transfer all technology for its prize, all-new NS minivan to Beijing--and even allow China to sublicense the van design and sell it in other Asian countries--Chairman Robert J. Eaton balked. That provided an opening for Mercedes and its parent company, Daimler Benz, which is pledging to put China on the map in industries ranging from passenger aircraft to high-speed trains.

The minivan deal was a high-stakes game from the start. In early 1993, when China first invited bids for a joint venture to make 60,000 vans and 100,000 gas and diesel engines in Guangdong province, officials let it be known that it would be the last major vehicle project in China until the year 2000. Since China already had set up car joint ventures with Volkswagen and Peugeot, they hinted that the next big deal would go to the U.S. or Japan.

Chrysler snapped to it. It wanted to widen the bridgehead provided by its 70,000-unit-a-year production of Jeep Cherokees, which start at $16,700, and military-style Jeeps through its 42% stake in a joint venture in Beijing. Plans call for boosting Jeep output to 200,000 early next century.

Meanwhile, Mercedes' new chief executive, Helmut Werner, needed a big win in Asia. Beset by Germany's strong mark and sky-high labor costs, he was eager to implement a new strategy to boost sales as well as to tap low-cost labor and supplies in the booming region. The loss of the diesel engine deal in China dealt Mercedes an unexpected blow. The company's executives had smugly figured their reputation for engineering excellence would make landing the contract a breeze.

So, as visiting Chinese Premier Li Peng signed the diesel deal with rival KHD on a trip to Bonn in July, 1994, Gottschalk, Mercedes' lead negotiator with the Chinese, knew he had to do something, and fast. He immediately called together his top strategists for brainstorming sessions at Mercedes' Stuttgart headquarters. They decided they could meet Chinese wishes to split minivan production between plants on Hainan island and another in Zhanjiang, a coastal town in southern Guangdong, some 40 miles away. Engineers from Ford, also invited to bid on the minivan project, had concluded the scheme was uneconomical.

If Mercedes was to have a real chance, its tactics had to change, too. Gottschalk scaled back Mercedes' big negotiating team to eight people and altered its bargaining style. Says Gottschalk, 52, a former political scientist: "There would be no more arrogance and no more pushy negotiations. Instead we said, `Let's see what Asia needs."'

WHOSE JEEPS? Little did Gottschalk know that at the same time, Chrysler believed it was closing in on the deal. As early as December, 1993, Chinese officials had indicated to Chrysler negotiators that they were the only ones in the race. In early July, 1994, after a 35-day marathon bargaining session, the rough details were on paper: Chrysler would invest more than $1 billion to build vans, engines, and transmissions.

Eaton wasn't completely satisfied with some technical details. But he was shocked when Chrysler officials discovered counterfeit versions of its Jeep cruising the streets of Beijing. Chinese pirates had copied the Jeep body and stuck them on "God-knows-what chassis," Chrysler President Robert A. Lutz told BUSINESS WEEK in January. Even more disturbing, Lutz recalled, was the Chinese response when Chrysler complained: "We're developing an auto industry, and you should help us."'

Worrying that China could become a global source of counterfeit parts, Eaton insisted that Beijing guarantee in writing it would protect designs. The Chinese agreed, and the signing ceremony for the deal was set as the high point of U.S. Commerce Secretary Ronald H. Brown's August trip to Beijing.

But to Eaton's dismay, the Chinese chose that time to unveil a slew of startling new demands. They insisted Chrysler invest the entire $1 billion up front, rather than in phases as previously agreed. China also wanted to export Chrysler's vans and components--even in markets where the company has its own distribution--without paying licensing fees. On top of that, Chinese negotiators wanted to delete intellectual-property protections from the contract, which could allow knockoff artists to copy Chrysler's components with impunity.

Flabbergasted, Eaton flew to Hong Kong, leaving his negotiators to salvage the deal. But the Chinese, who apparently thought Chrysler would come around to avoid embarrassing Brown in Beijing, didn't budge. On Sept. 3, the frustrated Chrysler team returned to Detroit.

For Gottschalk, Chrysler's troubles proved to be a godsend. Chinese officials asked Mercedes to resubmit its bid. They also asked Ford to make an offer. Gottschalk sent his team to Beijing, where they learned the standoff with Chrysler had changed the picture. Mercedes promised that it would eventually base the entire van production in China, set up technology centers, develop a components industry, and let the Chinese export 12,000 units a year.

Mercedes had much less to lose than Chrysler, for whom minivans are its biggest seller and top money maker. For Mercedes, minivans are a new, low-volume business. The model it proposes to build in China, the Viano, will begin production in Spain in 1996. Indeed, with its high German labor costs, Mercedes could use a low-cost Asian production base.

By March, discussions with Mercedes were again in full swing. Further dooming Chrysler's chances, just two months later, was the outrage in Beijing over President Lee's trip to the U.S. In one last encounter, Chinese officials summoned Chrysler officials to Beijing on June 20. Mercedes' proposal lay on the negotiating table. The Chinese claimed both Ford and Mercedes had agreed to let the mainland partner sublicense their technology at will and asked Chrysler to do the same. Chrysler's response: No deal.

Mercedes figured it would take several more months to hammer out an agreement. But Beijing apparently speeded the pace so that President Jiang could sign something big during his state visit to Germany in July. While rewarding Bonn, he could also show Washington that the political tensions could harm U.S. business in China.

PYRRHIC VICTORY? A question nags: Was it a good deal for Mercedes? Full details of the agreement haven't been revealed, but Chrysler execs suspect Mercedes is naive to trust China with its technology. Responds Gottschalk: "You have to face risks to get results."

What's more, Mercedes still has months of negotiating ahead before it can seal its deal. Technically, it only has signed a "basic agreement" to be "exclusive partner" and begin a feasibility study. That is not much further than Chrysler was with the Chinese in 1993.By John Templeman in Bonn and David Woodruff in Detroit, with Dexter Roberts in Beijing and Pete Engardio in New York


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