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How Gm Got The Inside Track In China


International Business: CHINA

HOW GM GOT THE INSIDE TRACK IN CHINA

For Chinese officials, a visit to Brazil last year was like a trip into the future. A high-level delegation from Shanghai Automotive Industry Corp. got a grand tour of General Motors Corp.'s Brazilian operations. Brazil has been transformed into a key outpost in GM's global network, linked by computer to the company's worldwide automotive and technology businesses so that cars and factories can be designed in concert with GM technical centers around the world. "We told them, `This is what Shanghai could become,"' recalls GM Chief Executive John F. Smith Jr.

That field trip may have been the turning point for GM in its pitched battle with Ford Motor Co. to win a $1 billion Shanghai luxury car and minivan project. Smith won't confirm the win, but Wall Street sources say Chinese officials are telling GM and Ford that GM has received the nod for the project, which aims to produce 300,000 midsize cars and minivans annually. A 40-person Chinese automotive delegation arrived in Detroit in late October and is expected to announce its selection the week of Oct. 30. The joint venture would vault GM into first place among the U.S. auto makers skirmishing to stake claims in China.

GM is cautious about declaring victory, and Ford hasn't conceded defeat. Both know deals can fall apart in China. Chrysler Corp., which builds about 60,000 Jeeps annually in Beijing, once thought it would get a coveted minivan deal in China, but it fizzled at the last minute. In July, Mercedes-Benz got it instead. "Nothing is certain in China," says one Detroit executive. Chinese officials deny they have made a decision, and politics may have played a role--word emerged just as President Clinton was meeting Chinese President Jiang Zemin in New York.

But a GM win would cap a two-year overhaul of its Chinese strategy. The company's vast parts-making operation, Delphi Automotive Systems, made its first cautious explorations into the Chinese market in 1993. A year earlier, GM set up a joint venture to produce pickup trucks, but felt that auto-assembly projects were too uncertain.

BOLD GOAL However, since Smith visited China in mid-1994, the auto maker has accelerated its approach to a market that could eclipse the U.S. by early next century. Urged on by his activist board, Smith set a bold goal to make GM the No.1 or No.2 foreign auto maker in China. "To maintain our stature in the worldwide auto industry, our top management and the board realized a major presence in China was a necessity," says Tom McDaniel, former vice-president of GM's Asian and Pacific operations.

To run its China operations, Smith dispatched Rudolph A. Schlais Jr., formerly head of Delphi's Packard Electric Div. Schlais earned his stripes by negotiating three Chinese joint ventures for Packard. His marching orders from Smith: Win the Shanghai project. "My job is to change our role in China into a major presence," Schlais said earlier this year.

GM's strategy was to bill itself as a one-stop shopping center for technology. Beyond its car design and building capabilities, the company offered the electronics knowhow of Hughes Electronics Corp. and the computer technology of its Electronic Data Systems unit. Similar approaches had worked for others, including AT&T, Motorola, and most recently Daimler Benz, with its $1 billion southern China minivan project. "GM is probably the only company in the automotive world with the resources to work with China on an across-the-board basis," says Schlais.

The approach appealed to the technology-hungry Chinese, who insist that foreign auto makers share some of their vehicle-development secrets to win projects. Chrysler lost the southern China project when it balked at licensing production of its minivan components. "We're very protective of our technology," says one Chrysler official.

But GM figures it has more to gain than to lose by sharing. To that end, it has established two GM-China Technology Institutes to teach Chinese college graduates to design car parts, engines, and transmissions. At least three more are on the way, at a total cost of $40 million. Aside from Brazil, GM has brought Chinese engineers to Detroit to teach them computer-aided design and other aspects of vehicle development. "The Chinese are going to get the technology somewhere," says David Cole, a University of Michigan auto consultant. "It might as well be you rather than your competitor."

GM officials hope that someday China will become a linchpin in Asia, with the region as a global source of auto parts, low-cost vehicles, and even engineering expertise, linked to design centers in the U.S., Brazil, Europe, and Japan. "You'll be seeing all these pieces coming to the forefront," Schlais promises.

GM also appears to have taken the Shanghai prize for pragmatic reasons. It offered Shanghai Automotive the staid Buick Regal and its internationally designed 1997 minivan. Ford, meanwhile, offered the conservative Chinese a version of its jazzy new Taurus and its big Windstar minivan. The Chinese reckoned those models were not as well suited to their needs.

CRUSHING BLOW. For Ford, the only Detroit auto maker without a high-profile vehicle-producing venture in China, the loss would be a crushing blow. Ford made a big push into China this year by establishing a $40 million joint venture with Jiangling Motors, which followed a $200 million investment in four parts plants. The parts operations with Shanghai Automotive gave Ford hope that it could overtake GM in the race for the big joint venture. Ford says losing the Shanghai connection won't put an end to its prospects in the market of 1.2 billion. "There will be many more deals in the future," says Ford Chairman Alex J. Trotman. "This is one step in a very long, unfolding journey in China."

Not all is going well for GM in China. Just as its joint venture factory in northeastern China was about to crank out pickup trucks last spring, GM's partner, Jinbei Automotive Co., was acquired by First Auto Works of Changchun, and the new owner wanted to renegotiate. That put everything on hold. Schlais now optimistically predicts that the Jinbei deal is at "a turning point."

For now, GM feels that prospects are much better with Shanghai Automotive. By impressing the Chinese with its global operations--and anteing up its proprietary technology--GM has the chance to become an influential new homesteader in China's automotive frontier.

GM'S CHINA PRESENCE

-- Front-runner in $1 billion venture with Shanghai Automotive to assemble midsize cars and minivans

-- Renegotiating a $30 million joint venture with First Auto Works to build pickup trucks

-- A dozen ventures by its Delphi Automotive Systems unit to make car parts

-- Investing $40 million in five technology institutes to teach design of car parts, engines, and transmissions

DATA: BUSINESS WEEKBy Keith Naughton in Detroit and Pete Engardio in Hong Kong, with Katie Kerwin in Tokyo and Dexter Roberts in Beijing


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