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Monday, January 23, 2006

Byline: Jamie Butters

Dec. 22--SHANGHAI, China -- When he speaks of doing business with General Motors, Hu Mao Yuan likes to tell a parable about a man who asks God about heaven and hell.

God first shows him a land where all the people have a delicious meat soup. But they have spoons longer than their arms, so they go hungry and suffer in hell.

Then God shows the man another place where everyone has the same wonderful soup and same long spoons. But here they use the spoons to feed each other. This is heaven.

"I believe our relationship with GM is heaven," says Hu, the chairman of Shanghai Automotive Industry Corp., GM's business partner in China. Then he adds: "Sometimes, they want to whack us in the head with the long spoon... so we have to ask God for help to remember to feed each other."

With 1.3 billion people and one of the world's fastest-growing economies, China has the potential to be heaven for General Motors Corp. Prices are high and profits are deep at the moment. If enough people switch from pedaling bicycles or cramming themselves into city buses, GM could find itself with a leading position in an enormous market.

The Communist-led country already has become the world's third-largest automobile marketplace -- and could overtake the United States as the biggest vehicle market in the world in 20 years. GM could easily sell more Buicks in China than in the United States in a year or two, and expects to sell up to 25 percent of its Cadillacs in China by 2010.

Or China could be bloody hell. In its loosely guarded markets, bootleggers can easily steal the work of others, from DVDs and watches to corporate logos and entire vehicle designs. Doing business in the shadow of a still-authoritarian government also comes with inherent political risks. But the biggest danger is that China's auto market will soon become just like the United States, western Europe or Japan: too many companies making too many cars, leading to miniscule profits for all but a handful of the most efficient manufacturers or popular brands.

But the opportunity to get established in a country with five times as many people as the United States is too big to ignore. GM is hoping to make money in China to help meet its enormous pension, health care and other burdens at home. Beyond that, it also wants to put more pressure on Ford, Toyota and other competitors by forcing them to divert money and attention into competing with the giant automaker in China.

Says Rick Wagoner, GM's chairman and CEO: "Us being stronger in China is far better for our U.S. dealers and our U.S. employees than us being weak in China."

In the early '90s, Ford and Toyota were angling all over China in hopes of catching up to Volkswagen, already established there, and getting in position for the day -- someday -- when "socialism with Chinese characteristics," as Deng Xiaoping called his modest market reforms, would turn masses of comrades into consumers.

But in those years, GM was just trying to survive its own failed social experiments. Chairman Roger Smith had completely misunderstood Toyota's now-legendary manufacturing system: He wasted billions on robots that made worse cars than people did. GM's board of directors eventually fired his hand-picked replacement and brought in new management led by Jack Smith, the soft-spoken New Englander who had run the company's profitable foreign businesses.

Once things settled down, Jack Smith and the board concluded that, to make money for shareholders and maintain its place as the world's biggest automaker, GM simply had to get in the game in China.

Chinese incomes are shockingly low by U.S. standards: about $1,000 per year on average. That average, however, combines the 900 million or more Chinese in rural areas and Western cities, which tend to be poorer, with 400 million or so along the eastern coast, including major cities like Beijing, the capital, and Shanghai, the economic center.

In that coastal region, GM was looking at a population with the same number of cars and same incomes as Poland -- but with 10 times as many people.

About that time, China's Communist leadership let it be known that a foreign automaker would be allowed to form a joint venture with a Chinese company to make midsize luxury cars.

For Smith and the board, it was a no-brainer.

For Rudy Schlais, however, it was not such an easy decision.

A decade ago, he was in Warren, Ohio, happily running Packard Electric, a $4. 5-billion GM subsidiary that was competing well against some of Japan's best auto suppliers. Packard is now part of Delphi Corp.

So he was a little taken aback when Jack Smith asked him to lead GM's efforts in China.

For one thing, Schlais had always been a parts guy -- not an assembly plant manager or sales-and-marketing whiz. Besides, he didn't know the language or Chinese culture. "I'm not the right guy," he told Smith.

He went home and talked to his wife. She was not thrilled about moving so far away. Their kids were married and just starting their own families.

But they could see where it was going: The boss asked. The boss who had restored calm and order to GM.

A month later, Smith called him again: "We need you to go to China."

Schlais relented. He started figuring out how to manage this life change -- while looking everywhere to figure out how to do business in China.

Two days before Schlais and his wife were set to move, China's Vice Premier Li Lan Qing came to visit Michigan, and they hit it off. Driving around, looking at plants and dealerships, they talked long and deeply about the U.S. auto industry and Chinese industry and what each had to offer the other. Schlais decided he needed more time with his new best friend.

So his wife headed alone to China to find them a place to live as he stayed behind to continue a conversation that eventually produced five principles that would guide GM through its courtship of China:

--GM would look at China as part of the global market and produce world-class vehicles, not just hand-me-down designs that were just "good enough for China."

--GM would bring the parts industry to China -- including engine assembly -- as well as assembly plants.

--GM would provide world-class technology that China needed.

--GM would use Chinese people, though there would be no useless busy-work.

Finally, the attitude needed to be one with a long-term view. As Schlais put it: "You may have some bad times, but you don't abandon China."

And he had one extra principle, a commandment from Smith: Never promise something you aren't certain you can deliver.

With those ideas in hand, Schlais now had a structure for each meeting about GM's new venture: He could give a point-by-point explanation of how what was good for GM was good for China. As he settled in China, Schlais made a point of fitting into the culture. He made friends with Chinese artists. He tried acupuncture to help recover from surgery. Like a young Shanghaiese couple, he and his wife took strolls along the Bund, the riverfront walkway that divides old Shanghai, called Pu Xi (poo- SHEE), from Pu Dong, which was transformed from rice fields into a world economic capital in little more than a decade.

"I didn't want to just live as an American in China," Schlais said.

He learned enough about Chinese business culture to quickly grasp the importance of meetings and personal connections. He brought Smith for several visits, once scheduling him for two 14-course meals in the same night to demonstrate the top man's commitment to China -- and to Schlais.

In a culture that is so sensitive to titles, that kind of thing is supremely important, as it would be when Schlais and Smith went to visit China's leader, Jiang Zemin.

The chief executive of the world's largest automaker was calling on the ruler of the world's most populous nation. It was, by definition, a big meeting.

It would be conducted in the Zhongnanhai, the walled compound sometimes called "China's Kremlin." Built as an imperial getaway 1,000 years ago, it includes a presidential palace, Communist Party offices and two large lakes.

Few visitors are invited to the Zhongnanhai, where they first see a giant screen of Maoist calligraphy that reads "Serve the People." The GM delegation and Chinese hosts went inside a hall, around great wood-framed walls of screen art. Schlais remembers how he was struck by the beautiful restorations, and wondered whether they were originals, immaculately maintained for decades.

Meetings in China are quite ritualistic: Leaders greet each other, then move down the line to people with lesser titles. Only the leaders speak. They share small talk, then get down to business. After the business is settled, if the leaders like each other, they may sit awhile longer.

Despite the awesome security that gave the impression of privacy, the meetings were actually quite public: The Chinese government recorded them and occasionally broadcast portions over the radio.

Educated as an engineer, Jiang had interned at the Stalin Automobile Works in Moscow and helped manage a First Auto Works plant in Changchun in the 1950s -- back when GM ruled American streets with Buick Roadmasters and Chevy Bel Airs.

From the start, Schlais said, Jiang liked Smith.

"He was not a dogmatic, blustery businessman, which" Jiang "had, you know, begun to see, especially out of the U.S.," Schlais said.

But perhaps the clincher was at the end of the first meeting, after the formal business was done.

Rising to shake hands, Smith presented Jiang with a Chinese stamp made of fine stone, bearing the GM logo and Jiang's name. All the members of Jiang's staff received a stamp with their name, too. It was an idea Schlais had picked up from an artist friend in Shanghai.

It was just a gesture -- but a significant one.

"That was probably one of the best-received gifts, because we were working with their traditions," Schlais recalled.

When GM won the right to partner with Shanghai Automotive Industry Corp. -- the 50/50 joint venture called Shanghai GM was formally created in 1997 -- Schlais set right to work putting together a management team.

He said he asked Hu, the man with the parable about heaven and hell, to leave Georgia Tech's MBA program early and return to Shanghai Automotive. Hu had started his career at Shanghai Tractor Co. in his hometown in 1968. He seized the opportunity and traveled to Detroit to meet with some GM executives, who approved of Schlais' choice.

Schlais also proposed Phil Murtaugh as the No. 2 American in the partnership. A native of small-town Ohio, Murtaugh had graduated from the GM Institute, a Flint engineering school now known as Kettering University, and earned a master's degree at Stanford University. More important, he had demonstrated, while working with GM's partner Isuzu in Japan and London, that he could represent GM as he operated in a foreign culture. Shanghai Automotive approved of him, and a partnership was born.

Painfully.

Nowadays, people involved with Shanghai General Motors, or SGM, say it has its own culture, one that mixes talents and styles of Chinese nationals and GM types from places like Australia, Germany and Michigan.

But in the early years of the joint venture, it was clear that SGM was made up of two camps: GMers and the Shanghaiese. Each held separate staff meetings, then brought entrenched positions to the table, where neither side would budge for fear of losing power or losing face.

Like parents in a dysfunctional family, Hu and Murtaugh set out to start over, hammering out three rules to guide their futures together.

Rule 1: Never argue in front of the staff. It gives them an excuse to draw lines. Arguments are OK, but only behind closed doors.

Rule 2: After an argument, never keep silent for more than 2 minutes. Hard feelings can't be allowed to fester.

Rule 3: No matter how difficult the problem, they should solve it between the two of them. Calling in their bosses to negotiate a solution, they feared, could quickly become a debilitating crutch. "It is Phil and I who work at the joint venture and know... best ourselves," Hu said.

Wagoner says GM has been fortunate to pair up with Shanghai Automotive, the leading Chinese maker of passenger cars.

Although owned by the city government of Shanghai, it is nimble and entrepreneurial -- at least compared with enterprises entirely owned by the Chinese central government. The holding company, whose board includes Jiang's son, boasts 63 joint ventures -- all profitable, said Hu, now chairman of the company. Those ventures include partners such as Volkswagen, Visteon, JCI and Delphi.

Its partnerships with GM include a technical center that adapts foreign-designed models to Chinese standards, a newly launched financing subsidiary, and assembly plants such as the Shanghai GM plant in the Waigaoqiao Free Trade Zone in the Pudong New Area. The plant employs 4,000 men and women, including Duan Xiong and his wife.

When Duan goes to work, he changes from his Pacific Surfing Co. T-shirt into a white button-down shirt, no tie. When Duan goes to work, he and his wife leave their son with Duan's mother-in-law. The young family lives during the week in her spotless apartment with hardwood floors and a big goldfish tank. They spend weekends at their own apartment, two hours away, on the other end of Shanghai.

When Duan goes to work, he drives a Buick Sail, which he helped launch two years ago. He bought the production pilot at an employee discount, putting 20 percent down. He now has it paid off. He steers the blue wagon -- it's his wife's favorite color -- past a Gillette plant across the street and drives 5 minutes to a company parking lot of grass and cement, where the couple and other workers catch a shuttle bus to the plant. They exit at the second stop.

When Duan goes to work, he wears clear plastic safety shields that slip on either side of his wire-rimmed glasses.

He stands in a plant-floor workroom, and speaks calmly and briefly to 36 front-line workers -- called team members -- before sending them out to final-assembly workstations 040 to 064. Like any group leader at, say, GM's Lansing Grand River plant, he then discusses the production plan in greater detail with the five-team leaders. They then attend a 20-minute session with the area manager. Surrounding them are charts showing the plant's performance. The charts are grouped under headings such as "QUALITY," "COST" and "SAFETY."

Without a doubt, China has many dangerous workplaces. But this is not one of them. Every employee at SGM gets a full week of training on general and department-level safety. They even get written up at work if they have traffic accidents while driving home.

"The intent is to educate them that safety is not just for the workplace," said Tom Wilson, a manufacturing chief at the facility. It runs 24 hours a day, 6 days a week.

The emphasis on safety does not keep SGM from getting the most out of its workers.

Efficient use of labor is hardly standard practice in China. The Beijing airport, for instance, has a crew on the graveyard shift that hand-washes the luggage carousels, slowly and ineffectively. In Shanghai, the city government hires crossing guards -- redundantly re-enforcing the crosswalk lights -- just to keep employment up.

The SGM plant is not like that, but is still far from world-class efficiency in terms of labor hours per vehicle. No great worry. Labor costs, at most, 10 percent of what it costs in the United States, Western Europe or Japan.

What really counts is the efficiency relative to investment, insists Murtaugh, the president of GM-China. By those standards, he said, "We are at the very upper levels of GM."

Murtaugh won't talk about -- and forbids subordinates from disclosing -- SGM wages. "You wouldn't understand," he says.

To be sure, it is somewhat inconceivable that the average income in China is about $1,100 per year. A $5,000 income is considered the upper end of middle class. But Murtaugh notes that turnover is incredibly low and that union negotiators once insisted that GM give smaller raises than management had proposed, because they didn't want to see the plants become uncompetitive.

Staying competitive is a focus at all levels of the plant. To keep from being stuck with the wrong mix of vehicles, tools at the Shanghai GM plant are bolted into the floor, rather than planted in cement. That way, they can be moved more easily to accommodate new model introductions.

The plant currently makes five Buick models: the Regal, the Daewoo-based Excelle sedan, the Sail and S-RV wagons, based on the Opel Corsa, and the GL8 minivan, sold as an "executive wagon."

The GL8 is exported in small numbers to other Asian countries, just to show that Chinese-made Buicks can stand up to entrenched Japanese models, Murtaugh said.

With its fresh start in China, GM can use many of the industry's best practices, unencumbered by UAW orthodoxy or hard feelings earned by previous generations of management.

In that sense, it is quite like the arrival of Toyota and Honda in the United States 20 years ago. Like those leading manufacturers, and the joint venture GM has with Toyota in California, GM refers to its line workers in China as team members or associates.

But job titles aren't enough. Shanghai GM is also going to have to see Toyota-like improvement in efficiency and quality year after year. If SGM can achieve global standards, there will be awesome opportunities for workers there -- especially those like Duan, who started as a team leader before being promoted to group leader.

"I think because SGM is still a growing company, there will be opportunities, " Duan said. "... I think I like this company."

SGM is a growing company, indeed. GM and Shanghai Automotive announced this summer that they planned to invest a combined $3 billion over the next three years to more than double their manufacturing capacity.

That's an aggressive plan, but one entirely funded by the existing Chinese operations.

It also is only about enough to keep up with the competition.

CSM Worldwide, a Farmington Hills company that forecasts auto- trends, projects Chinese manufacturing will roughly double between 2004 and 2009, led by growth at Hyundai, Honda and Toyota.

"What I lose sleep over is how am I going to raise my market share to the level expected by Rick Wagoner," says Murtaugh. He didn't specify that goal.

Along with the usual tough competitors, including BMW, Volkswagen, DaimlerChrysler and Ford, Murtaugh and SGM are also competing with a hundred or so domestic Chinese automakers, some of whom don't seem to play by the same rules as everyone else.

One of the most egregious cases, from GM's point of view, is that of the Chery QQ, a cute little Chinese car that looks for all the world like a Chevrolet Spark.

The Spark, in fact, is a re-badged Daewoo Matiz. GM led a takeover of then-bankrupt Daewoo in 2002 and planned to launch the Spark. But Chery -- a Chinese company -- quickly introduced the QQ, thereby claiming design rights. Priced at least $1,300 less than the Spark, the Chery now outsells the Chevy, 3-to-1. How the Daewoo design became introduced to Chinese consumers as a Chery months prior to the Chevy's release is a bit of a mystery.

Some suspect that engineering plans were smuggled out of Daewoo before GM salvaged the company from bankruptcy. Others say the Chinese automaker could have simply bought a Daewoo in Korea, dismantled it and recreated each part -- a process called "backwards engineering."

GM won't say publicly what it thinks happened. It had tried to negotiate a solution through government channels, but last week filed a suit against government-owned Chery, based in Anhui province.

On Tuesday, China's top court announced stiffer punishments for copyright infringement.

But in the GM-Chery case, the models are so similar -- a door can be taken off one and securely fitted to the other -- that it makes a joke of China's intellectual-property rights.

At the auto show in Beijing in June, Murtaugh bumped into Dario Trucco, the chief executive of Italian design house Giugiaro, which Daewoo had hired to craft the Matiz (before it became a Spark). The GM executive wryly introduced Trucco as "the creative genius behind the Chery QQ original design."

In over developed markets, such as the United States and Japan, the mantra of auto executives is that succeeding in the industry is all about the product. But Joseph Liu, one of the more astute observers of the Chinese auto industry, says the key to the world's fastest-growing vehicle market is something else.

"The challenge for China is not the product that you have in China for China, " said Liu, GM's expert on sales, service and marketing in China. "It's how you work with your partner and dealer network."

Wang Zhe, who is in car sales, thought his team knew how to sell, because people came in the Buick dealership where he had worked, and the team sold them cars.

Not much to it.

But GM saw that there was much room for improvement at Chinese dealerships. So it taught, standardized practices -- such basic things as always greeting customers when they come in the door -- and sales-closing rates at Zhe's Buick dealership soared, making it one of the top stores in China.

The store did so well that the owner was awarded a Cadillac franchise, and Wang is now deputy general manager.

Last June, he was standing in sawdust, wearing a gray suit, plastic safety glasses and a white hard hat, while laborers scurried to complete the basic construction by the end of the month, before the interior finishes were installed.

The wide-open floor plan was taking shape. Sliding glass doors would open to the second-floor City Center showroom. To the right, a custom-made bar of black granite would serve as the centerpiece of the Cadillac Cafe, on display to drivers on the busy Third Ring Road.

It would have a full bar -- coffee, alcohol, you name it.

To the left were to be the cars and "consulting offices," as they are called. They were big enough for the buyer to sit with his family -- and, often, the family driver -- while they were briefed on the features and benefits of the Cadillac experience. Many Chinese cars are not driven by the owners.

Further back was a second bar, in a waiting area intended for the chauffeurs.

The man in charge of creating the Cadillac setting, styled to meet Chinese needs, is Paul Biggers.

Biggers grew up in southern Kentucky, where some entire counties don't have two bars, and graduated with a design degree from the University of Cincinnati in 1975. He moved to Nashville in 1986, just as the city was hitting a growth spurt that would make it a development model for mid size Southern cities.

"It was a great time to come to Nashville," he said.

The firm where he was working got some business doing interior designs and furnishings at the Saturn plant that GM was building at Spring Hill, Tenn., to compete with Japanese transplants.

That went well, so he started his own company. Its first big contract was working with the national rollout of the Saturn brand.

He didn't design the look of the dealerships, but he figured out how to capture the desired look -- that this was not a traditional GM brand -- in a cost-effective way.

After Saturn came "Buick and GMC and it just started from that: Pontiac and Chevrolet and Cadillac and Oldsmobile and Saab."

His firm, Infrastructure, now has offices in Houston, Jacksonville, Fla., Columbus, Ohio, and in Detroit at the Renaissance Center.

Biggers racks up frequent-flier miles traveling to China every month or two, as well as checking for consistent design and workmanship in Europe and the Middle East. He has learned to use chopsticks, but not China's official Mandarin language, which is most common in the country.

"Although I'm a Southerner, there's not a language barrier," Biggers said. "All the Chinese speak English. It may be broken, but it works."

Their knowledge of English and their access to the Internet has quickly brought the Chinese consumer class to the prejudices of conventional wisdom: They like European luxury cars best, such as BMW and Mercedes-Benz. Second, they admire high-quality Japanese cars, like Toyotas and Hondas. Everyone else is lumped together.

American cars are often seen as too big and too expensive for regular people -- even the affluent who buy vehicles.

"They definitely make better cars than the companies in China, though they tend to be more expensive," said A.J. Guo, 20, speaking at the Beijing auto show in June. "I think the rest of the people prefer cheaper cars. I think American car companies should build cars here. That way they'd be cheaper than importing them and more people would buy here. "

More people will also be able to buy cars as lending becomes more common.

The Chinese government this year allowed a few foreign automakers -- including GM -- to open financing companies there.

GM makes most of its worldwide profits from lending, rather than automaking. So this is great news, right? Not so fast. As a place to lend money, China lacks some basic building blocks.

For one thing, there are no credit bureaus to tell lenders which consumers pay their bills and which don't. And when they don't, the rules for repossession are impractical and ineffective.

By working with Shanghai Automotive -- with its Shanghai government connections -- GM may be a little better equipped to overcome these obstacles than Toyota or Volkswagen.

As with so much of the Chinese auto industry, the risks and uncertainties are significant. But the potential to make money on loans, and to use loans to boost sales, is too big to pass up.

GM had estimated that about 20 percent of Chinese auto sales in 2003 were financed with loans, primarily from government-owned banks. It now appears that informal loans may also account for a significant chunk of the market.

Whatever the level, it is far lower than the 60 percent to 95 percent of sales that are financed with loans or leases in other countries. Finance departments are noticeably missing from most Chinese dealerships.

The Shanghai city center Cadillac dealership is primarily just a showroom, which is unusual in China. Most are called 3-in-1 stores that have sales, service and spare parts, but such large facilities are not allowed in the heart of the giant city.

At Beijing Shonechung Senwei, a leading Buick dealership on the outskirts of the capital, customers tend to fall into two categories: young people in their 20s, and "middle-age " customers in their 30s and 40s.

And they are almost all first-time buyers, said Dale Sullivan, a vehicle sales, service and marketing expert from GM.

Before cracking open a bag packed with $10,000 or more in renminbi -- few buyers take out loans, remember -- most customers conduct massive research efforts, he said.

They show up the first time with a bundle of papers printed off the Internet. They are seated at a table to discuss their needs, then are shown the vehicles in the Buick showroom.

Fewer than one in five will buy a car on their first visit to a dealership, so it is important to make a good impression and start forming a bond -- one that lasts beyond the no-haggle sale to events in the Buick Club customer lounge, with its karaoke, table shuffleboard and goldfish bowl on the bar.

"One of the biggest things in China is relationships," Sullivan said. "You have to take care of those relationships if you want to do business with somebody."

GM's relationships in China have gotten off to a good start, even if they make some people in the United States uncomfortable.

As Jinya Chen, the Delphi China president, notes, the Detroit automaker needs to make the most of this opportunity.

"Maybe I'm biased, because I work for an American company, " he said. "But if GM doesn't gain this market share in China, then who is going to do it?"

Amy Leang contributed to this report.

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