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The Honolulu Advertiser
Posted on: Sunday, January 23, 2005

GM's China business is crucial to its future

By Jamie Butters
Detroit Free Press

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 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 easily could 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.

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 near or 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.

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.