The China Drive

The Mickey Mouse jingle is sounding again at station 121R on the Shanghai General Motors assembly line. The procession of semiassembled cars and minivans halts, and workers start frantically pulling off an exhaust pipe from a blue minivan. Dennis Dougherty, GM's man in charge of manufacturing, is watching the process apprehensively from 50 yds. away. Blue-uniformed Chinese engineers come running to help. But Dougherty doesn't move. Two minutes later, Mickey Mouse stops, the line starts moving again...and Dougherty's expression relaxes.

"It is gut wrenching. There's something wrong, and your instinct is to jump in there and fix it," says the 48-year-old Maryland native, who has been in Shanghai since 1996. "But you've got to let the system work, got to let the team you have trained solve the problem."

In the beginning, there were so many problems that nobody outside the small Shanghai GM (SGM) project team thought the venture could work, even with $1.5 billion to invest. Build a factory in a marsh, train Chinese workers to international standards and bring to market a car costing $40,000 in a country where per capita GDP is less than $800? In two years?

But work it has. In its first year of production last year SGM sold 20,000 Buick Century sedans--more than double the target--and declared a $75 million profit. In addition to the original model, the company has launched two new vehicles, including a minivan, which goes on sale this week, only five months after the plant geared up production for it. There have been plenty of problems and more than a few Mickey Mouse alarms along the way, but the auto plant has become a textbook example of how a joint venture in China can succeed--as well as a prime exhibit in the politically charged debate over U.S.-China trade.

Just as President Bill Clinton launches a final effort to convince Congress that China deserves permanent normal trade status, there are still plenty of critics who see the communist goliath variously as a strategic threat to the U.S., a vast sweatshop economy swallowing up American jobs and a serial abuser of human rights. Even free-trading multinational corporations experience enormous frustrations trying to do business in China. Countless joint ventures have soured on disagreements between the partners, contract violations and unrealistic expectations of quick profits. A survey last year by management consultants AT Kearney found that 60% of all foreign companies were unprofitable in China.

It could be that SGM is an induplicable exception. But talk to foreign executives on the ground--including the skeptics who ruled that GM would never make it--and they'll tell you SGM's achievements are a remarkable symbol of what is possible. "It's the vision thing," says Patrick Cranley, head of the Cigna insurance group and chairman of the American Chamber of Commerce in Shanghai. "GM knows what it is in China for."

In short, that is to leave other automakers in its dust. So far, with the exception of Volkswagen and new efforts by Honda and Audi, nearly every other foreign-car company in China has wrecked its hopes for a quick piece of the world's fastest-growing market. In the 1990s, Chrysler shut its China offices, Peugeot-Citroen closed a loss-leading factory in Guangdong, and even Audi is still seething over the reverse engineering of its 100 model by a Chinese manufacturer, after its own production license for that model expired. GM had a classic failure with its first venture--a factory to produce pickups in the northern city of Shenyang. It was established in 1991, struggled for years, and was finally mothballed in 1996 after producing just 300 vehicles.

That might have been the end for GM had it not been for a heroic personal campaign by then CEO Jack Smith. Frustrated at the inability of the world's largest car manufacturer to make any headway in the world's most populous country, Smith sat down in 1994 with Vice Premier Li Lanqing to hammer out what it would take for GM to be successful in China. The Chinese side was unequivocal. There had to be a long-term commitment, a readiness to transfer technology to the Chinese and the introduction of Chinese employees into upper management. In short, GM would have to function as a Chinese company, for the Chinese, and not, in Smith's words, "as a U.S. company in China."

Back in 1994, many GM executives balked at the technology-transfer requirement. China has 112 car factories, but they are state-owned, inefficient producers using old technology. The country's largest producer, First Auto Works, turns out just 300,000 vehicles a year--a small fraction of GM's 5 million annual production in the U.S. It was no secret that the Chinese wanted to develop their own car industry using foreign technology, and after the Audi 100 experience, foreign carmakers were cautious of giving China up-to-date technology.

Still, Smith had two advantages: his enthusiasm and his counterparts, who were in Shanghai, not Beijing. The GM veteran embraced what he called a "paradigm shift"--the company would try to forge a long-term strategic relationship with the Chinese, to get a head start in the market. If that meant giving away modern technology, so be it. Meanwhile, instead of wining and dining China's central-government bureaucrats, GM strategists decided to direct all their negotiating efforts at Shanghai, run by the powerful and increasingly autonomous acolytes of President Jiang Zemin and Prime Minister Zhu Rongji. Smith was so intent on securing a deal that he kept a bag packed in his Detroit office, ready at a phone call's notice to fly out for another round of talks. The following year, GM beat out Ford, Toyota and Mercedes for the license to produce high-end sedans in Shanghai.