American Wheels, Chinese Roads

The Story of General Motors in China

Michael J. Dunne

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9780470828618
• eBook ISBN: 9780470828656
• Edition: 1
• Topic: Business
• Subtopic: Automobile Industry
• Index: Business

How could one company—General Motors—meet disaster on one continent and achieve explosive growth on another at the very same time?

While General Motors was hurtling towards bankruptcy in 2009, GM's subsidiary in China was setting new sales and profit records. This book reveals how extraordinary people, remarkable decisions and surprising breaks made triumph in China possible for General Motors. It also shows just how vulnerable that winning track record remains.

No small part of GM's success in China springs from its management of shifting business and political relationships. In China, the government makes the rules for—and competes in—the auto industry. GM's business partner, the City of Shanghai, is both an ally and a competitor. How does such an unnatural relationship work on a day-to-day basis? Where will it go on the future? General Motors also engages in constant battles with other global and Chinese car makers for the hearts of demanding Chinese consumers. Dunne gives us rare glimpses into the mindsets and behavior of this new moneyed set, the worlds newest class of wealthy consumers.

China is already the number one car market in the world. During the next ten years, China will export millions of cars and trucks globally, including to the United States. American Wheels, Chinese Roads presents readers with fascinating illustrations of what to expect when Chinese cars, companies, and business people arrive on our shores.

Part One

Rules of the Chinese Road

Chapter 1

SCALING NEW HEIGHTS

The producers of 60 Minutes had unearthed a story, and they wanted the inside scoop: How had General Motors managed to compete—indeed, to thrive—in China, while the rest of the company declined into the shameful bankruptcy of 2009? They put this question to GM executives in China and Detroit during the summer of 2010. But GM wasn’t talking, so the program was shelved.

That’s too bad, because 60 Minutes viewers missed the opportunity to hear a good story. Not a fairy-tale story with a happy ending for all, but a story that would bring to life the strange and unfamiliar rules of the road that make doing business in China a very uncertain endeavor.

If you gauge China accurately and have a little luck, you make a fortune. Get it wrong, and there will be no good Samaritans to help you out of the roadside ditch. For GM, there were many potholes, detours, U-turns, setbacks, surprises, and disappointments before any money was made.

If the executives had spoken on camera, viewers would no doubt have heard a litany of the traditional factors of success: product, pricing, positioning, and placement. Those are all important, of course. But they do not get to the heart of how competition works in China. To understand how GM—or any company—flourishes in China, you must begin with a look at the very different nature of that competition. In China, everything begins with a license.

You don’t just walk into China and start selling Buicks and Chevys and Cadillacs. You need a license to build cars. You need a license to sell cars. You need a license to import product. You need a license to export product. You need a license to turn your Chinese yuan into U.S. dollars. You need a license to do just about anything that involves money—which is to say you need a license to do most things in today’s China.

Even small businesses are closely regulated. Any foreign company that opens a subsidiary in Shanghai must make a minimum $140,000 initial capital contribution. It’s a rule. Once the money reaches a Chinese bank, it stays there. If one month later, you have a change of heart and want to move your money back out, well, you can’t. It remains in China until your firm is formally closed, which could take a year or more. Maybe there will be an audit, which will push the timeline out even further.

Frank Rocco, a street-smart attorney with nine years in Shanghai, distills the rules around money flows. “China makes it very easy for the money to come in, and very difficult for you to move it back out.” And even after money enters a bank account inside China, you still need to get approval for a business license.

To get a license in the car industry, you need a Chinese partner. It’s the law. If you find a partner and if the government approves of the partnership, then the partner can help you get the license. Foreign car companies building and selling cars in China all have partners. And all of the Chinese partners have no less than a 50-percent ownership stake in the joint venture. That’s a regulation, too.

In the car industry, the domestic partner is usually a major municipality like Shanghai, Beijing, Guangzhou, or even the central government itself. Some licenses are issued by the city, your partner. Other licenses are approved and issued by the central government. It’s complicated, to be sure.

China protects its auto industry, citing national security as its primary reason, so some licensing is understandable. But the strict culture of licensing does not stop at cars. The Chinese government has its hands in almost every aspect of the economy, often to the unending frustration of foreign companies trying to penetrate this gigantic marketplace.

You can get a feel for how the licensing system shapes business in China only by going there. After your flight lands at the Shanghai Pudong International Airport, you make your way past the giant floor-to-ceiling advertisements for DHL, MasterCard, and Bank of China. You likely will be struck by how brightly lit, modern, and clean this massive airport really is.

You work your way through a dense river of people in the arrival hall and step outside into the thick Shanghai air, to the curbside taxi stand. This is the point where you really enter China, where you first notice how licenses define the commercial landscape.

As you’d expect, the taxis are a myriad of colors—red, white, burnt orange, light green, blue, and turquoise, each representing a different company. But the make and model never vary. Without exception, every taxi is a Volkswagen Santana; an aged model built in Shanghai without interruption since 1984. The Santana is an inexpensive, utilitarian machine that moves reliably from point A to point B. That pretty much exhausts the car’s strong points.

Invariably, you have to tug on the door handle a couple of times before the latch succumbs and allows the back door to open. Once inside, you’ll note the seats are completely inadequate, the clutch squeaks, wind noise invades through the loose window seals, and the air conditioning never quite makes it to the back seat. The aging Santana taxis’ mechanicals and plain styling are an odd juxtaposition to the twenty-first-century airport. That’s to say nothing of the surfeit of refined, luxury autos—Audis, Cadillacs, Mercedes, and BMW X-5s—you can see rolling in and out of the airport parking lot across the street.

So how is it that this wealthy city, the leading light of China’s march to capitalism, the trend-setter of Chinese fashion and bling, permits the aging and clunky Santana to monopolize the city’s fleet of taxis?

It comes down to money, of course. It cannot be overstated that in China, every channel to money has a license attached to it. A permit. Permission to enter the market.

There are forty-five thousand Santana taxis coursing through the streets of Shanghai. Most of them belong to one of a handful of state-owned enterprises, the largest of which is DaZhong, which means “the masses.” Dazong’s taxis are all painted turquoise.

The story of Shanghai’s leading taxi service, DaZhong Taxi, tells us much about the way China works. It also provides insight into how GM competes in China. Formed in 1988, the Shanghai DaZhong Taxi Company was one of the first companies to list on the Shanghai Stock Exchange in 1992. “That’s the most important difference,” explains a driver from a competing, orange-painted taxi, referring to the success of DaZhong. “They got approval to list [on the stock exchange], which gives them more money. They take that money to advertise. They got permission to list and we did not.”

Yang Guoping cofounded Shanghai Dazhong. In 2000, CEO Yang was selected as a “national model worker,” a prize bestowed by the Chinese Communist Party upon the best workers in the nation. Five years later, the Party selected Yang as one of the “Top-10 Individuals with Outstanding Quality Achievements in China.” Out of 1.4 billion people, Yang was selected as one of the ten best businessmen.

Like many other successful businesspeople in China today, the fifty-five-year-old Mr. Yang has been both an active member of the Young Entrepreneurs Association and a loyal member of the Communist Party. These seemingly at-odds affiliations are the result of a half-reformed society that is partly command economy (one in which the government regulates supplies and prices) and partly unbridled capitalism. Or, more accurately, it is unfettered capitalism within the arbitrary bounds outlined by the Party and its government officials.

Back in 1998, then Chinese Premier Zhu Rongji, formerly mayor of Shanghai, wrote an inscription to mark the company’s tenth birthday: “It is arduous and hard to create a business and it is a long way to scale new heights.” A long way to scale new heights becomes a little shorter when you understand where to buy your taxis.

“They have the right to buy any car,” explained the driver of the orange-colored taxi.”But they don’t exercise that right, you see?”

It is not a matter of limited choice. Today there are more than sixty different car brands on offer in China. There are more car brands produced in China than in any other market in the world, including the United States. There’s Mercedes, Audi, BMW, and Volkswagen from Germany; Ford and GM from America; Hyundai and Kia from Korea; and Toyota, Nissan, Mazda, Honda, and Suzuki from Japan. Even the French (Peugeot and Citroën) and the Italian (Fiat)—companies that do not compete in the United States—are now in the Chinese game. The Chinese car marketplace is further enriched by more than two dozen Chinese car brands, led by names like Geely, Chery, Great Wall, Brilliance, and BYD.

Indeed, Mr. Yang could buy cars from anywhere. But he always buys his cars—his Santanas—from Shanghai Volkswagen, the Chinese-German joint venture. He does this primarily because doing so provides a kind of insurance policy. So long as DaZhong buys Shanghai Volkswagen Santanas, there is a good chance that its license to manage the city’s largest fleet of nearly nine thousand taxis will be renewed by city authorities. Yes, DaZhong buys its taxis from the same place it gets its business license.

Every time DaZhong Taxi Company buys or services a Santana, the City of Shanghai takes half the revenue. That is because the City of Shanghai also happens to own the Shanghai Automotive Industry Corporation (SAIC). This massive state enterprise achieved $25 billion in revenues in 2008. That was enough to place it at number 359 in the Fortune 500 in 2009.

SAIC runs two giant car joint ventures—Shanghai General Motors and Shanghai Volkswagen—that together employ tens of thousands of people. Shanghai GM is situated on the eastern side of the Huangpu River in an area known as Pudong. Shanghai VW makes camp on the western side of the river, or Puxi, where it produces the Santanas. There’s actually a third major player here, too: the City of Shanghai also makes and markets its own brand of sedans under its Roewe brand name.

In 2010, Shanghai GM and Shanghai VW produced two million cars. All of the taxis and a large percentage of the cars seen tooling on the roads in Shanghai are made by these companies, with half of the ownership belonging to the city. The Buick Regals and Excelles, Chevrolet Cruzes and Volkswagen Passats, Tiguans, and Polos come from the Shanghai GM and Shanghai Volkswagen joint ventures.

Like all foreign automakers wishing to build and sell cars in China, GM was required to form a joint venture with a Chinese partner. That is the law. Ninety-five percent of cars sold in China are produced in China, because steep taxes make imports extremely expensive. The joint venture gives GM and VW access to a license that allows them to build and sell cars. No joint venture, no car factory, and no chance at selling in the world’s largest automotive market. With the joint venture, GM has anted up for a license and will be dealt some cards and some room in which to play them.

The commercial goal of selling more GM Buicks and Chevrolets in China becomes a political and economic campaign to enhance the power and might of the city of Shanghai. Think of it as Shanghai, Inc., with the mayor as chairman and CEO.

It is in this complex competitive arena that GM has found its way to incredibly strong growth and profits. In 2010, GM and its Chinese partners built more than one million Buicks, Chevrolets and Cadillacs and generated close to $1 billion in profits. GM splits the revenue and profits with the City of Shanghai.

In a front-page article that ran in July 2010, the New York Times captured the success story.

As G.M. prepares a public stock offering later this year, China is emerging as a crucial piece of its appeal to potential investors. In the first half of this year, G.M.’s China sales rose 48.5 percent over the same period last year, and for the first time ever, the automaker sold more vehicles in China than in the United States. Just 13 years after entering China, G.M. now says the country accounts for a quarter of its global sales.

Why would GM executives not want to share this success story with 60 Minutes in advance of the IPO? One possibility is that a close look at China would embarrass people in charge of GM’s woeful operations in the United States and Europe.

But a more likely reason is that, sooner or later, the investigative reporters at 60 Minutes would come across a startling fact: GM’s success in China depends heavily on the goodwill of its partner, SAIC, which, of course, is owned by the City of Shanghai. The Shanghai municipal government, in turn, is part of the Chinese government. The officials at all levels of the government ultimately report to the Chinese Communist Party. The difficulty, then, is how to explain to American viewers—the taxpayers who owned 66 percent of the company in 2010—that one vital ingredient in GM’s success is its implicit alignment with the Chinese Communist Party?

To enter and compete in China, you need a license. To get a license you need a friend. Once you have a license, that friend can help you build your business. The better the friendship, the more lucrative the business. If the friendship ever turns sour, the business will be in trouble. Your friend might ultimately aim to control your business.

“It is arduous and hard to create a business and it is a long way to scale new heights” said former Premier Zhu Rongji, who proved instrumental in helping GM secure a license in China to make cars.

GM had to travel a long hard road before it scaled new heights in China.

Chapter 2

MANY DETROITS

If central government planning officials in Beijing had their way, Shanghai would be one of only a handful of automotive manufacturing centers in China. The officials believe that China’s automotive strength must arise from concentration and consolidation of people, assets, and production volumes, just as it has in America, Germany, Japan, and Korea.

But that’s not been the case. In today’s China, where power has devolved to the cities, every mayor wants a piece of the automotive action—it means more jobs and a larger tax base in their own backyard. As the total market for cars and trucks approaches twenty million vehicles a year, everyone wants in. As a result, there are many, many “Detroits of China.”

Leading Chinese cities like Beijing, Guangzhou, Wuhan, and Chongqing have developed massive automotive industrial complexes that each employ tens of thousands of people. They partner with foreign automakers to access products and manufacturing technologies. Think of powerful municipalities as the hubs of the automotive ind...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Acknowledgments
• Introduction
• Part One: Rules of the Chinese Road
• Part Two: Pole Position, Yellow Flags
• Part Three: Negotiating the Obstacle Course
• Part Four: Quick Acceleration, Then a Tight Corner
• Part Five: The End of the Beginning
• Conclusion: The End of the Beginning
• Index