Chinese Lessons: What GM Has Learned in China

I saw this on Edmunds' inside line today. very interesting...

Chinese Lessons: What GM Has Learned in China
         By Michelle Krebs, Contributor Email  

Date posted: 01-01-3000
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SHANGHAI, China — General Motors in China would make a great case study
for an MBA student. While GM tries to turn things around in the U.S.,
its sales are soaring in China, where the automaker surpassed Volkswagen
to become No. 1 in passenger car sales.

The contrast between GM China and GM North America is stark — and not
lost on top GM executives. Indeed, they smartly are making a case study
of their own of GM China to see what valuable lessons translate to other
markets.

Here's an outsider's view of what that case study should consider.

A little bit of luck: No question, GM has lucked out. Wise GM executives
should recognize some of their good Chinese fortune, indeed, has been
luck. Everyone knew China eventually had huge potential; no one knew
when it would be realized. Absolutely no one — including GM's analysts —
predicted how high vehicle sales would soar in such a short period of
time. GM executives in China joke how every single forecast for industry
sales and GM's volume and share have been way off the mark. In contrast
to its North American forecasts, which have been equally wrong as GM has
underperformed in both sales and market share, GM China has enjoyed
higher sales and share than predicted.

GM China has ridden the crest of the wave. In 1998, China's total
vehicles sales were under 2 million units a year. Last year, they were
just shy of 6 million vehicles, and 2006 is expected to be just north of
7 million. No one now doubts that China will be the world's largest
market for vehicles in the next decade or so. China currently is GM's
second largest market behind the U.S.

Timing is everything: While lucky, GM, at the same time, deserves credit
for its timing. In particular, now retired GM Chairman Jack Smith
deserves — and receives from current GM management — credit for moving
early and fast in China. Smith chose to take the China risk with no
guarantee there would be any wave to ride in short order.

Arriving early allowed GM to partner with the best players (see below),
grab up sales and market share for a dominant position and earn hefty
profits. China has represented a license to print money for early
arrivals as profit margins have been hefty due to demand for vehicles
far outstripping supply. Those margins now are being squeezed as
competition intensifies.

Solid partnerships: Latecomers have been forced to partner with
also-rans, and they have not enjoyed GM's success. Chinese law requires
that a foreign automobile manufacturer operate in China under a joint
venture agreement with a local manufacturer. GM gained a solid partner
with Shanghai Automotive Industries Corp. (SAIC), China's largest auto
manufacturer, which also partners with others, including Volkswagen.

GM has had the luck of a crap shoot with many global partners. Failures
include the costly Fiat fiasco and largely unfruitful Subaru
affiliation. But partnerships related to China have operated well. In
part, success appears to be due to the fact that the partnerships have
been allowed to flourish and develop a life of their own rather than
either partner gaining the upper hand.

In addition to SAIC, GM formed a three-way venture with SAIC China's
Wuling that has been awesomely beneficial. The venture is No. 1 in the
mini truck market with sales soaring by double-digit annual increases;
they are now at more than 400,000 vehicles a year. The big seller is the
Wuling Sunshine, a boxy, vanlike vehicle that starts at under $5,000 U.S.

Further, GM China has capitalized on its non-China ventures, including
GMDAT, the new entity formed from the ashes of South Korea's Daewoo. The
venture has provided critically needed small cars in China as well as
other markets.

Fast and furious: With the foundation laid, GM, notoriously slow-moving,
has traveled at light speed in China.

In 1998, GM had a single assembly facility to build a single model, the
Buick Regal. GM sales that year were about 61,000 Regals.

Today, GM China sells five brands — Buick, Cadillac, Chevrolet, Opel,
Saab and Wuling — more than 30 models with sales forecasted at nearly
864,000 vehicles this year. In China GM has eight vehicle assembly
plants, three powertrain facilities, an engineering and design center,
an automotive financing arm and some of its supplier operations, like AC
Delco and Allison transmission. GM employs more than 20,000 people in China.

Part of the success for its lightning speed in China has been support
without meddling from corporate headquarters. Further, China's Wild West
environment has forced new business methods. Troy Clarke, now president
of GM North America who previously headed GM's Asia-Pacific region, said
decision-making there is fast and different compared with GM North
America. Here, decision-making relies on the meeting calendar. Everyone
gets together, they discuss (likely endlessly) and then decisions are
made. Clarke noted such meetings are impossible in the far-flung
Asia-Pacific region. So they are made in series through phone calls,
which result in quicker decisions.

Thinking global, acting local: GM has capitalized on its global
capabilities, but applied them locally. The Cadillac SLS, introduced at
the recent Beijing auto show, addresses the needs of the Chinese market
for a roomy, luxurious backseat for chauffeur-driven riders. The SLS is
a stretched version of the STS. Same, too, for the Buick LaCrosse. Both
were designed and engineered largely in China (the LaCrosse) or with
heavy influence from China (the SLS). In the same vein, GM China has
been able to take vehicles from other markets and create new niches,
addressing a specific need in China.

GM China appears to be doing a better job of truly listening to
customers and partnering with dealers as well as doing more with less
than GM North America has.

WARNING: But dangers are arising on GM's Chinese horizon. Indeed, GM
executives acknowledge that major challenges confront them: increased
competition with virtually every automaker in the world doing business
in China; additional vehicle price reductions that further squeeze
profit margins; government changing regulations on short notice and
seemingly at whim; and managing its own size and complexity of its China
operations.

In addition, here's what an outsider sees as dangers. It's brilliant
that GM is bringing executives from other global operations to China,
presumably to learn. What GM China needs to guard against is executives
bringing in their cronies who may not be best suited for the job or
execs who are not open-minded to learning from the Chinese and smother
the Chinese with their way of doing things.

Clarke relates the tale of his first visit to GMDAT in Korea. With a
background in the metal part of the auto business, Clarke immediately
recognized how the Koreans' body-in-white process represented a best
practice standard that should be spread throughout GM. He told
headquarters, which sent a half-dozen people. They must have been of the
notoriously GM "not invented here" variety since Clarke noted: "They
apparently forgot everything they'd seen on the flight home, because
nothing happened." Clarke was persistent. Six more came and then the top
dogs. Finally, the new practice was adopted.

Too much of many things could be a downfall for GM China: too much
attention, i.e. meddling, dictates, etc. from headquarters; too much
production capacity; too many brands; too many dealers. All have been
downfalls for GM North America.

So the lessons go both ways. GM China needs to learn from the lessons of
GM North America and steer clear of them. And, so far, that seems to be
the case as GM China appears to be moving carefully and wisely. Indeed,
if GM China suffers the same pitfalls as GM North America did, it'll see
its Chinese fortune cookie crumble