August 10, 2005

General Motors Success in China Proves Company Can Compete After All (Free of Union Labor, At Least)

Wuling Sunshine

General Motors has apparently figured out how to build the right car for the right market - in this case, $5,000 minivans that get 43 miles to the gallon in city driving.

The minivans, which GM builds in a joint venture with a Chinese partner, have a quarter the horsepower of American minivans, weak acceleration and a top speed of 81 miles an hour - but they're selling like hotcakes. The New York Times reported that GM has sold more than 170,000 very small vehicles in China - enough to pass Volkswagen this year in sales in a market that VW has dominated for two decades, becoming, with its Chinese partner Wuling, the top automobile company in China.

The Wuling Sunshine minivan is a far cry from its bigger-is-better image of GM in United States, where it produces some of largest gas guzzlers on market, like Hummers. The minivan's development was led by Philip Murtaugh, the maverick executive who was able to create in China the kind of innovative environment that GM has struggled for decades to achieve in its American operations; but Murtaugh's success in China has led to his departure from company, in what may be telling sign of corporate culture at GM. A good summary comes from IHT:

    The seats are only a third of the thickness of seats in Western models but look plush compared to similar Chinese cars.

    Murtaugh's decision to invest in such practical vehicles went against the grain of a company known in the United States for producing some of the biggest gas-guzzlers on the market, like the Hummer. But in what may be a telling sign of the corporate culture at GM, his success in China led not to promotion, but to his departure from the company.

    Meanwhile, the minivans have been a big hit in China, helping GM sell more than 170,000 compact vehicles and pass Volkswagen this year in sales in a market the German manufacturer has dominated for two decades.

    They have also helped turn China into GM's biggest center of automotive profit - in contrast to losses in manufacturing operations in the United States - and its second-largest market in terms of the number of vehicles sold, after the United States.

    Whether GM can duplicate elsewhere its success in China or even keep its pace here is unclear. But one thing is sure: Murtaugh was able to create a circle of innovation around the Wuling Sunshine minivan, the kind of environment GM has struggled for decades to foster in its American operations.

    A genial, soft-spoken man in a company known for autocratic leaders, Murtaugh showed more talent in building a business than arguably any other GM executive of the past quarter century. From his base in Shanghai, he ran the company's China operations for more than nine years.

    Yet he repeatedly made the best calls in the industry, only to find himself suddenly unemployed this spring and living in a small community in rural Kentucky.

    Murtaugh resigned in March after the rising importance of China to GM prompted senior company executives in Detroit and Asia to intervene and take more direct control of the business. GM has firmly pegged its fortunes in the United States to sales of the biggest gas-guzzlers - the immense Hummers and Chevrolet Suburbans - even as oil prices soar past $60 a barrel and many Americans grow nervous about paying more than $50 for a tank of gas.

    But here in China, GM was the only multinational automaker that spotted the potential back in the late 1990s for building lots of small, inexpensive, fuel-sipping cars, minivans and pickups.

    "It is impressive, and it is strategically very smart," said Michael Dunne, the president of Automotive Resources Asia, a consulting firm based in Beijing and Bangkok.

    GM's reward came in the first half of this year, when demand for utilitarian vehicles in China soared in response to steep gasoline prices and rising prosperity among the peasants and small business owners. GM's sales of spartan minivans and pickups and very small cars have climbed faster than its rivals, to 172,368 in the first half of this year, up 48.7 percent from a year earlier.

    GM's Asian and Pacific division - just 5 percent of the company's worldwide sales - are increasingly dominated by the fortunes of its China business. The unit earned $176 million in the second quarter even as the company's overall automotive operations lost $948 million because of heavy losses in North America.

    The factory here now runs day and night, six days a week. "When the employees stop for lunch, the maintenance people run in," said Yao Zuo Ping, the chief of manufacturing here.

    Murtaugh played a central role in 1996 in setting up the company's main operation in China, a 50-50 joint venture with Shanghai Automotive Industry Corp., or SAIC. Instead of following the usual GM career track of bouncing through assignments around the world every two years, Murtaugh stayed on to run the operation for nearly a decade.

    In the late 1990s, he noticed that millions of small business owners and affluent peasants were not prosperous enough to afford the latest Western models. But they were saving enough to acquire more spartan vehicles selling for less than $5,000.

    "Essentially, it is his baby," said Stephen Small, the joint venture's GM-appointed chief financial officer.

    Murtaugh never learned to speak Chinese, but he was instrumental in setting up the Liuzhou joint venture, which is 34 percent owned by GM and 50.1 percent by SAIC. The rest is held by the Liuzhou Wuling Automotive Co. His personal skills and ability to explain the latest ways to run a factory, often borrowed from Japanese carmakers, made a deep impression with executives here, as did his regular visits.

    "Murtaugh himself was actually paying a lot of attention to our facility here," said Shen Yang, the president of the joint venture and a leading executive at the factory for more than a decade before GM invested here.

    Murtaugh said by telephone from his home in Cadiz, Kentucky, that he made safety suggestions at the start of his very first visit to the factory in 1999. "We got about 20 paces inside the stamping plant and I said to Shen Yang, 'how many eye surgeries and finger amputations do you perform every year?"'

    In early March, GM gave more power to executives in Detroit to oversee design, engineering and various manufacturing disciplines all over the world, including in China. The shift is supposed to allow greater coordination between the now-sprawling operations in China and the rest of GM's businesses.

    In late March, Murtaugh resigned, at 49 years old. Murtaugh and the company said that the decision to leave GM was his, and that he was not fired.

    But Shen, the president of the joint venture here, becomes visibly emotional at Murtaugh's surprise departure.

    "I have a very good relationship with Murtaugh, he is my friend, and seeing him leave is very hard on me," Shen said, his voice catching slightly.

Regardless, it's forced VW to cut prices - according to Financial Times, Auto Asia, up to 14 percent just recently:

    Responding to a loss of its previously commanding Chinese market share to GM’s Chinese joint venture, one of Volkswagen's two assembly joint ventures operations in China yesterday announced price cuts of up to 14% in its model range. Prices on 10 derivatives of four model families - Gol, Passat, Santana and Santana 3000 - were lowered by between six and 13.7 per cent on 8 August.

    However, VW’s other Chinese joint venture, with First Auto Works (FAW), announced yesterday that it would not follow suit, but rather, hold current car prices. It is one of the first occasions since the beginning of China’s automotive market growth spurt that a domestic joint venture partner appears to have forced decisions that may not necessarily accord with the wishes of its Western partner.

    VW’s partner in Shanghai VW is the state-controlled SAIC (Shanghai Automotive Industries Corp.), which independently spent £67m last year in acquiring intellectual property from MG Rover’s parent company, but failed last month to secure ownership of the British firm’s remaining assets. SAIC recently announced it will invest independently in a new plant which will make its own-badged cars derived from the Rover 25 and 75 model designs it acquired when considering a joint venture with MG Rover.

    As a pioneer of inward investment, VW built up a large lead in the smaller, government fleet-dominated Chinese car market with the Santana, a derivative of the 1970s VW Passat, when cars remained unavailable to private Chinese consumers. Subsequently, the success of GM’s Wuling Sunshine small car, among others such as the Buick Sail, has helped GM overtake VW as China’s biggest-selling car brand, and the country recently became GM’s automotive operations’ largest profit centre.

    A price ‘war’ in China could affect the majority of joint venture assembly and supplier firms which have invested heavily in China in recent years; a cooling of the Chinese consumer car market, together with raw materials cost increases, has already halved the Chinese automotive industry’s average profitability in the past half year, according to official sources.

    China showed some recovery in demand for new cars in June and July after a pause in market growth; the China Association of Automobile Manufacturers (CAAM) cited stabilising car prices as an important factor in the regrowth of demand.

To build the cars in China, GM rebuilt a former tractor factory in ways that could become a model for automobile production in China for years to come. The assembly process has only one robot, for sealing windshields, relying mostly on workers earning $60 a month, above average for this region. That comes after GM's experience in Shanghai, where it installed four dozen robots for its first assembly line only to find them much costlier and less flexible than people; GM's second assembly line there was built with only four robots.

Still, while a $5,000 vehicle is probably not feasible here in the United States, Americans would no doubt be happy to pay two or three times that much for a vehicle getting that kind of mileage, hard seats and not.

- Arik

Posted by Arik Johnson at August 10, 2005 10:46 AM