Paddy Fields to Full Production

Dec. 21, 2004
General Motors Corp. reaps rewards from its huge, fast investment in Shanghai.

Executives still do a double take when they look at the expansive new General Motors Corp. factory in the Chinese port city of Shanghai. Senior American managers witnessed that piece of land transformed within two years from a sleepy peasant village, surrounded by paddy fields, into a showcase factory that churns out luxury Buick sedans. The factory, developed and built at a cost of more than US$1.5 billion, was completed in a remarkably short period of time; even more extraordinary was the fact that GM pumped in $100 million before a solid contract was signed, a major gamble in a communist country where rule of law still is an alien concept. But GM Chairman John F. Smith Jr. was convinced that the time and place were right for investment. Shanghai, the largest city in China with some 14 million people, was desperate to attract a major blue-chip investor for its newly developed Pudong industrial area. It was an open secret that the nationalistic leaders of the country were becoming embarrassed by the proliferation of imported luxury cars, in particular Mercedes, BMWs, and Audis, which were being used by senior Communist Party officials and successful entrepreneurs. GM may well be an American industrial icon and an arch-capitalist conglomerate straddling the world, but at least the Detroit-designed autos would be put together by Chinese workers on Chinese soil using many Chinese-made parts. The motives in the GM boardroom on the other side of the Pacific were less subtle, but just as vital for the long-term well-being of the company. Senior executives reasoned that if they missed out on the developing Chinese market with its 1.3 billion people and huge potential, it would be a massive opportunity missed, possibly forever. While negotiations continued throughout 1997, frantic site-preparation work began. First the local government razed family homes and farms and moved the people elsewhere -- the kind of act nonelected governments can carry out without fear of environmental protesters or legal appeals by residents -- before installing water and electricity and building access roads. Then came the rush to build, with the roof being constructed at the same time that assembly-line machinery was being installed. Philip F. Murtaugh, now chairman and CEO of GM's China operations, still shakes his head with disbelief when looking back at those frantic days. As construction work began, the veteran executive, who previously had worked in England and Japan, was deep in negotiations to secure an equitable deal with his joint-venture counterparts. Long, closed-door meetings became his daily life as he thrashed out details with representatives of Shanghai Automotive Industry Corp. (SAIC), a company with aspirations to become the first Chinese company on the Fortune 500 list. "We made a decision to work out a joint-venture contract and build the plant simultaneously," says Murtaugh. "We began both in January 1996 and it took us a year to negotiate the agreement. By that time there was steel on the site and we had spent more than $100 million. It was a fairly high-risk approach. GM has never built a plant on this scale this fast in its entire history. "In terms of the challenges of building a plant, we had about three [potential sites] but settled on this one because of its location and the fact that it was the biggest one. When we came here there were 800 families, seven factories, and canals running through the site. There were people reaping the crops. Typically with construction you do things in sequence. We did everything in parallel. We were doing utilities at the same time as structural work and installing machinery and equipment while we were putting in wires and pipes." Foreign-Investment Showcase The rush to complete the Shanghai project was a key element of the Chinese government's bigger-picture plans. It had determined a decade ago that the area of Pudong, across the river from the Bund promenade, would be a showcase for the new China, a site that would be tailor-made to the needs of foreign investors. When the scope and schedule of the Pudong scheme was announced by the then-mayor of Shanghai, Zhu Rongji, who later would become prime minister and World Trade Organization negotiator-in-chief, there was much cynicism. A decade later, the doubters have had to eat humble pie. The main financial area of Pudong has been transformed into a mini-Manhattan, with the world's third-highest building, an 88-story silver skyscraper, as the showcase construction. The outlying manufacturing areas, served by new highways and a new airport, have indeed attracted foreign manufacturers that want to take advantage of a labor force that is cheap, motivated, and well educated. (Area universities with strong programs in science and technology include Shanghai University and Fudan University.) GM, with its prestigious reputation and big-ticket products, has enhanced Pudong's profile still further. "One of their primary objectives was to have GM bring in our management practices, so the capitalist-versus-Marxist/Leninist culture clash wasn't such a big issue," says Murtaugh. "They wanted the Western system. The clash came [with] things like bookkeeping and working through why you do things the way you do. We had to explain why we did things. They said that might work in Detroit, but this is the way things are done in China. "Sourcing was the most contentious issue. At the time SAIC had a very large supplier and we had a vested interest in sourcing with our companies. That was the most contentious decision. Very early on we worked out a sourcing principle that we would source on the basis of quality, service, technology, and price, and [we] would put out multiple bids. Local content is extraordinarily good quality. In fact, it is better than many of the components we are importing." The company's main auto, the Buick sedan, originally had 40% of its supplied components made locally, a figure that has grown to 60%. The imported components -- US$140 million worth annually from the U.S. alone -- include plastic fixtures, powertrain parts, and electronics. The completed autos sell for $43,000 and, according to GM, are built to the same high standards as those that roll off production lines in the U.S. or Europe. Not that the models are facsimiles of U.S. autos. Engineers made a total of 600 design changes to take into account Chinese tastes, from strengthening the chassis to endure the appalling rural roads to making the ashtrays bigger for a nation of inveterate smokers. The engine size was cut from 3.5 liters to 2.8 liters, essentially to accommodate Communist Party pecking-order etiquette. Higher-powered models traditionally are used only by high-ranking officials; reducing the engine below three liters allowed less-senior officials to place an order for the auto. Changes also were made to the design so the air conditioner and radio speakers were adjusted primarily for rear-seat passengers; officials in China prefer to be chauffeured. Long before the first car took shape, key workers were sent to GM facilities around the world to work alongside American, Australian, and German crews. Plant manager Dennis Dougherty was pleased with the results. He says: "I got letters back saying, 'Where do you get these employees from? They are so keen they take their manuals home to read at night.' I have worked for GM for 28 years and I have never had letters like that." Each would-be employee is screened initially for personality traits, through behavioral and psychological tests and teamwork activities, before being given more than 300 hours of training. With an average salary of $4,000 a year, well above the city average and four times the national average, there is no shortage of applicants and there has been a negligible employee turnover rate. Production Begins The first car built by the neophyte auto workers was driven out of the plant in May 1998, several months ahead of schedule. Last year 20,000 vehicles were made while the target for this year is 50,000 vehicles, including the company's latest product, the Buick GL8 wagon, which is based on the Pontiac Montana. On the production line itself, there is little to distinguish the scene from any similar modern facility in the world -- apart from the Chinese-language announcements and signs and an overhead walkway, where up to 10,000 visitors a month from the area, including school children, take guided tours of their city's industrial pride and joy. A completed car emerges every two minutes and two seconds during the current schedule. The same production line is capable of handling the Buick sedans, available in the G, GS, GL, GLX, and New Century packages, and the wagon, and is ultimately capable of producing 100,000 autos annually. While the quality of the cars is not in dispute, General Motors is up against a deeply ingrained foreign competitor, also located in Shanghai and also a joint venture with SAIC. The German manufacturer Volkswagen AG has been churning out its Santana sedans, the favored model for taxi drivers and midranking officials, for almost a decade; the no-frills auto is estimated to account for half the 500,000 annual auto sales in China. The more modern Jetta, Golf, and Audi models also are proving popular. Other manufacturers have not had such positive results from their China experience, including GM itself back in 1991 when a venture to produce pickups in the northern city of Shenyang proved unsuccessful. But, under a restructured deal between GM and its local partner, production of Chevrolet Blazers and Chevrolet S10 pickups will start next year in Shenyang. The DaimlerChrysler AG joint venture, Beijing Jeep, sold 21,000 vehicles last year, divided almost equally between the Cherokee and the ruggedly basic Jeep model. It has various other ventures including production of heavy-duty trucks in Inner Mongolia and buses and chassis in Jiangsu. All foreign manufacturers and importers, whether they are involved in autos or eyeglasses, are attracted by the alluring figure of 1.3 billion potential consumers in increasingly affluent China. But population figures, like all statistics, can be misleading. The majority of people in China are still peasant farmers living in rural areas, where their transportation option for the foreseeable future is a black Flying Pigeon bicycle and their immediate upgrade ambition is a mini-tractor. Even for the minority affluent enough to own a car, there are not too many places to drive outside the major cities. China has no national highway system linking its major cities, although a system of toll roads is beginning to radiate out from the major urban centers. These factors essentially limit GM and other top-end auto suppliers to the 300 million potential consumers in the cities. The middle classes in years to come will be hankering for a small car for their one-child families. To meet that demand GM announced last month that it will produce a small-car model at the Shanghai-GM plant beginning in December. The 1.6-litre Buick Sail, which will be priced at about US$12,000, is based on the Opel Corsa sold in some 80 countries. The plant's flexible manufacturing system will produce the Sail on the same production line as the existing Buick models. GM has looked at the possibility of building trucks in China, but even a cursory examination of the market reveals almost insurmountable problems for large-scale sales. Although most Chinese trucks are based on a lumbering 1950s Russian design, the fume-spewing vehicles have the advantage of being dirt cheap (up to a third the price of an imported model from GM or Isuzu), widely available, and easily repairable. For now, most of GM's resources are being directed to the Shanghai plant and at making the Buick brand as well known nationally as Mercedes. Selling the car in Shanghai is a no-brainer -- the city did, after all, decree that GM was the city's number one project -- but elsewhere a sales and distribution network has to be painstakingly set up. GM, though, is determined to overcome the difficulties inherent in dealing with China. Although American executives put on public displays of corporate bonhomie with their partners, representatives of the SAIC are notoriously reluctant to talk to foreign media or, indeed, say much at all apart from platitudes. Old Communist Party habits of secrecy and subterfuge die hard. Murtaugh, a straight-talking man not given to hyperbole or spin, is blunt when asked how important China is for GM, despite all the inherent hassles. He stresses forcefully that U.S. companies such as GM must search out new and growing markets. "China is the biggest potential growth market anywhere in the world for the next 20 years," says Murtaugh categorically. "We believe it is a win-win opportunity. If we don't have a presence in China we will no longer be the world's largest auto company."

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