The Other GM

The Other GM

At last month’s glitzy Shanghai auto show, held in the only significant car market in the world that’s still growing, Nick Reilly, the president of GM Asia-Pacific, knew the question would come. Still, he winced a bit when a Chinese journalist asked him what would happen to Detroit’s fallen giant if it was forced by the U.S. government to declare bankruptcy. “In China, bankruptcy means you’re out of business,” the journalist noted. “Finished.”

Reilly, who has heard this a lot lately, patiently explained that in the U.S., bankruptcy is not necessarily the end of the road, but a chance to restructure decimated businesses and balance sheets. Many companies have emerged healthier after going through the court-supervised wringer, a fate that looks likelier for GM after the U.S. Administration of President Barack Obama forced Chrysler into bankruptcy on April 30. After establishing GM wasn’t ready for the hearse, Reilly not so subtly steered the conversation back to China, insisting that no matter what happens, it would be business as usual for him and his management team.

That’s because at the lowest moment in history for one of America’s iconic industrial companies, China is GM’s parallel universe — a place where business couldn’t be much better. Global sales for the auto industry as a whole are forecast to fall nearly 9% to 56 million light vehicles this year, according to market-research firm CSM Worldwide. But in China, where consumers are still spending and where the government is offering subsidies to small-car buyers, sales are expected to grow nearly 8% this year to nearly 9 million vehicles. In the first quarter of 2009, China was the world’s largest car market, overtaking the recession-wracked U.S. for the first time ever.

GM back home may be saddled with gas-guzzling car models nobody wants while it loses customers to rivals, but in China, the company is neck and neck with Volkswagen for the market-share lead, 10 years after the first GM cars started rolling off Chinese assembly lines. In April, GM set a record for monthly sales: 151,084 vehicles, a stunning 50% increase over its April 2008 results. GM remains “solidly profitable” in the country, Reilly says . While GM plans to slash its U.S. workforce by 38% — 23,000 jobs — by 2011, it’s hiring in China and expects to open a new factory there within the next few years. The work rules that strangled productivity for decades on many of GM’s U.S. factory floors barely exist in China. Though GM China tightly guards data on labor costs, analysts conservatively estimate that wages and benefits per factory worker are less than a tenth of what they are in North America. “And quality,” insists Reilly, “is not an issue” — its Chinese plants are as good as GM factories anywhere. “Within 10 years,” says Kevin Wale, Reilly’s deputy and the president of GM China, “this will be our largest market in the world.”

That statement is almost a mantra at GM’s regional headquarters in Shanghai, where executives are trying to hammer home an upbeat message about its long-term viability not just to Chinese car buyers but to its 21,000 Chinese employees. Earlier this year, rumors circulated that GM was in talks with Shanghai Automotive Industry Corp., China’s largest carmaker, to reduce its stake in a key 50-50 joint venture — Shanghai GM — as a way to raise cash to send back to Detroit. Wale had to knock that talk down. “Absolutely untrue,” he tells TIME — GM executives say none of their China operations are for sale. Reilly was informing everyone at the Shanghai auto show that, while the China unit obviously could not count on big capital injections from Detroit, growth plans are “self-financing.”

Still, GM’s Chinese employees are acutely aware that the times are anything but normal. Obama’s decision earlier this year to dismiss CEO Rick Wagoner was a jolt. As one young executive puts it, “we didn’t think in America that the President could fire the CEO of a private company. For us Chinese, it was very confusing.” Doubly so because Wagoner is viewed as one of architects of GM’s dominance in China. Says a former GM executive: “It may be the ultimate irony of [Wagoner’s] career that as bad as things are in the U.S., his more important legacy may turn out to be China. People don’t get that now, but they will eventually.”

At the moment, it’s hard to envision GM’s Chinese operations eclipsing those in the U.S. — sales on the mainland last year accounted for just 13% of GM’s global total. But there’s no question GM China is racing ahead. It is rolling out no fewer than 10 new models over the next two years — five for Buick, its most popular brand in China, and five for Chevrolet. One of the most important launches is that of the Chevy Cruze, a compact sedan designed for the global market that will make its China debut this summer. It will compete head to head with the popular Toyota Corolla and the Volkswagen Passat in what Reilly calls the market’s “sweet spot,” cars costing $16,000 to $20,000. Reilly insists that buyers have not been put off by all the talk of bankruptcy. But a senior executive at a Japanese competitor says the American company will “have to expend a lot of energy and resources reassuring Chinese customers and even their dealers here that nothing will change. That gives the rest of us something of an advantage.”

Even if GM manages to stay out of bankruptcy court, a government-driven restructuring may ultimately have a big impact on its China operations — but not necessarily a negative one. Currently, most of what GM makes in China, including engines and power trains, is solely for domestic consumption. As factories in the U.S. are downsized and closed, Reilly says that he would see China “becoming a significant exporter” of passenger cars. Clayton Christensen, a Harvard Business School professor and former consultant to Wagoner, says relatively inexpensive Chinese-made Chevys, exported to the U.S., could be the “disruptive” force the company needs to get its market share growing again in North America. “It’s exactly the right thing for them to do,” Christensen has said.

But doing what’s right from a competitive standpoint could bump up against political constraints. Under the GM restructuring plan released in late April, Washington would own 50% of the carmaker, and the United Auto Workers union just under 40%. The UAW will get one seat on the board of directors and the government may occupy another. Obama insists he doesn’t want his Administration running a car company, but if that ownership structure persists, GM’s board may face a confounding choice: Should GM, in order to become more competitive, export more cars from China to the U.S. and other markets — at the inevitable loss of more UAW jobs While that may make corporate sense, the UAW and its supporters could argue that a China-centric manufacturing strategy would defeat the very reason GM is being rescued in the first place: to preserve some of America’s shrinking industrial base while propping up the economy. GM might one day find that it’s possible to be too successful in China.

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