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G.M. Thrives in China With Small, Thrifty Vans

$5,000 minivans being assembled at a G.M.-led venture by Chinese workers who are paid $60 a month. Photo : Chang W. Lee/The New York Times

August 9, 2005

BY KEITH BRADSHER New York Times

LIUZHOU, China - In this obscure corner of southern China, General Motors seems to have hit on a hot new formula: $5,000 minivans that get 43 miles to the gallon in city driving. That combination of advantages has captivated Chinese buyers, propelling G.M. into the leading spot in this nascent car market.

Compact and utilitarian, these vehicles, called Wuling Sunshine minivans, hardly fit the big-is-better image of G.M., known in the United States for producing some of the largest gas guzzlers on the market, like Hummers.
The minivans, which G.M. 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. The seats are only a third the thickness of seats in Western models but look plush compared with some Chinese cars.

Their development was led by an American, Philip F. Murtaugh, a native of Ohio and a maverick executive who was willing to zig while the rest of G.M. was zagging. Mr. Murtaugh was able to create in China the kind of innovative environment that G.M. has struggled for decades to achieve in its American operations. But whether G.M. can duplicate elsewhere its achievements in China or even keep its pace here is unclear.

In what may be a telling sign of the corporate culture at G.M., Mr. Murtaugh's success in China led not to promotion but to his departure from the company. G.M. declined to discuss personnel matters, but both it and Mr. Murtaugh said he resigned and was not dismissed.

A soft-spoken man in a company known for autocratic leaders, Mr. Murtaugh ran the China operations for more than nine years from his base in Shanghai, repeatedly making some of the best calls in the industry. Now he finds himself unemployed and living in a small community in rural Kentucky.

His resignation in March, at the age of 49, came shortly after senior company executives reorganized management to give more power to Detroit executives to oversee design, engineering and various manufacturing disciplines all over the world, including operations in China.

The shift was supposed to allow greater coordination between the growing Chinese operations and the rest of G.M.'s businesses. Other G.M. regional executives had already been more under Detroit's control and did not leave the company.

For years, G.M. has linked its fortunes in the United States to the sale of big vehicles, like Chevrolet Suburbans, only to find oil prices soaring and many Americans nervous about paying more than $50 for a tank of gas.

But here in China, Mr. Murtaugh's G.M. was the only multinational automaker that spotted the potential in the late 1990's for building lots of small, inexpensive, fuel-sipping cars, minivans and pickup trucks.

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

The utilitarian minivans and pickups are mainly purchased in China by small-business owners in towns and smaller cities, who drive them both to carry supplies for their businesses and to transport their families. Gasoline in China is slightly cheaper than in the United States, as the government is gradually passing on price increases to consumers.

The minivans have been a big hit, helping G.M. sell more than 170,000 very small vehicles - automobile types not available in the United States - and to pass Volkswagen this year in sales in a market that VW has dominated for two decades. They have helped turn China into G.M.'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.

In the important market for larger cars, those not made by the Wuling joint venture, Honda, Toyota and Hyundai are gaining on Volkswagen and, to a lesser extent, G.M.

Such slippage is a familiar experience for G.M. at home. It has repeatedly failed to halt a slide in its domestic market share that began in the 1960's, and has faced the humiliation of seeing its bonds downgraded to junk status this spring. G.M.'s success in China shows that the company, the world's largest automaker, can still summon the energy and innovation occasionally to take command of a big market.

The Chinese government has also encouraged a shift toward more efficient models through stringent fuel-economy regulations, even as Congress has opted for more subsidies for oil production and a limit on hybrid car subsidies.

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

Its Asian and Pacific division - just 5 percent of worldwide sales - is increasingly dominated by the fortunes of its China business. The division earned $176 million in the second quarter, even as overall automotive operations lost $948 million amid 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.

Mr. Murtaugh played a central role in 1996 in setting up the company's main operation in China, a 50-50 joint venture with the Shanghai Automotive Industry Corporation, or S.A.I.C. Instead of following the usual G.M. career track of bouncing through assignments around the world every couple of years, he stayed on to run the operation for nearly a decade.

In the late 90's, he noticed that millions of small-business owners and affluent peasants were not yet prosperous enough to afford the latest Western models but were saving enough to acquire more frugal vehicles selling for less than $5,000.

"Essentially, it is his baby," said Stephen Small, the joint venture's G.M.-appointed chief financial officer.
Mr. Murtaugh never learned to speak Chinese, but he was instrumental in setting up the Liuzhou joint venture, which is 34 percent owned by G.M., 50.1 percent by S.A.I.C. and the rest by the Liuzhou Wuling Automotive Company. His personal skills and ability to explain the latest ways to run a factory, often borrowed from Japanese automakers, 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 G.M. invested here.

To build the cars, G.M. helped gut and rebuild a former tractor factory in ways that could become a model for automobile production in China for years to come.

Long white halls erected in 1958 during Mao's Great Leap Forward still stand here, the paint peeling in places, the wood window frames warped and the windowpanes cracked and broken. Inside, however, is a factory that combines old and new management techniques. Small, plastic racks of parts delivered several times or more a day have replaced large bins of parts delivered to the assembly line in big shipments every few days. This way, the factory can keep low inventories and order quick design changes, if necessary, from nearby suppliers.

The assembly process has only one robot, for sealing windshields, relying mostly on workers earning $60 a month, above average for this impoverished region. That comes after G.M.'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; G.M.'s second assembly line there was built with only four robots.

"Low cost doesn't just mean low wages, it means low investment," Mr. Small said.

Worker safety in most Chinese factories is abysmal by Western standards. But workers at the factory here wear afety glasses, and the equipment has automatic cutoffs to prevent workers from losing fingers.

Mr. Murtaugh said in a telephone interview from his home, now in Cadiz, Ky., that he made safety suggestions at the start of his 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?' "

Before the joint venture began to be set up in 1999, Wuling did not even have procedures for handling workers' suggestions. Now, the workers are given extensive information about the performance of their units and encouraged to submit suggestions. The factory received 4,000 suggestions from its 5,000 employees last year, and as many suggestions again in the first five months of this year.

Zhou Libo, a 28-year-old worker who welds minivan underbodies and has worked here for 10 years, said that until the last several years, "We made a lot of parts that were not good quality and had to be thrown away."

Mr. Murtaugh's departure was widely seen within the automotive industry as linked to moves by G.M. that limited his autonomy. Last summer, the company transferred executives from Singapore to an office just down the street from Mr. Murtaugh's in Shanghai, a shift that made closer supervision possible.

Mr. Shen, the president of the joint venture here, becomes visibly emotional when he mentions Mr. Murtaugh's surprise departure.

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

Mr. Murtaugh said that he was playing a little golf now, but found himself with many idle hours.

"I'm looking for work," he said, and then joked, "do you have a deck that needs painting?"

posted by Henry @ 4:14 PM