Cultural clashes killed Asian alliances

In 1994, General Motors' board of directors debated whether the company would be a global player in the auto industry.

It was an odd question. After all, GM was the world's largest automaker. But the board concluded that GM's status was in jeopardy. It decided, says Rudy Schlais, the retired president of GM Asia Pacific, that "unless you're a significant player in Asia, you're not a global player."

At the time, GM was not a significant player in Asia, except for GM-Holden's Ltd. in Australia. GM's attempts to sell U.S.-built cars in Japan, by far Asia's largest market, had failed. Its 2-year-old venture to build trucks in China was collapsing. It recently had sold its half of Daewoo Motor Co. after a dispute with Daewoo Group. GM needed a new Asian strategy.

Schlais then was head of a parts-making operation that had several profitable projects in China. In 1995, he became GM's point man in a joint venture with Shanghai Automotive Industry Corp. to build Buick sedans in China.

In 1996 he put together a forecast for GM's Asian strategy board. At best, it showed, GM might get 10 percent of the Asian market on its own. But GM could take at least 16 percent, sooner and at less cost, through joint ventures and alliances.

CEO Jack Smith endorsed the alliance strategy. He had worked with Suzuki in Canada in 1982, set up a successful commercial truck venture in Europe with Isuzu, and led negotiations on a joint-venture assembly plant in California with Toyota Motor Corp. Smith was convinced GM could gain from working with Asian partners.

GM's global alliance strategy was off and running.

A new GM

By 2002, GM had doubled its stake in Suzuki Motor Corp. to 20 percent. It bought 20 percent of Subaru-maker Fuji Heavy Industries Ltd., 20 percent of Italy's Fiat Auto and 34 percent of a minivehicle maker in China. It expanded pickup and diesel engine projects with Isuzu Motors Ltd. from Thailand to Poland. And it bought control of Daewoo Motor.

The plan had gone beyond grabbing share in Asia. Now it was central to the New GM that Rick Wagoner, who became president in October 1998, was building.

Starting in 1908, Michigan entrepreneur Billy Durant built GM by acquiring disparate carmakers such as Buick and Chevrolet. The new GM would become a company at the center of a ring of alliances, coordinating efforts of nominally independent automakers. In effect, Wagoner set out to be the consolidating Billy Durant of his generation.

The plan was audacious. In 2001, Larry Burns, who oversaw the various alliances, boasted, "I'd certainly like to see us and our partners up around 30 to 35 percent of the world's volume." He included the Japanese partners' global shares in the total. At the time, GM and its partners combined had about 25 percent of global volume. GM itself had about 15 percent.

Broken strategy

But by 2005, the plan had unraveled. GM sold its stakes in Fuji Heavy and Isuzu, both of which soon joined the Toyota camp. GM sold its stake in Fiat at a massive loss. It slashed its Suzuki stake to 3 percent.

It kept GM Daewoo Auto & Technology Co., a GM subsidiary, not an alliance partner. And it kept its 50 percent share of Shanghai GM and a lesser share of another Chinese joint venture.

The plan suffered from culture clashes and GM's aversion to alliances, says Schlais, 67. "It was just too large of a cultural activity to pursue," he says. For GM, "if it doesn't bring money to the bottom line in big amounts, it probably isn't where we want to be."

"The way to make an alliance work is at the top," says Burns. At first, that's why the strategy clicked.

Smith and GM's board backed the idea. Says Schlais: "I had always had extreme support of eight board members who said, 'You gotta do it,' even though we may have internal financial issues. There wasn't a rigor of financial analysis and all that type of stuff."

For example, the first car that Shanghai GM built was the Buick Regal. Tweaking it for the China market "got a very high priority because it was a strategic decision," says Schlais. GM engineers knew Jack Smith was following its progress.

But when GM China sought help with subsequent cars, engineers in the United States and Europe gave those projects a lower priority because of their relatively small volumes. And Opel's engineers resented being asked to develop cars for Asia when Opel's position in Europe was sliding.

When GM wanted to gain share in Japan, its partners there had much to offer. But then China's lure grew. "If we got an extra dollar to spend, there are markets that are growing a lot faster that are easier to penetrate" than Japan, says Wagoner.

Cultural clashes and differing aims at each partner took their toll.

Consider Fuji Heavy. When the automaker came to GM looking for a partner, Wagoner agreed. Schlais represented GM on Fuji Heavy's board.

"They had total commitment" to the alliance, says Schlais. At board meetings, "Everything was in simultaneous translation. You had two screens in front of you: one with Japanese on it, one with English on it."

But GM didn't share that commitment. When Fuji Heavy proposed joint projects, "we found it very difficult to get the rest of the General Motors organization to respond to those proposals. And so an air of disillusionment built up," he says.

GM felt the ideal fit for Subaru was Saab. It encouraged the two companies to cooperate, but Fuji Heavy said its horizontally opposed boxer engines ruled that out. Finally, a Subaru Impreza was rebadged as the Saab 9-2 and promptly dubbed the Saabaru.

Lackluster effort

"We did a halfhearted attempt with the 9-2, but reskinning doesn't necessarily give you a vehicle," says Schlais. By then, the two sides had "their own barriers to what they're going to give and not give."

GM also was cultivating Isuzu as a source for small diesel engines worldwide. Then "lo and behold, came the Fiat agreement," recalls Schlais. GM would buy Fiat's diesels in Europe. "Isuzu wasn't even made aware of that activity until it was announced."

Suzuki and GM cooperated on several fronts. But Suzuki's crown jewel of Maruti Udyog Ltd., a venture that dominated India's market, was off limits to GM.

After a long and bumpy courtship, meanwhile, GM bought control of Daewoo. GM was impressed by its new subsidiary's engineering abilities. GM was culturally comfortable with control in a way it never was with alliances. GM Daewoo swiftly started supplying inexpensive cars for GM in North America and Europe.

Meanwhile, GM started questioning why it was tying up cash in stakes in overseas automakers at a time of financial troubles back in North America.

"The North American commitment is financial," says Schlais. "If the finances work, everything is hunky-dory. The Asian commitment is much more a commitment of building trust, relationships, openness between the top levels. I think that our organization did not accept the alliances because it was, frankly, counter-cultural and it wasn't a big financial windfall."

It wasn't entirely a Western vs. Asian culture clash. GM's alliance with Fiat also was souring. Later, Fiat's new CEO, Sergio Marchionne, would look back at that alliance with disdain. The auto industry, he said, lacked "the necessary wherewithal and maturity to carry out effective cross-border transactions."

His view was "jaundiced," he said, "by dealing with the vestiges of a marriage that was only partially and, I may add, badly consummated."

With Fiat and its Japanese partners, GM sought significant savings from joint purchasing. But the attempt did not get far beyond commodities such as glass, steel and rubber.

"Again, our cultural differences really threw this into a cocked hat," says Schlais. GM's pattern of beating down suppliers on price jarred with the Japanese view of suppliers as partners. "They just couldn't comprehend how we operated with suppliers."

And so the alliances were disbanded.

GM's top management has washed its hands of the Smith-Wagoner experiment. "I look back at that whole alliance experience and you could say that was a bad strategy," says Burns.

"The Isuzu thing no longer exists. The Subaru thing no longer exists. The Suzuki ownership position is a lot lower. Fiat's done. I'd take Daewoo and cash all of that other stuff in a minute."

You can reach James B. Treece at jtreece@crain.com.