(FORTUNE Magazine) – It was like the gold rush. After the U.S. restored diplomatic relations with China in 1979, Western businessmen dashed to the mainland to invest and set up shop. Disenchantment followed quickly; last June's massacre in Tiananmen Square merely accelerated it. Jim Mann recounts the short, unhappy honeymoon of U.S. companies in China in his new book, Beijing Jeep (Simon & Schuster, $19.95). Would-be global managers can learn from the experience of American Motors, which teamed with Beijing Automotive Works in a celebrated venture to produce -- and sell -- jeeps in China.

THE OFFICIALS from American Motors Corp. were greeted with red carpets and exotic, sweet, flowery scents as they filed into the Great Hall of the People in May 1983. After four years of on-again off-again negotiations, AMC and the Chinese government had agreed to jointly produce jeeps in Beijing. As the celebrants sipped champagne, Wu Zhongliang, a bureaucrat who had been tapped to become chairman of the new joint venture, turned to his American partner, AMC Chairman W. Paul Tippett. ''I've never been a chairman before,'' confessed Wu. ''Can you tell me what a chairman does?'' That was just one sign of trouble for AMC. The deal was a landmark, the largest manufacturing agreement up to then between a foreign corporation and China. American Motors and Beijing Automotive Works would form a new joint venture called the Beijing Jeep Co. AMC would own a 31% stake by contributing $8 million in cash and another $8 million in technology. The Chinese agreed to put up $31 million in assets for 69% of the new company. According to the announcement, the venture would first modernize the old Chinese jeep, the BJ212, and soon develop a ''new, second- generation vehicle'' for sale domestically and overseas. Through such ventures China hoped to attract foreign investment and obtain the technology it needs to catch up with the West. For their part, foreign companies anticipated nothing less than enormous sales. Wall Street and the American media joined the hoopla. AMC's stock jumped 40% in two weeks. The press emphasized that China was not only a large market for vehicles, it also offered low labor costs and a strategic location for exporting to the rest of Asia and competing with the Japanese. The Detroit Free Press hailed AMC's move, saying it ''could turn out to be one of the shrewdest industrial strokes of the decade.'' ) But the Americans didn't fully realize that the vague language of the agreement contained the seeds of future conflict. The contract did not spell out what kind of new jeep the two sides would develop, did not give AMC the right to convert its Chinese earnings into dollars, and did not guarantee that the venture would get enough hard currency to buy parts from Detroit. AMC officials would soon discover that the signing of a contract often marked not the end of a business negotiation but the beginning. Once the ink was dry, the Chinese partner surprised them by seeking new concessions. In each case the controversy was resolved when the Americans gave way. The Chinese, for example, argued that their eight top managers should be paid roughly as much as the American expatriate staff, around $40,000 each. The Americans at Beijing Jeep knew that the highest take-home pay in China was no more than $100 a month. They objected, but their bosses in Detroit overrode them. So hundreds of thousands of dollars each year went to phony salaries; the Americans had no idea how this money would be used. AFTER THE VENTURE started up in January 1984, the two sides clashed over the nature of the new jeep and the method by which it would be made. The Americans wanted it to look as much like other AMC jeeps as possible so that parts would be interchangeable. BJC's Chinese officials were set on a military jeep for the People's Liberation Army, historically Beijing Automotive Works' most important customer. The army wanted a four-door vehicle with a soft convertible top so that soldiers could open fire from inside the car and quickly hop in and out. Such a vehicle couldn't be made from any of AMC's existing jeeps, but the two sides had glossed over this point in negotiating the contract. Moreover, developing the vehicle would cost $1 billion. That was out of the question: Neither China nor AMC had the money. Several AMC vice presidents visited Beijing later in 1984. Their mission: convince the Chinese to accept the idea of assembling AMC's newest product, the Cherokee Jeep, from parts kits imported from the U.S. After a month the Chinese agreed. This marked a fundamental change in plans. But the Chinese still believed that they were going along with a short-term expedient and hadn't abandoned the idea of eventually producing a new Chinese-made jeep. Another ominous sign: During a trial run in the summer of 1985, the first Chinese Cherokee had to be pushed, not driven, off the line. Workers had ^ forgotten to tighten the clutch. But by September, Beijing Jeep was ready to launch the Cherokee, and at a press conference that month AMC executive vice president Joseph Cappy bullishly said he hoped Beijing Jeep would produce 40,000 Cherokees a year by 1990. Sniffed P. Jeffrey Trimmer, head of AMC's operations in the Far East: ''Selling that ((number of cars)) in this country is a piece of cake.'' BY THE FALL China found itself short of reserves and began imposing severe foreign exchange restrictions. BJC needed hard currency in order to import Cherokee parts kits. It couldn't exchange its local earnings in renminbi for dollars because the domestic currency was not convertible. Don St. Pierre, president of Beijing Jeep and AMC's top man in China, discussed the situation with his Chinese colleagues, but the sessions would break up in disarray. The Chinese would simply say: ''Foreign exchange is a little short here right now.'' Chen Xulin, a BJC board member, later acknowledged in an interview that China had intended to import only ''a very small volume'' of kits -- just enough to get a peek at the technology, because that was what they were really after. The problem became more acute. As winter approached, AMC had hundreds of Cherokee parts kits waiting to be shipped to China, but the Chinese government balked at granting import licenses for them. Without telling their Chinese colleagues, St. Pierre and Trimmer privately appealed to Beijing city officials but got nowhere. Things went from bad to much worse. Beijing Jeep's first 200 Cherokees had been sold to the State Materials Bureau, a government agency, for resale inside China. But the Bureau refused to pay the approximately $2 million it owed Beijing Jeep for them. Another 1,008 kits for new Cherokee Jeeps were sitting in the U.S., but the venture had no hard currency to buy them. St. Pierre discovered that his venture wasn't even being paid in Chinese currency for the old BJ212 jeeps it made. Beijing Automotive Works was supposed to collect the money and turn it over to the joint venture, but that didn't happen. When St. Pierre asked Beijing Automotive officials about the more than $9 million they owed, they refused to answer his letters or return his phone calls. He not only didn't have the foreign exchange he needed, he didn't have much renminbi, either. By the winter Beijing Jeep Co. was broke. St. Pierre even had to stop production of the Chinese jeeps for a day. The finance director for the joint venture, Li Bolin, came to the rescue by loaning BJC $1.8 million from the employees' health and welfare fund. Fund? The American officials at BJC had never heard of it. Only then did they learn that the difference between the $40,000 salaries charged for the top Chinese managers and their less-than- $100-a-month take-home pay went into a kind of emergency reserve. This was obviously an emergency. St. Pierre urged Detroit to withdraw immediately from the venture. As of March 1986, BJC had delivered 450 Cherokees to the Chinese government but had not been paid the foreign exchange it was owed for 200 of them, and at least 200 more were sitting unsold at the plant. The venture had no prospects of exporting any significant volume of vehicles or components in the next few years. The company faced $3.1 million in debts for capital projects. Moreover, housing costs for AMC's expatriate staff had ballooned 38%. Without telling Detroit, St. Pierre tried to force the issue by soliciting wide press coverage of AMC's difficulties in 1986: If China was going to make life difficult for a Western corporate partner, the world was going to know. He also appealed to top Chinese officials in writing, and one of his missives was delivered to Premier Zhao Ziyang. By May, whether AMC would stay in China was an open question. Zhao instructed Zhu Rongji, vice minister of the State Economic Commission, to resolve the situation. Zhu and two senior officials met with Tod Clare, AMC's vice president of international operations, and Timothy Adams, AMC's director of forward plans and programs. THE CHINESE made a major concession: They would guarantee AMC enough foreign currency to import American parts for at least a few Cherokees. But how many Cherokees? The Americans had originally been hoping for 5,200 in 1986 and 40,000 annually by 1990. The Chinese, however, were offering enough foreign exchange for only 2,000 Cherokee parts kits in the first year and another 2,500 the following year. China had never given up the idea of getting a newly designed Chinese jeep. Throughout the week the Chinese wouldn't budge. On the final day, a dejected Clare was about to leave for the airport empty handed when the two sides suddenly struck a compromise. Beijing Jeep would import 12,500 Cherokee kits over four years, and China would guarantee $120 million in foreign exchange to pay for them. AMC succeeded because its venture attracted enough attention to turn the future of Beijing Jeep into a test of China's open-door policy. The long- contemplated ''new, second generation vehicle'' was redefined as a Cherokee, and the Chinese finally abandoned their hopes of making a new military jeep. More important, the Chinese promised that whenever sales inside China didn't generate enough foreign currency, Beijing Jeep could keep on importing the Cherokee kits by converting its renminbi earnings from the BJ212 into dollars. AMC would make money both by selling the American kits to BJC and by selling the assembled Cherokees inside China. China also agreed to finance major new capital projects at Beijing Jeep. BJC was back in business. It was the ultimate irony: An American corporation that originally expected to reap huge profits by bringing modern technology to China and by selling its superior products to the Chinese found itself surviving, indeed thriving, by selling the Chinese established Chinese products. Of the 24,500 jeeps the venture produced in 1986, only 2,000 were Cherokees. The rest were the old Chinese jeeps, the BJ212s, and the overwhelming majority of them were distributed through the central-planning techniques set up in the 1950s. NONETHELESS, things overall seemed to be going well at Beijing Jeep. The Chinese had contributed $70 million to modernize the plant since the venture was formed, while the American side had put in virtually no new capital beyond the original investment. The factory produced 3,000 Cherokees in 1987 and sold them all. Chrysler bought AMC that year but announced that it had no intention of altering operations. St. Pierre handed the presidency of Beijing Jeep over to his handpicked successor, vice president Chen Xulin, in 1988. Chrysler offered St. Pierre a job in business development, but he turned it down and left the company. Then more trouble. Chrysler found that Beijing Automotive Works was again hoarding proceeds from sales of the BJ212s. It owed Beijing Jeep $8 million as of March 1989. That same month BJC nearly shut down its Cherokee production line because the customs bureau in Tianjin suddenly announced a hefty increase in duties on the parts kits. After a series of negotiations the customs officials backed down. On the night of June 3, a Saturday, Chinese troops drove into Beijing to recapture Tiananmen Square from student demonstrators who had occupied the area for most of the previous six weeks. The soldiers fired indiscriminately into the crowds, killing, by most estimates, a few thousand people. The Chinese regime of Deng Xiaoping succeeded in repressing the pro-democracy movement that had swept the country during the spring, but at extraordinary costs to China's political stability and international standing. On Sunday afternoon Chrysler urged its Beijing representatives to leave China, even though some executives worried the company could lose its whole investment. On Monday, June 5, for the first time in more than five years, there wasn't a single AMC or Chrysler executive in Beijing. BJC resumed operations in mid-June, with the Chinese running the Cherokee assembly line on their own. An immediate rekindling of romance between China and Western businesses is improbable. The recent experiences of private businesses inside the People's Republic are just the latest chapter in the long history of Western frustration in the Middle Kingdom. Companies like AMC faced the same cultural and bureaucratic obstacles that stymied Christian missionaries who tried unsuccessfully to convert Chinese souls a century ago. From the outside China has always seemed malleable. From the inside it seems deceptive, intractable, and endlessly capable of thwarting change.