China's Car Guy Hu Mao Yuan has skillfully blended GM's best practices into a creaky state auto industry.
By Louis Kraar

(FORTUNE Magazine) – Nearly two years ago Hu Mao Yuan, 48, the first president of Shanghai General Motors, found himself enduring a sleepless night at the Renaissance Center Hotel in Detroit, far from his home in China. A veteran manager of state-owned corporations, Hu was kept awake by fears that the $1.5 billion enterprise with GM--the largest U.S. joint venture in the People's Republic--would wind up "as an auto company that just produces quarrels" between its partners. He spent that night fretting over a set of cooperative principles that would stress the independence of the joint venture. As it turns out, Hu could have rested peacefully: The project has been a hit: The Buicks now rolling out of a state-of-the-art plant in Shanghai are the highest-quality cars of that model being produced anywhere in the world--and they are also selling.

Hu has drawn much of the credit for this promising start. Top officials at General Motors are quick to attribute the early success of this ambitious and risky investment to his leadership and his ability to bridge the gap between Western and Chinese business practices. Says Rudolph A. Schlais Jr., president of General Motors Asia Pacific: "He's a businessman and hard-charger who understands the Chinese system."

Hu ardently embraces lean manufacturing techniques and puts customers first--revolutionary notions in the People's Republic. His biggest accomplishment, though, is resolving inevitable conflicts between a superefficient automaker and China's often maddening bureaucracy. Hu, in fact, personifies the real potential of China's awkward transition from rigid state controls to a "socialist market economy." As he puts it, "So far, that concept is not completely clear, but GM is helping us to understand how to operate in a market economy and become internationally competitive."

A pragmatist with a sharp eye on the bottom line, Hu is in the vanguard of Chinese managers who are working to modernize the economy. Taking a broad view of what helps China, Hu says, "In the 1950s, saying that a joint venture's interests should come first could land you in jail. There's still some risk in saying this. The country and the [Communist] Party were supposed to come first. But this is a precious opportunity for us to learn something from a world-class company."

His performance has pleased not only GM but his Chinese bosses as well. In July, Hu was appointed president and chief executive of Shanghai Automotive Industry Corp. (SAIC), the largest and most successful automotive manufacturer in China--and GM's partner. Now Hu oversees a huge state conglomerate that last year produced 235,000 cars through a 14-year-old joint venture with Volkswagen, plus its own trucks, tractors, buses, and components with such partners as Bosch of Germany, Ford of the U.S., and Koito of Japan. His work with GM, says Hu, provided "a learning experience" for running this behemoth, which last year earned $164 million on $5.2 billion in revenues.

For all his openness and warmth, Hu still has to work and live under many subtle constraints. Foreigners are not allowed to visit him in his office at SAIC or at his home, an apartment in a compound reserved for Shanghai government officials. Instead we went to a park to meet his wife, Ding Xiu Fang, who works at an auto sales company, and his lively daughter, Peggy, 17, who hopes to become a computer software engineer.

Sheer management ability brought Hu to the top, in a system that long valued political correctness and personal connections over expertise. Born into a large family in Shanghai, where his father worked as a retail clerk, Hu went straight from middle school to the factory floor during a radical ideological campaign in 1968. Understating the personal horrors the campaign inflicted on many Chinese for nearly a decade, he says, "This was the time of the Cultural Revolution, and I had no chance to study." Hu's family was among the millions of urban Chinese sent to the countryside to work on farms. Still, Hu worked his way up to plant manager by 1983, when he finally was able to get a college degree from Shanghai University of Engineering Technology.

Selected by the Shanghai government as one of the 100 most promising managers in the city, Hu was dispatched to Georgia Tech in 1995 to study business administration. Before leaving for Atlanta, he finished a master's thesis at Fudan University in Shanghai on zero defects in quality control at Hui Zhong, a producer of trucks and components that he had headed. Shanghai authorities pulled him out of Georgia Tech after three months to lead the Chinese team forming the GM joint venture. Recalls Hu: "Both parties had to overcome a lot of obstacles--differences in social, political, and legal systems. I wasn't surprised that we had difficulties."

Despite his new, broader responsibilities, Hu's heart still seems to be with the GM joint venture, known in Shanghai as SGM. On a recent Saturday he drove his Shanghai-built Buick Xin Shi Ji ("New Century") and wore a Shanghai Buick T-shirt to a gathering of top managers of Shanghai Automotive for a day of sports, one of Hu's ways of promoting teamwork. Chinese leaders are supposed to be good at everything, so Hu surprised no one with his superior skills at bridge, Ping-Pong, and bowling. Though in 31 years Hu has never taken a vacation, he once spent all night at a bowling alley to improve his game.

The next day, a humid Sunday, Hu gives a long lecture to six Chinese managers from various companies about his experiences in leading the GM joint venture. His work with Americans especially interests fellow Chinese managers, so Hu shares insights on the inscrutable West. "Americans are known as individualists," he says, "but they spend a lot of time building teamwork--while Chinese nowadays are increasingly focused on their individual development. In China we have a long history of teamwork but somehow forgot to update it." Describing SGM's strict procurement practices as a safeguard against corruption, Hu tells the seminar, "If a system allows dishonesty, black money will grow even if one doesn't need to take it. It's like a poison and must be stopped at the beginning." Sounding as if he's still CEO of the GM venture, he concludes, "We've kept our promise to society not only to build a modern plant and produce modern products but also to develop modern people."

Later Hu tells FORTUNE how he has made a fifty-fifty joint venture work, which he says "is difficult anywhere in the world." A joint board sets broad policies, but the top SGM executives in Shanghai--two from each of the owners--make the company's operating decisions. Says Hu: "If you hand a problem to your boss, he may not think you are capable. I like to solve things myself." In doing so, Hu has helped fit GM's strategic goal of capturing a significant share of the Chinese market while operating in an environment in which government support is crucial to business success.

From the start, the joint venture partners agreed that GM would inject technology and management skill to support a world-class car company, complete with exclusive Chinese dealers and vigorous marketing. Making that happen in the People's Republic proved to be tougher than either partner expected. The Chinese government, for instance, still dictates what products automakers can build, as well as how many and at what price. Moreover, GM is required to use locally made components, 40% in terms of value this year and 60% next year. And while sharing its latest technology, GM is restricted by Chinese law to owning just half of the joint venture. Hu notes, "GM naturally wanted control."

Bitter disputes long bedeviled SGM, even though the two partners spent 17 months negotiating contracts that stack about a foot high. Remarks Hu: "They were just done to meet legal requirements, and we never had time to look at them afterward." Inside the joint venture, officially formed in March 1997, the arguments raged so intensely that Hu told his GM associates, "I think Ford and Volkswagen would be very happy to see us quarrel." Says Philip Murtaugh, 44, executive vice president and the senior GM manager in the joint venture: "We had a lot of shouting matches but finally established a level of trust." Murtaugh credits Hu with moving American and Chinese managers from confrontation, unavoidable in negotiations, to cooperation, and says, "He could run a company anywhere in the world."

Dealing with the egos of leaders of the biggest corporation on earth proved to be an enormous challenge for Hu, who says, "In many other places GM won't listen to its local partners. That made my job more creative. It's not easy to change the attitudes of GM people." Nonetheless, he broke through deadlocks by establishing great rapport with Murtaugh, a bright young charger himself. Before coming to Shanghai, Murtaugh learned much about Asians by working for three years inside Isuzu in Japan and for two years at a joint venture with Isuzu that builds sport-utility vehicles in England. Hu says, "My relationship with Phil is a secret weapon."

The Chinese executive didn't just pretend to like the GM representative on the other side of the table, but really sensed a bond. "Both of us were leaders at a young age, and like solving problems quickly," says Hu. "And both of us had bad tempers. In negotiations you're allowed to lose your temper, but it shouldn't happen in a partnership." Consequently, the two men struck a personal agreement never to criticize each other in public but to argue behind closed doors and, even after the most bitter disagreements, to start speaking again within two minutes. "We had to talk because there was a $1.5 billion project on our heads, and all the auto companies in the world were looking at us," says Hu. "I told Phil that it's your human right to say something when you're angry, but let's do it behind closed doors." Making their personal deal known to the entire management energized the joint venture, which initially was preoccupied with conflicts between its Chinese and Western executives. Remarks Dennis G. Dougherty, 47, director of manufacturing: "They unfroze the rest of us to get on with things."

As Hu tells it, teamwork has enabled SGM to achieve "some amazing results." At its sprawling factory in the industrial suburb of Pudong, SGM took just 23 months from breaking ground to building its first test-model cars--and did it under budget and probably in record time for China. Though regular production of vehicles shipped to dealers started only in April, SGM has already sold about half of the 20,000 cars it will make this year. The factory is designed to build 100,000 vehicles annually. Initially, the Chinese government allowed the company to make only Buick sedans, luxury cars with a minimum $48,400 price tag that few Chinese can afford, but Hu has helped gain approval for adding a minivan version, for which there's much greater demand. Small businesses, for instance, prefer vehicles that can haul goods as well as people.

Essentially, the Chinese CEO has imbued managers with a focus that is simple but extremely difficult to carry out in China: The joint venture's interests come first. Insists Hu: "If a decision helps Shanghai Automotive but hurts GM, it's no good. Both sides must benefit." That's quite a leap forward in the PRC, where many state companies treat joint ventures with foreign investors as cash cows for themselves and their cronies, as well as dumping grounds for surplus workers.

Hu also devised during that sleepless night in Detroit a crucial guide for operating the joint venture, summed up in the style of a Chinese slogan as "the 4S principles." Simplistic as they may sound, the ideas became an effective operating philosophy: (1) Study each other's culture and practices to get the advantages of both; (2) SGM's interests come first; (3) standardization, meaning abiding by both laws and company policy; (4) spring, which represents the idea of being flexible rather than stubborn, and taking the initiative. Hu says that the final S also means that managers should focus on "problem solving rather than empty talk." Adds Murtaugh: "After we instituted the 4S principles, cooperation became the bible. Those principles are not medicine to cure ailments, but an attitude that makes everything easier to achieve."

Many small conflicts eased quickly. GM executives, for instance, disliked making drivers of its company cars pay cash for oil changes and persuaded SGM to set up a contract with a service station near the plant, resulting in a 20% discount. Remarks Hu: "It was also more convenient for the drivers, who signed for the oil change and felt that they had gained more respect too." Then there was the problem of banking relationships. GM customarily has spread its money across a number of banks, looking for the best deals on deposits, loans, and other services. Hu, however, argued that the Chinese financial system was so fragile that no bank would lend to a company that wasn't a depositor. As a result, SGM compromised, making deposits and taking out loans from the same handful of banks.

Selecting suppliers of auto parts proved to be far more contentious. Suppliers are supposed to be picked from among three competing bidders on the basis of GM's worldwide criteria--quality, technology, service, and price. Both GM and its Chinese partner, however, wanted to enlist their own suppliers, an issue that sparked heated debates. The joint venture wound up with 85 component suppliers that are mostly associated with its Chinese partner--and that are still striving to meet GM standards. Insists Hu: "We don't accept a defect or pass on a defect. Everyone is involved in building quality into the car." Component makers are turning out no more than 2.5 defective parts per million, but their costs are far from internationally competitive. Says Murtaugh: "The cost structure of doing business in China remains very high. Labor is the only thing that is relatively low in cost. And service, another requirement of suppliers, demands a big change in attitude because the Chinese really haven't dealt with customers before."

The Chinese government tries to shackle every joint venture with a firm commitment to export, but Hu's principle of putting SGM first has effectively contained that pressure. Explains Murtaugh: "To export, we have to be better in quality than anybody else because there's a strong perception in the world that China produces poor products. We can export only on the basis of the venture's ability to produce vehicles that are competitive in quality and price." SGM has the quality part of the quotient licked--so far making Buicks with fewer deviations from specs than those built in North America--but its costs are still too high.

Breaking with standard Chinese employment practices has given SGM an elite work force. The joint venture, which considered 30,000 applicants, hired just 1,700--half of them college graduates. "In China university graduates usually work in an office, but many of ours are on the assembly line," explains Hu. "I tell them that I started out as a production worker, so they are potential leaders." Their skills are honed through rigorous training, often at GM's best plants, such as the Opel factory in Eisenach, Germany. Remarks Shanghai GM's production director Dougherty: "Everyone here is learning to look at the company from the customer on back. This is very different from most Chinese companies, which are based on providing employment rather than being customer-oriented."

From Hu's broader perspective as a Chinese auto industry leader, GM's demanding standards are just what the PRC needs. Indeed, he helped sell the GM project to Beijing with the argument that it would pressure Volkswagen and other international automakers to update the technology they brought to the PRC. And there is another consolation: When China is eventually allowed to enter the World Trade Organization, it will have to lower its import tariffs. That means, Hu says, that "all our companies must become globally competitive very fast." In short, he believes that what's good for GM is also good for his country.