Mercedes' China deal: politics or policy?

Merdedes-Benz AG's recent triumph over Ford Motor Co. and Chrysler Corp. in winning rights to a key minivan deal in South China last month, raises the question of whether China's decision was based on deteriorating political relations with the U.S. or rooted in the best interest of China's new automotive policy.

The German giant, previously believed to be the runner-up due to its inexperience with minivans, has been crowned the exclusive partner for a $1 billion deal to produce 60,000 luxury vans and 100,000 diesel and gasoline engines a year. The venture will fulfill two objectives of the Ninth Five-Year Plan automotive policy, which calls for production of 60,000 vans and 100,000 engines by 2000. China currently has no minivan production.

Mercedes will grab a 45% stake in the forthcoming venture; state-run Nanfang South China Motor Corp. will control the remainder. The venture will produce Viano-based vans -- slated for production in Spain next year -- and production will be divvied up between two facilities on the island of Hainan and at Zhanjiang in Guangdong province. Besides the minivan venture, Mercedes will invest in a $50 million venture with Yangzhou Motor Coach Mfg. Co. to produce 7,000 touring coaches and bus chassis.

Mercedes has not yet signed a joint-venture contract with the Chinese partners, and all of the details have yet to be ironed out. In fact, the only binding factor of the agreement that Chinese President Jiang Zemin and German Chancellor Helmut Kohl signed in Bonn is that the Chinese would conduct no further negotiations with foreign companies for the venture. The deal gives Mercedes the green light to begin feasibility studies and negotiations.

Mercedes' fortune comes at the expense of U.S. automakers who may be caught in the tailspin of rocky diplomatic relations between the U.S. and Chinese governments. Several issues have divided the nations in recent months. In February, the U.S. was ready to scold China with $1.1 billion in sanctions because of intellectual property infringements, which it claims cost U.S. industry $830 million in 1993. Then in June the U.S. welcomed Taiwan President Lee Teng-hui to discuss the possibility of admitting Taiwan to the United Nations as an independent nation. But what really put the nations at odds was the arrest of Harry Wu, a Chinese-American human rights activist who was detained for espionage after he crossed China's border in July.

On the surface, it appears Beijing let politics override true competition. The decision frustrates U.S. OEMs who are trying desperately to root themselves in China's vehicle market -- a designated pillar in the nation's industrial development. Automakers know that the development will move at a breakneck pace over the next few years and that gaining clearance to the market now is urgent.

Both Ford and Chrysler made light of the decision. Chrysler said it had not yet received the final word from the Chinese and until it does, the decision is not final.

Ford appeared more resilient, however, immediately shifting its sights back to a luxury car/minivan project in Shanghai with the hope of defeating GM. Also on Ford's drawing board is the national family car project, for which Ford faces the competitive pressures of eight rivals from Japan, six from Europe, two from Korea and two from its home turf. Ford also has earned itself four major components ventures over the last two years to produce plastic parts, glass, electronics and radiators.

Chinese officials say the minivan decision was based solely on commercial factors rather than politics. Countless Chinese industry executives say the U.S. simply does not know how to negotiate properly for vehicle ventures. They note that U.S. firms expect hard and fast developments to result from three-day visits to China and claim the U.S. has very little understanding of Chinese business policies, the market, government systems, and culture.