Capitalist Roadsters : BEIJING JEEP The Short, Unhappy Romance of American Business in China <i> by Jim Mann (Simon & Schuster: $19.95; 311 pp.; O-671-62027-4) </i>

Enchanted by the vision of an ocean of consumers and cheap laborers, American businesses rushed to China 10 years ago when diplomatic relations were re-established. Now disillusioned, many of these businesses are reevaluating their ventures in the Middle Kingdom. Yet China was then, and still is, a land of potentially great rewards where caution and patience can yield profitable results.

How then did so many experienced business people fumble on both sides of the Pacific? Using American Motors Corp. for his case study, Jim Mann ably chronicles a decade of earnest enterprise, grave misunderstanding and serious self-delusion among American business people in China.

Now that markets in Russia and Eastern Europe beckon, the lessons that AMC and other firms learned can serve as guidelines for future dealings in this newly opened “socialist” world. We should be mindful that our competitors in Japan and Europe always stand ready to capitalize on our lost chances.

The former Beijing bureau chief for the Los Angeles Times, Mann tells an engaging tale of American Motors’ joint venture in China, from its hasty, optimistic inception in 1979 to the present period of frank reevaluation.

The choice of AMC is a good one. Often touted as the model for all Sino-American ventures, AMC’s ground-breaking deal seemed to have something for everyone: respectable short-term profits for AMC with glorious long-term possibilities, and swift modernization for its joint venture partner, Beijing Automotive Works. AMC had the tools and the know-how, China the labor and the promise of unlimited sales.

Anyone who has tried to do business in China will read “Beijing Jeep” with recognition and nostalgia--recognition of a shared experience of daily life in Beijing and nostalgia for an era lost in the debris of the Tian An Men Square Massacre on June 4, 1989.

Those who never have been to China will find in this book a revealing and enjoyable portrayal of the Chinese working world, from the negotiating table to the assembly line. Equally instructive is Mann’s hard look at the workings of American business, including the costly and classic schism between overseas operations and the home office.

Perhaps the most fundamental Western misconception about the Chinese is that they can be forced to respond to Western business methods and attitudes. As the author points out, what was true for the British in the late 1800s still holds today--China is at best a reluctant consumer of foreign goods. “We have never set much store in strange or ingenious objects, nor do we need any more of your country’s manufactures,” wrote Chinese Emperor Qianlong in a 1793 letter to England’s King George III. It’s a seminal point: Upheavals aside, most things still change slowly in China.

Moreover, as business people dealing with any government well know, ideologies come and go, but bureaucracies are forever. Mann reminds us that it was ever thus: “China’s intractable bureaucracy had stymied Mao and Deng just as it had the imperial and republican leaders who went before them.”

In the mid-1970s, AMC was in an economically frail position. In spite of a merger with French auto-maker Renault, the company was sustaining itself largely by sales of a single, very profitable product, the Jeep. So, when Todd Clare, AMC’s vice president of international sales and self-styled “China hand,” decided the time had come for the AMC jeep to be manufactured and sold in China, he was enthusiastically supported by senior AMC management.

On paper at least, it seemed irresistible. With a population of 1 billion, China was certainly the largest new market in the world. Even if local sales flagged, labor costs near 34 cents per hour promised a highly competitive product for export to nearby Asian countries.

The deal looked good to the Chinese as well. They saw an opportunity to acquire Western technology, build up foreign exchange and replace their aging Soviet-designed jeeps, used by the military and civilian work units, with an entirely new model designed and built with AMC expertise.

The original 1979 memo of understanding was nothing if not promising. It laid out, Mann writes, “the broad objectives: to improve the quality of the Chinese jeep, to introduce a new family of jeeps made under AMC’s directions, and to begin manufacturing parts and components in China to export.”

It was all so simple! “Clare was dazzled by the speed with which they had reached the agreement. My God, he had only been in China for seventy-two hours, and boom, crash, everything’s fine, it was all done. China was going to be much easier than they expected. Clare thought this was going to be a pushover.” What Clare did not realize is that the Chinese consider such memos routine courtesies designed to initiate a relationship, not define it. In a sense, the Chinese were just being polite.

Of course, both sides had conveniently overlooked some important details. For one thing, with an average annual take-home pay of less than $1,000, Chinese consumers weren’t likely to spend $19,000 for a Jeep Cherokee. Even if large organizations, such as civilian work units or the powerful People’s Liberation Army, had the money, they weren’t authorized to use precious foreign exchange to buy the American-sourced product. Understandably, AMC wanted payment in foreign exchange for the very good reason that the local currency, renminbi, is worthless outside of China.

Undaunted, the new partners plunged ahead to form their joint venture called Beijing Jeep. As Mann tells it, while each side loudly proclaimed the mutual benefits of their enterprise, in fact neither side had any intention of living up to the letter of the original agreement. The Chinese wanted only the technology, not the product; AMC paid lip service to transferring technology but really wanted the sales.

That Beijing Jeep did not officially launch its operations until six years after the initial agreement was signed was a strong hint that China is not the “pushover” that Todd Clare thought it was.

A major miscalculation was the mistaken, but widely held, belief that “old friends” would be rewarded for their early generosity and patience. Like any savvy negotiators, the Chinese exploited this myth by playing one “friend” against another. In fact, according to Mann, Beijing Jeep’s start-up delay was in part due to the Chinese using the AMC agreement as a negotiating ploy in a potential deal with Toyota.

Another misconception was that high short-term costs were justified by the potential for great long-term gains. The Chinese tested this cavalier approach every chance they got. With convertible foreign currency in short supply, the Chinese government exploited every opportunity to generate foreign exchange. Meeting virtually no resistance among the stampeding Westerners, every year the Beijing government coolly hiked the prices of all services used by foreigners, from hotel rooms to telephone calls.

Our gold-rush mentality now seems shockingly naive. Mann writes: “American business leaders tended not to examine (their) assumptions. There was a mystique, a romance about the China market that transcended all logic and caused the board chairmen to suspend their normal, everyday business judgments.”

In the case of AMC, this suspension of normal business judgment nearly resulted in the demise of Beijing Jeep. Only by the use of unorthodox tactics was AMC able to force limited success from its ill-conceived business strategy.

After discovering that the costs of designing and building an entirely new Chinese jeep were prohibitive, AMC decided that the only profitable course was to sell ready-to-assemble Cherokee kits. This way, AMC made money twice: once from the sale of the kits, and again from the sale of the assembled Jeeps.

There remained the problem of payment in foreign exchange. AMC’s solution: Get the attention of top Chinese authorities by escalating the problem to the level of an international incident through a well-orchestrated manipulation of the American press. Even then, the good offices of a lucky contact close to then-premier Zhao Ziyang were required before AMC was guaranteed foreign-exchange payments.

With visiting dignitaries, including then Vice President George Bush and Secretary of the Treasury Jim Baker, dropping in for tours of the Beijing Jeep assembly line, the Chinese were willing to pay the price for a model relationship. Other companies were not as fortunate. Absent similar special favors, many Western companies have been quite willing to reexamine their China enterprises, especially in the wake of the Tian An Men Square massacre.

Though an important and well-told tale, “Beijing Jeep” suffers from a non-fatal case of ethnocentrism. Mann does make an effort to report the Chinese side of things, and overall, his sympathies lie with AMC and the American business community. AMC’s exaggerated promises somehow come across as more forgivable than do those of the Chinese.

This book may give some readers the impression that the China market is hopeless. Not so. As someone who has worked in China on a variety of transactions, from TV sales to equity joint ventures, I am convinced that with patience and persistence we can do profitable business with the Chinese. To be sure, they are tough negotiators, but if a deal makes sense, they certainly can say yes and mean it. It would be unwise for American businesses to be daunted by the long march toward lucrative commerce in China, Eastern Europe or the Soviet Union.

If we do not compete aggressively in these countries, we will ultimately weaken our position in international business, and we’ll lose in the long run to savvy competitors less fearful of the complexities of international trade.

As American companies return to Beijing and begin to evaluate opportunities in newly opened Eastern-bloc nations, they would be wise to learn from their colleagues’ hard-won experiences in China. For starters, they should pick up a copy of “Beijing Jeep.”