Friday, November 10, 2006

China's Automotive Ambitions

Tuesday's Wall Street Journal featured an article on the rapidly-evolving automotive production sector of the Chinese economy. The details are interesting, and not at all surprising.

Their automotive sector resembles, in many ways, that of the US economy prior to the 1950s. There are many brands, a scramble to gain share, and many component suppliers.

A key difference, however, is the presence of large European, Japanese and American automotive companies with minority stakes in some of the Chinese firms, as well as a coterie of component suppliers from Europe and America.

Thus, the Chinese producers are poised to gain rapidly on American and European manufacturers, in China, by piggy-backing on these existing infrastructures.

With the US elections on Tuesday as a backdrop, the development of the Chinese automotive sector presents the newly-elected Democratic Congress with a vexing predicament.

Do they support US expansion abroad, global trade, and economic health, by acknowledging and accepting this reality of Chinese automotive ascension? Or do they myopically frame the issue as one of US automotive manufacturing and assembly jobs migrating to China, and behave in a protectionist vein?

The article ends with a quote from Bill Ford, describing his firm's substantial investments in China,

"Americans don't get it. They don't understand what's going to happen."

The "it" to which Ford refers is that, soon, China will be the global destination for low-cost, highly productive auto manufacturing. Democratic policies notwithstanding, this is going to occur. The question is, does the US government, in the form of the newly-arriving Democratic Congressional leadership, maneuver to benefit Americans as a result of this reality, and construct positive relationships with the Chinese, or fail to do so, and risk substituting the risk of military confrontation with that of trade confrontation?

For GM and Ford, of course, all of this Chinese development creates even more risk for their turnarounds. With so much value being compressed in the process of producing and marketing cars, and so much of that remaining value moving to China, what's left for a US-based company to extract and on which to make a profit?


Anonymous said...

1. Every country (except the US, often) moves to protect its important industries. Japan has massive "unfair" protections for its auto industry; China is not simply going to roll over if the Bill Fords of the word 20 years from now decide that Ghana or Bosnia or Uruguay is the new place for low-cost, high-productivity auto manufacturing. These protecotinist steps invariably feed a cycle of rising manufacturing costs; being the lowest cost producer is a self-ending position.

2. Cars, much as I smetimes wish they were, aren't widgets. Numerous factors go into the buying decision, and cost, often, is not the primary concern. We've all had the experience of an import car dealer telling us that our car will be in 3 months, loaded with options we don't want. There are plenty of reasons to "buy American," patriotism notwithstanding. That the US makers still sell a lot of cars is evidence of that. One might attribute that to US car buyers not knowing any better; maybe so, but no one ever made money by overestimating the intelligence of the cutomer base.

3. I don't think there will be any strong protectioinist legislation coming out of this Congress. With majorities that are nowhere near veto-proof, the Democrats can do some things for show, but I doubt they will waste much energy creating and passing bills that are, in Reagan's words, "dead on arrival."

C Neul said...

As to point number one, I don't know what choice they would have.

However, it's unlikely, simply because of China's size as a market. It's the same reason the US became home to so many large auto manufacturers during the 20th century.

However, even the Chinese, in time, might outsource assembly work to Ghana or Bosnia, et al.

As to the second point, I haven't noticed much trouble recently with imported cars. Then again, most significant 'foreign' makers located production facilities here, in effect re-employing some of the numbers (tho not exactly the same people) of people who were displaced by Ford's and GM's inept management. Thus, the Chinese could well locate facilities here in time, but preserve value for their equity interests.

I agree with your third point.