Will the President's bailout be enough to combat the shifting tide of the auto industry?
…Drove my Chevy to the levy but the levy was dry.”
Those words ring with such prophetic irony now – that is if the levy had been retaining a history of American automobile prowess. Or that’s at least what one might feel after reading Kendra Marr’s 18 May Washington Post article titled, “As Detroit Crumbles, China Emerges as Auto Epicenter”. In her article, Marr quoted Daimler chairman Dieter Zetsche as saying “The center of gravity is moving eastward” – a sentiment maintained by many journalists in response to Shanghai’s April autoshow.
It seems China, on the brink of exporting Chinese-manufactured vehicles to the United States, has been on the path of eclipsing diminished American brand power over the auto industry for the past 15 years as Marr notes a 1994 plan by the government to triple auto production by 2000 and reduce imports. In China’s most recent auto plan, the “Automotive Readjustment and Revitalization Plan,” the State Council has raised 8 development goals for the industry including plans to gain 10% average growth in the next 3 years on the more than 10 million units of automobiles planned to be produced and sold in 2009.
With increased production goals in sight, many analysts are looking at the decline in Detroit’s automotive prowess as the harbinger of evolution for the Chinese. China has long been known for its “copycat” like production methods, however, the void being made by Detroit’s crumbling is space for Chinese car companies to develop autonomy in ways historically Chinese businesses haven’t enjoyed. Kelly Sims Gallagher of Harvard’s Kennedy School of Government was quoted as saying, “They [Chinese automobile manufacturers] have world-class business and manufacturing capabilities now. What they still lack is technological know-how, systems integration, being able to design new vehicles from scratch and get them to a manufacturing line.” And though there hasn’t been a mad dash to acquire ailing US auto firms just yet, in many ways, a fusion of American systems integration with the sheer economic weight and manufacturing capacity of growing Chinese firms might be the key ingredient for a full, permanent tilt in the automotive scales.
One car company, though, has begun the Eastward migration of auto production with the acquisition of some major American brand power. Italy’s century old Fiat, best-known for its line of efficiency cars, has been an international player in Europe that’s garnered little American attention until its recent takeover of Chrysler and talks for a sizable portion of GM. Ironically enough, it was GM in 2005 that paid an ailing Fiat to abandon a partnership that is now negotiating with this burgeoning titan to takeover its European and Latin American operations. Fiat is now the third largest automobile manufacturer, behind Toyota and Volkswagon, and has acquired major industry weight at minimal cost to itself.
So where are costs being felt in all of these acquisitons?
The American automotive brand. Years of increased international ownership and offshore production of American vehicles, on top of a tarnished reputation, have contributed to the inability of American auto companies to thrive now in an evolved auto market. Of course, Asian car companies like Toyota and Hyundai have been perfecting a mass produced reliable car, with far superior gas mileage and maintenance records than many American brand cars. And Europe, with some cities established centuries before the advent of the automobile and its windy roads perfect for a scenic getaway, has developed vehicles of precision, rather than size, for luxury cars that many American’s prefer to pour millions into maintaining, year over year. However, it hasn’t been the competition from foreign-brand cars so much as it has been competition for foreign-produced cars that has been the undoing of the US auto industry. The “race to the bottom” for lower production costs has done more to give away a competitive advantage of production savvy (including a basic production workforce) than to penetrate these markets with an internationally nimble brand for an evolving product.
GM just released an outline to Washington projecting the proportion of GM cars sold domestically and manufactured in Mexico, China and South Korea will rise from 15% to 23% over the next 5 years. Increased demand for smaller, fuel efficient cars in countries where wages are miniscule in comparison to that of US auto workers has shifted both demand and supply curves for auto production away from US over the last 20-30 years (US auto workers with benefits make around $54/hr compared to $22/hr for South Korean workers, $10/hr for Mexican workers and some Chinese workers make as little as $3/hr). Moreover, GM and other ailing US automakers have been out-positioning themselves financially for years with pension problems and systemic mismangement trends on their home turf well before this economic crisis forced financial bailout or bankruptcy as the only sources of survival.
As the President’s recent National Fuel Efficiency Policy seems to favor the already very low-emission, compact-car producing competitors of these dying US auto firms, the policy is inevitably accelerating the current trend in US auto consumption further away from the American brand of auto production. In the National Fuel Efficiency Policy, President Obama has essentially revised the 2007 CAFE law, requiring an average fuel economy standard of 35.5mpg for 2012 to 2016 models of new cars and trucks sold in the US, up from a 35mpg standard to go into effect in 2020. The creation of this more timely deadline brings under federal purview emissions standards for the protection of the environment and consumer that previously was a source interstate policy conflict. And with a uniformity in laws, automakers that operate more efficiently, both international and domestic alike, will be producing these more environmentally friendly cars for the US. But with the Ford Escape as the lone US vehicle among the top 10 2009 leaders in fuel economy, whatever is left of the US auto industry might not be enough to set the stage for a comeback in US brand automaking. It might be, instead, another chapter in the conclusion of the US auto industry as we’ve known it. Unless international policies in emissions or labor standards are set that mitigate rapid overseas production of both American brand and international brand automobiles, this reorienting of the auto industry Eastward might be for good.
For links to articles used in this post, check out the following:
As Detroit Crumbles, China Emerges as Auto Epicenter
Under construction, GM To Build More Cars Overseas
