EDITORIAL: Auto-Industry Obituary for West? Not So Fast

With the recent announcement of plant closings and huge losses, the American automotive industry makes a tempting target for an obituary writer. As West European carmakers shift production to Eastern Europe, it's tempting to include them, too. Yet reports of the death of carmaking in wealthy countries, experts say, are premature.

From International Herald Tribune

With the recent announcement of plant closings and huge losses, the American automotive industry makes a tempting target for an obituary writer. As West European carmakers shift production to Eastern Europe, it’s tempting to include them, too. Yet reports of the death of carmaking in wealthy countries, experts say, are premature.

One could easily forecast that with China’s growing capacity to export cars, and South Korea’s footholds in the American and European markets, it’s only a matter of time before the big names end up closing all their plants. That could happen eventually, but probably not for decades. The reason is that the problems of American carmakers aren’t entirely of globalization’s making. And furthermore, producing cars in China isn’t quite as straightforward as producing sweaters or stereos.

First off, the current shakeup in the U.S. may be a repeat of a situation that the industry endured, and survived, a quarter-century ago. “The current announcement by Ford of the layoffs reminds me very much of the early 1980s, when oil prices had gone up in the U.S.,” said Robert Feenstra, a professor of economics at the University of California at Davis. “There was a big move away from American cars because they were not building the kind of cars that people wanted at high gas prices.” Ford stuck with a lineup full of sport utility vehicles for too long, he added, and did not anticipate how higher gasoline prices could shift people’s preferences.

Feenstra said that as in the 1980s, the American industry had a chance to renew itself.

“It seems to me that the plants they’re shutting down really are old plants,” he said, “and there’s a lot of potential there for putting together a whole new type plant.”

Newer plants typically use more equipment and fewer workers to produce the same number of cars.

It may be less expensive to build new plants in developing countries like China, where the work forces don’t carry the same heavy pension obligations as in the West. Companies like Volkswagen, Nissan and General Motors already have joint ventures in China. But making cars there isn’t necessarily that much cheaper than in the West at least not yet.

“Currently they’re not exporting because the scale so far is small; the cost is not dramatically lower,” said Yale Zhang, director of emerging market vehicle forecasts in the Shanghai office of CSM Worldwide, an auto industry consulting firm. It’s not just the economies of scale that are missing, though. Zhang said Chinese supply chains were nowhere near as sophisticated as those of the big manufacturers in the United States and Europe, with their computerized, just-in-time delivery of parts from nearby factories. One thing that might not hold China back, however, is quality. When the South Korean automaker Hyundai first arrived in the U.S. market in 1986, it was viewed, with some justification, as a producer of fairly flimsy cars. Hyundai retrenched, retooled and re-entered the market with higher-quality products, backed by long warranties and a new marketing campaign. In the end, it was successful; Hyundai and its lower-priced sibling, Kia, sold about half a million cars in the United States last year. Yet its flagship sedan, the Sonata, was built in Alabama.

The Hyundai story is unlikely to be repeated in China. The biggest reason is that the main exporting base in China will belong to foreign brands, like General Motors. “The GM car in Shanghai is a luxury Buick,” Feenstra said. He asserted that “they’re built to tighter tolerance than the American versions.”

With time, China may also find a niche for its own brands, said Christopher Findlay, a professor of economics at the Australian National University. He noted that Chinese-made appliances had been selling for years under better-known names, and now the Chinese brands, like Haier, are starting to enter markets on their own. The same could happen with cars. But that’s a long way off, Zhang said. “They’re not actually competing with U.S. or European automakers at all,” he said. “At the most, they are competing with some low- end Korean products.”

He said the big names themselves, not the local Chinese brands, posed the bigger threat to plants in the West. Even then, design and some manufacturing are likely to stay in the wealthy countries.

“The construction and design of components is where there was a lot of skill and capital required,” Findlay said. “What you might find is that assembly is what moves out of the high-income and high- wage countries, but development and some of the high-value components might stay.”

Employment in the auto industries of wealthy countries is still likely to fall. As they focus on more capital-intensive components and production techniques, their need for workers will slowly erode.

“There’s really just no doubt about it,” Feenstra said.

Still, these changes are unlikely to occur uniformly across the industry, because the margins involved are very small. The difference in cost between producing in the United States and in China would have to grow before the decision became a no-brainer, Findlay explained. “What you might see is different companies having different strategies,” he said. “It’s going to be fun to watch, to see which one works out.”

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