Cars Per Capita

Cars per 1000 people.

The acquisition of one of the big three by a Chinese company would vault China a decade forward.

China wants a car company. The right wing, blinded by a hatred of unions, wants to give it to them. China is already looking at what that would mean: gaining a decade on having a car culture, and the ability to produce it’s own automobiles.

Up until now, it has acted as an assembly point, and source for parts, for some time, in the hopes of learning the secrets of what is one of the crown jewels of the industrial system. Its attempts to penetrate the core automotive markets have been fraught with problems. For China, automobiles provide the key to opening their own interior, expanding their compact cities, turning vast stretches of marginal economic land into developments, and at the end, an export engine with a high value add.

China has not treated automobile technology to the same export oriented path as it has many other industries, only recently to the value of Chinese auto exports surpass auto imports. For a country with a huge chunk of its GDP in exports, and an openly mercantile economic policy, this is unusual. However, as with everything, the end game is both to have China produce high value goods domestically, and export to the rest of the world when they can. For China’s auto industry, that day is coming soon. Right now they are where the Japanese were in the 1960′s – able to export to second tier markets, or able to build other company’s vehicles. China exported only 44,000 complete vehicles in September of 2008, a drop in the global bucket – and mainly to second tier and developing markets.

China’s automobiles also have quality problems. According to JD Powers and associates, defect rates are still nearly twice times comparable North American produced vehicles. China’s supply chain problems, while not as acute as they were in 2006, are the focus of a national build out. Tariffs on parts imported for re-export have been dropped. While China is indeed the epicenter of cheap factory labor, most of the cost of a car is materials, not labor, and China still has a chronic shortage of management. The Chinese are still "a product generation away" from being able to face competitive markets. Even international car companies have defect rates that are 50% above the Big Three. And domestic brands? More than three times. While it might seem that two dollar an hour labor will make up for almost anything, that’s not the case when producing large complex industrial goods. First, time on tools matters. Two dollar an hour labor is not the same thing as assembly line quality labor in Europe or the United States.

Second the speed of China’s growth in export has meant that there are stretch marks all over China’s build out. The quality of almost everything in China, is suspect, from paint to "tofu construction." The larger the end product, the more the underlying defects add up. The more delays from breakdowns and other problems, the more cushion factories have to build in. It is one thing to assemble parts, it is another thing to build something of locally produced parts. In automobiles, the power train is one area most susceptible to these problems. Finally, China has a shortage of people who can run groups, factories, and extended businesses. Managing a global supply chain is hard, Renault has a "crisis cell" group that does nothing but deal with problems with their global supply chain. China does not have this expertise, nor the expertise with hedging materials costs and futures costs. That’s why China’s penetration into the US and Europe remains limited. Quality, emissions standards, safety, design skills, scalability, all need to be addressed.

The above means that fear of China flooding the world with cheap cars any time soon, is overblown. But the threat is more indirect, in a more important sense, this moment is a do or die for the US automotive industry. China, you see, doesn’t need to compete head to head with BMW, Volkswagon, or the Big Three. It doesn’t need to beat Toyota in a price war over sedans. Instead, what it needs is the ability to produce vehicles for it’s domstic market that are "good enough," and it needs continued access to the US domestic parts market. Autoparts account for a noticeable amount of US exports, auto parts are a significant part of auto employment. It is in auto parts where the Chinese labor advantage is most important, and Chinese auto parts are not falling in the recession, because their defect rate is comparable to America parts, and the prices are lower. They aren’t equal, but they are close enough cheap enough. The acquisition of one of the big three by a Chinese company would vault China a decade forward. Enough to do two important things. The first is have a network of distributors and dealers in the US, which is one of the most difficult and expensive propositions. The second is the ability to ignite their own internal economy. It needs to move beyond knock-offs, and it is, both by acquiring older manufacturers like MG Rover, and by building large R&D facilities. It is moving beyond lower quality and lower price as the only selling points by purchasing sophisticated supply chain and materials handling technology. It takes time to integrate this technology, but once the cycle of development and retooling is learned, the lesson of the South Korean auto industry is instructive: 15 years from joke, to solid player in the global market.

China is serious about automotive technology. It is also considering using its currency reserves to bail out its own troubled automotive sector, which has over built low quality production in an era of 25% market growth, and is facing an era of significantly slower growth, with higher bar to market. That’s why They’ve propose buying key assets from Chrysler and GM. That’s what the right wing noise machine, and Senator Shelby, are pushing in essence: selling Detroit to Shanghai. Such a move would not vault China into the top ranks over night, but it would create a vacuum in the US, and mean that the US auto industry would be on circling the drain. Even the hard right realizes that nationalization would be the only other solution.

China wants to shift from being export driven, to being internally driven. Auto penetration in China is still a fraction of the USFor this they need to have the ability to expand internally, and that means roads automobiles and the sprawlconomy, and they need something to export to the world which can be synergistic with this: namely, security. This is why the Chinese want an aircraft carrier because that is one important key to force projection, at a time when the American security product is not in high repute. The rest of the world puts up with American exceptionalism for peace. Failing to protect oil shipping is an example not doing our job.

That is the real threat: a China which can decouple is more dangerous that the People’s Liberation Army. Dumping trillions of dollars a more effective threat than dumping bombs on Taibei. The American economy is the key strength that America must protect. But the distance to both the carrier, and to a domestic auto industry show that why getting an auto industry restructuring right this time, along with a financial industry right this time, because with each passing economic cycle the time when the United States will have a genuine replacement to run the 20th century hegemonic power position, grows stronger. Failing to restructure the American automotive industry now, will have drastic consequences. Not just on the immediate employment picture, but on the next economic cycle. There will be another recession after this one, it is a metaphysical certainty. When that recession comes, if the financial system has not been overhauled, and the US basic economy has not been dramatically altered, then a China that can credibly say that it is going to decouple from the US is in the cards. And on that day the easy money of the hegemonic period will evaporate, not just for a year or two, but forever.

Would a world dependent on Chinese auto production be one that is going to combat global warming, or even ordinary pollution? That doesn’t seem reasonable given the Chinese attitude towards pollution as "someone else’s problem." Would a world dependent on Chinese auto production be able to shift transportation policy? Again, unlikely. Personal transportation is the fulcrum both of personal opportunity, and the largest problems facing the public. If the US wants to control it’s destiny on these matters, then neither take down, nor bail out, are reasonable options. The only one that remains, is an overhaul, recognizing that an SUV might put more profits on the balance sheet of GM, but it has more costs on the national balance sheets than it is worth.

The US still has the liquidity and position to get this right now, but if it fails, it will almost certainly not see a chance again. There’s no tomorrow on this one, and the choices of letting US automotive industry either collapse, or turn into a money sinking zombie, both lead down a road from which there are no exits, and no chances to turn back.