22  A New Stage of Automobile Overexpansion?

William Krehm

The wild overproduction of the automobile industry has brought yesterday’s powerful concerns to the gates of bankruptcy. The Wall Street Journal (20/04) brought us two major articles disclosing new vistas of disaster for it. The first – "Passing Lane: GM’s Chinese Partner Looms as a New Rival" by Gordon Fairclough – recounts how GM to postpone yesteryear’s disaster entered into partnerships with Chinese companies that shared all technology in return for admission to the Chinese market. But as is the case with the entire gospel of relentless growth, yesterday’s solution becomes to-morrow’s nightmare: "Shanghai – Garment-company owner Li Xiangin was planning to buy a new Buick this month. ‘Then I saw the Roewe,’ a new Chinese-made sedan,’ he said. ‘It’s quite a bit bigger and more luxurious and looks like a Jaguar.’

"Mr. Li’s change of heart points to a challenge for GM in the world’s second biggest car market. The Roewe’s maker, Shanghai Automotive Industry Corp., has been GM’s partner in making Buicks in China for a decade. Now the Chinese company, applying that know-how and the money earned from selling joint-venture cars, could become a serious competitor.

"GM says the bargain it made – access to the Chinese market in exchange for transferring technology and expertise – was worth it. ‘We made a big bet back in 1997 and it’s paid off for us very well,’ says CEO Rick Wagoner."

The price: the tougher nature of the next decade of survival in competition with its partner, thoroughly schooled in the trade’s secrets and now acting independently as a new competitor of GM as well as a partner. For GM’s world-wide labour force this spells a further descent down the marble staircase to dubious pensions, employment and wage levels that brings us closer to the levels of our GM’s Chinese hosts.

"GM’s 50-50 joint venture which also makes Chevrolets and Cadillacs is the biggest car-maker in China by volume, bringing GM hundreds of millions of dollars in profit. That’s a rare bright spot for a company that has trouble earning anything in its home North American market. GM is also a minority partner in a successful Shanghai Automotive-led company that makes minivans and cars in southwestern China.

"Still, the question lingers: did GM give away too much? Its Chinese partner could end up competing against GM both in China and abroad. Shanghai, owned by the Shanghai city government, already rivals GM in a joint venture with Volkswagen AG.

"Hu Maoyuan, chairman of Shanghai Automotive, says he wants to ‘build a global Chinese brand.’ His company, he says, ‘will take full advantage of the technical and management experience we’ve accumulated in the GM and Volkswagen joint ventures.’

"Competition is threatening everyone’s profits. Average vehicle prices in China have been falling by about 7% annually in recent years. GM’s profits from China operations in the final quarter of 2006 fell nearly 19%.

"The Roewe that Mr. Li plans to buy is no knock-off. Shanghai Automotive based it on plans acquired from the now defunct MG Rover Group Ltd. The project included British veterans of Rover along with Chinese engineers. The sedan’s list price, about $30 to $36 thousand depending on options, is up to $7,000 less than that of the Buick LaCrosse made by the joint venture.

"Shanghai Automotive started production of the Roewe 750 four months ago at a factory in Jiangsu Province near Shanghai. It plans to introduce a new model every year for the next five years, building a range of cars from subcompacts to SUVs."

That will guarantee that there will be less and less space for the Chinese-American joint venture, especially for guarantees of continued success. Future plants are likely to move from the Shanghai area to cheaper outlying regions of the country. That, however, will tend to ease the population pressures on Chinese society, unlike the globalized outsourcing of US and European industry.

That carries to a higher power the geopolitical advantage of the Chinese economy over that of the West not to be ignored in forecasting what the future holds in store.

Chinese Automakers — Wily Partners or Rivals?

"China’s car market grew 35% last year, making it the fastest growing in the world in major countries. By 2010, the country may surpass the US to become the world’s No. 1 market for cars and trucks.

"Other global car makers, banking on growth in China, are also seeing their local partners turn into potential rivals. Meanwhile, foreign companies are hampered by a Chinese law that says they must have local partners if they want to produce for the domestic market, and they can’t own more than half of a joint venture."

Contrast this keen grasp of Western capitalism’s weakness in its brainlessly shortsighted outsourcing largely for continued growth of speculative finance.

"Beijing is following the auto industry pattern in other high-tech industries as well. It is pushing foreign manufacturers of airplanes, power-generation equipment and electronics to share technical knowledge with Chinese partners.

"China’s modern auto industry dates to the early 1980s when a government-owned company in Beijing signed a deal with American Motors Corp. to produce Jeeps, and Volkswagen went into business with Shanghai Automotive.

"In 1994, the Chinese government, dissatisfied with the pace of progress, imposed stiff tariffs on imported vehicles and parts, and laid down requirements to speed knowledge transfer." That was right on the nose for coincidence with the outsourcing under NAFTA and other Globalization and Deregulation projects coming out of Washington.

"Toyota Motor Corp. [undoubtedly due to a better grasp of the thinking of Beijing and the realities of world trade], wasn’t willing to play ball. GM and Ford were. After almost a decade of economic reforms, capitalism was beginning to create an urban middle class and the market for passenger cars finally seemed poised to take off. The two Detroit makers tried to outdo each other in their offers of technical cooperation.

"In 1997 GM landed a deal. It agreed to create a $1.52 billion, 50-50 joint venture with Shanghai Automotive called Shanghai General Motors. GM promised to customize vehicles for the Chinese market and set up a research and development center. Chinese engineers would work alongside foreign colleagues at the joint venture.

"In exchange, GM thought it would have protection from luxury-car competitors, says Michael Dunne, who worked as a consultant for GM at the time and now heads an Asian unit of research firm J.D. Power & Associates. It didn’t work out that way. The year after Shanghai GM started producing cars in 1998, Honda Motor Co. began making Accords with a local partner. More surprisingly, Shanghai Automotive began to produce the Passat, a sedan that competed directly with Shanghai GM’s Buick New Century."

The 50-50 deal with Shanghai Automotive had been part of the strategy to lure the foreign producers to shed their technology for some much-needed short-term profits.

"In 2004 China’s government added another wrinkle, pushing domestic manufacturers to build their own brands and not merely serve as partners for foreign companies. By 2010 China ‘should become a major manufacturing country.’"

The joint venture gambit had served as a trap to get the foreign car companies to disgorge their technical know-how, and then face the fully empowered competitive muscle of wholly Chinese companies. Without the idiocy of Globalization and Deregulation dictated by the US financial sector, this would never have been possible.

"Today, the Shanghai General Motors Jinqiau South Plant, on the outskirts of Shanghai, builds Buick Regals with sophisticated equipment. The average car takes about 15 hours to build, about the same time as at the best GM plants in the US. Japanese-made robots put windshields in place, German machines marry the cars’ chassis to their bodies. Adjustable conveyors keep the cars within easy reach of workers in bright blue overalls.

"Last year Shanghai GM made more than 400,000 passenger cars. By 2010, the partners plan to boost capacity to one million cars annually. The venture already exports a small number of cars and GM officials say exports to developing markets could grow."

Whereas the usual outsourcing of production steps to cheap-labour lands leaves profits, high-reward design and marketing strategy at home, the Chinese have handled their strategy brilliantly. The Chinese will acquire major and eventually full control of such supreme rewards. Never mentioned in the discussions on D&G, it is, however – along with the job losses for North America and Europe – one of the key issues of outsourcing.

William Krehm

– from Economic Reform, May 2007