DETROIT-In 1952, Charles Erwin Wilson, then the president of General Motors, told the Senate Armed Services Committee: "What's good for General Motors is good for the country." In 2004, that axiom may have to be reversed and amended. What's bad for General Motors may be bad for President Bush's re-election chances.
If history holds, Bush's chances for a second term will depend more on the performance of the American economy over the next 18 months than on the success of U.S. troops in the looming war against Iraq. And administration expectations that the economy will bounce back soon after the Iraq situation gets sorted out depend on a strong performance by major U.S. industrial sectors-especially the automobile industry, which accounts for about 7.8 percent of all manufacturing in the United States. Today, the prospects for that are decidedly mixed.
Vehicle sales are at near-record levels in the United States-16.9 million in 2002-but that is an illusory image of success. A rising portion of those sales comes from imports, which create no high-paying U.S. manufacturing jobs. Moreover, automakers' unprecedented and unsustainable low-rate financing deals, which amount to a subsidy for every car sold, have been artificially sustaining new-car sales. A slowdown in sales would pose problems for the industry, because production overcapacity haunts both U.S. and foreign producers. Furthermore, thanks to falling prices, profits are down at Chrysler Group, the American division of DaimlerChrysler; Ford Motor; and General Motors. To compound the industry's problems, the Big Three face contentious contract negotiations this summer with the United Auto Workers.
Auto-making has been a growth industry in recent years. Automobile manufacturers around the world have added about 19 million units in production capacity since 1990 and can now build about 77 million cars and light trucks per year, according to Autofacts, a PricewaterhouseCoopers subsidiary in Bloomfield Hills, Mich. But consumption of new vehicles this year is expected to total only about 56 million units. As a result, overcapacity in the auto industry is now about 27 percent worldwide. "At some point, something has to give," said David Snyder, director of business development for Ford.
In theory, such a mismatch between supply and demand should not be a problem. "To an economist," said Mustafa Mohatarem, GM's chief economist, "it's an irrelevant concept in a competitive industry." In a rapidly changing market, successful firms will always be expanding to meet demand, and unsuccessful companies will be stuck with capacity they can't use, Mohatarem says. "I only get concerned when capacity is the result of government action."
But in practice, global overcapacity is a driver behind several problems now facing the Big Three.
As the world's largest vehicle market, the United States is an attractive release valve for other countries' excess capacity. And evidence is mounting that our Asian trading partners are doing what they can to keep that valve open. Japan's domestic automakers, which can produce several million more cars than that country's weak economy can absorb, are the worst offenders. Desperate to preserve manufacturing jobs, the Japanese government has repeatedly intervened in the exchange-rate market to ensure a weak yen, thus making Japanese cars-and other manufactured products-more affordable to foreigners.
The tactic has worked. Five years ago, 8.3 percent of the cars and light trucks sold in the United States were imported from Japan. Last year, the Japanese import portion of the U.S. market had grown to 10.4 percent. Cheaper auto parts imported from Japan have also helped U.S.-based Japanese automakers-Honda in Ohio, Toyota in Kentucky, and Nissan in Tennessee-grow their American-built share of the U.S. market, from 15.3 percent in 1997 to 17.5 percent in 2002. Today, Japan is reaping huge benefits from controlling 27.9 percent of the lucrative U.S. auto market. Analysts think that about three-quarters of Japanese automakers' profits now come from sales in the United States.
Japan's rising market share and the profits derived from it have potential long-term consequences for the Big Three, because Honda, Nissan, and Toyota are using that money to build more plants in the United States, solidifying their larger market share here.
They are also using their profits to expand capacity in China-the world's fastest-growing market. Honda recently started up a new facility in Guangzhou that builds Odyssey minivans and Accords. Nissan and Toyota have announced plans to build factories in China, too. As a result, some auto analysts think that by 2010, China may have the capacity to build 7 million cars and light trucks, more than twice its current output. Most of those vehicles will go to China's burgeoning domestic car market. But Honda is already promising to export cars from Guangzhou. And if it does, its competitors will not be far behind. Already, the value of Chinese-made auto parts imported into the United States has risen dramatically.
"China is where Korea was 25 years ago," observed Ron Glantz, the retired dean of American auto analysts. "But 10 years ago, the Koreans started exporting with a vengeance. And I think the Chinese can do it faster than the Koreans did." The reason, Glantz said, is that "the Koreans used their own management and bought obsolete technology. The Chinese are not buying obsolete technology, and they are letting in some first-rate management teams."
For Chrysler, Ford, and GM, this growing competition abroad, combined with their shrinking market share at home-the Big Three have lost 10 percent of the market in five years-spells trouble. If they sell fewer cars, their employee health care and pension costs-now billions of dollars annually-have to come from fewer vehicles, thus increasing the per-vehicle cost. And Japanese and German manufacturers abroad don't share that burden, because their governments pick up much of those costs for their workers. In addition, Japanese and German companies building cars here in the United States generally have a younger workforce and nonunion contracts, both factors that work to keep their employee expenses lower.
But these are only some of the domestic industry's growing problems. Starting in the mid-1990s, the price of building a car began to fall for the first time since the era of Henry Ford, thanks to long-overdue improvements in automating production. As a result, a car costs less today than a comparably equipped one did five years ago. That's good for consumers, but falling prices, combined with projected falling sales volumes, could mean even lower profits for the Big Three for the foreseeable future.
And that could mean hard bargaining when the domestic industry's contract with the United Auto Workers expires in September. The Big Three have yet to show their hand, but some analysts assume that automakers will demand revision of the "no-plant-closure" provision of the current UAW contract, so that they can bring their production capacity in line with their shrinking market share. That could mean layoffs. But the industry will also likely demand a change in the current contract provision that forces the Big Three to continue to pay laid-off workers most of their current income. With pension and health care costs per vehicle on the rise, the automakers are also likely to press for cuts in these benefits.
The prospect of less-well-paid autoworkers at the Big Three building fewer cars isn't a rosy forecast. Workers need more money in their pockets, not less, if they are to help revive the struggling American economy. To be sure, expanding production by Japanese, German, and Korean manufacturers in the United States is an economic benefit. But they pay their workers less and give them fewer benefits. So each of those workers pumps less into the economy than a UAW member does.
The more important issue for Karl Rove, President Bush's political adviser, is that foreign automakers produce cars largely in Republican-dominated "red" states in the South-Alabama, Kentucky, and Tennessee-a region Bush carried in 2000 and is likely to carry again easily in 2004. The Big Three autoworkers' jobs and benefits that are at risk, are disproportionately in "blue" states-Illinois and Michigan-which went Democratic in the last presidential election and will be hotly contested in 2004.
The White House can do little about any of this. Import restraints would do more harm than good to the overall economy. And overcapacity is a global, not just an American, problem. But the Bush administration could become more vocal about Japan holding down the value of the yen. It could also make it clear to Beijing that Washington will not sit by and let China follow Japan's weak-currency strategy to build up its own auto and auto-parts exports. And Democratic presidential candidates could raise the issue of easing the pension and health care burden borne by all U.S. manufacturers, including automakers-costs that put manufacturers at a competitive disadvantage internationally.
Washingtonians with long memories will note that these issues are all reminiscent of the industrial-policy debates of the 1980s, and that they seem out of step with the tax and budget fights that now consume Capitol Hill. But it is nitty-gritty, industry-specific issues such as these that are sapping the U.S. economy's overall performance. George W. Bush, and his Democratic challengers, ignore them at their peril.
Answered By: luigibrowser - 11/24/2007