The Coming Auto Wars

As discussed in our recent recap of the Global Auto Forum 2010, one of the consensus views expressed at the GAF was that China will have substantial excess capacity in autos by 2015, and the resulting pressure to export vehicles may lead to significant trade tensions with countries that have large automotive industries (read the United States). Stories about the rise of China’s automotive industry are already giving politicians in the United States heartburn, as they wonder when the other shoe will drop and Chinese cars start showing up on American streets and highways.

That is why the mere suggestion by Shanghai Automotive Industry Corporation, General Motors’ Chinese partner, that it might like to consider buying shares in the planned IPO of the big U.S. automaker this autumn must be giving the Obama Administration a bad case of agita. It’s no accident that GM’s IPO is scheduled to take place after the November elections. I’m sure no one wants to explain to American taxpayers how over $50 billion of their taxes went to bail out GM and facilitate ownership by foreign investors — least of all a Chinese car company, which may then gain access to technology and know-how that will better enable it to compete with U.S. carmakers. “Critics will publicly blast the Obama administration for using taxpayer money to fund foreign ownership in an American icon,” said Morningstar automotive equities analyst David Whiston.

Ambassador Charlene Barshefsky, Senior International Partner at the WilmerHale law firm in Washington, D.C, spoke at the GAF about China and trade issues, and offered her advice to China’s auto industry on how to mitigate trade tensions. As the former US Trade Representative under President Clinton who negotiated China’s entrance into the World Trade Organization (“WTO”), Ambassador Barshefsky knows of what she speaks.

Ambassador Barshefsky prefaced her recommendations by providing a bit of historical context.

….the pace of globalization and the reemergence of China have intensified global competitive pressures. Those pressures have been exacerbated by the financial crisis, and the continuing economic weakness of the US, many European countries, Japan and others, which suffer from uncertain economic performance, weak consumer confidence, and severe global trade and financial imbalances – all at a time that global competition has gotten tougher.

Continuing on, Ambassador Barshefsky said:

These forces have played a role in the disruption of settled industries. Of course, these same forces have led to the creation of wholly new industries and new opportunities, but as in most countries, factory jobs and manufacturing remain critical to employment and competitiveness and are supported by strong political forces. The disruption of settled industries has been going on for some time –- factory jobs in the U.S., e.g., have been declining as a percentage of the workforce since 1950, and the absolute number of factory jobs has been dropping since the 1970s –- largely the result of productivity increases, but not exclusively, with import competition and other factors also playing a role. The recession has accelerated the trend, however, quite substantially, with resulting high unemployment. As countries develop, massive additions to the global pool of labor lead some to worry further. Each of these five factors –- globalization, Chinese competitiveness, the economic weakness of the West, job losses and massive trade deficits, bring me to China’s “going out” strategy and the potential response of developed and some developing countries to Chinese automotive exports.

Commenting on autos, Ambassador Barshefsky pointed out that the United States auto industry employed 1.328 million workers and produced 12.8 million passenger cars and light trucks in 2000. By December 2009, U.S. industry employment had declined by one-half to 652,000, and in 2009 the US industry produced only 5.7 million cars and light trucks. Moreover, imports accounted for over 28 percent of total U.S. sales of cars and light trucks, and 35 percent of passenger vehicles alone, by 2009. Ambassador Barshefsky noted that both of these figures are vastly larger than the market share held by imports in any of the world’s other major auto producing countries.

China, on the other hand, produced just over 2 million cars and light trucks in 2000. By 2009, that figure had increased nearly six-fold to 13.8 million vehicles, and Chinese auto sector employment had increased dramatically along with production. In 2009, all Chinese auto companies were reporting record profits and, as Geely’s acquisition of Volvo demonstrated, China’s car makers are now going global.

Her advice to China’s auto industry if it wishes to mitigate trade tensions with the United States?

1. Chinese producers must evaluate each market carefully –- the politics, the commercial realties on the ground for domestic producers, and the feasibility of Chinese entry including timing.

2. Chinese producers should enter gradually in as non-disruptive a manner as possible –- at prices in line with the market –- not predatory to gain immediate share

3. Chinese producers should reach out to the domestic companies, perhaps to partner, so that a win/win situation is established, or to provide important assistance to them in the Chinese market.

4. Chinese producers should consider manufacturing in the U.S. or in the markets in which China wishes to sell, to create local jobs and local economic growth.

5. The Chinese government should liberalize further in the automotive sector to equalize conditions of competition –- cutting tariffs, e.g., on imported vehicles, ensuring ease of market access for imports, removing informal local content requirements, and so on.

Sound advice from someone who knows, we’ll see what happens. In the meantime, though, buckle up — we may be in for a bumpy ride!

No comments yet... Be the first to leave a reply!