Monday, November 21, 2016

Look Out, UAW! Here Comes China and India!

It was only a matter of time before automakers embraced two of the world's cheapest labor markets - China and India.   The question is, what took so long?

For China, it was building an automotive infrastructure.   Once cars were made in China the Chinese went nuts buying them.   Historically, China was famous for its reliance on bicycles and lack of cars.   Chinese flocked the streets in bikes and nary a car was seen.   When cars were made in China, well, one Chinese mayor moved to ban bicycles from the street, as they were blocking automobile traffic!

Chinese demand pretty much swallowed up all domestic production, but this year, GM quietly announced that a small Buick SUV will be imported from there.   And Ford has followed suit with its own small SUV from India.

Why the mini-utes from overseas?  Well, again, they need to offer a smaller SUV to balance out the gas mileage for CAFE ratings.  Large SUVs guzzle gas, so you have to sell small SUVs to compensate and make CAFE numbers.   Problem is, Americans don't want small cars and small SUVs.  So to sell them, you put attractive price tags on them.   And to make a car with an attractive price tag, you need cheap labor - which means "made in USA" is not an option, despite what Trump thinks.

For the time being, these Chinese and Indian cars are captive imports - a technique that backfired on the "Big 3" back in the 1970's in a big way.   Back then, the US Automakers, like today, struggled to be able to make small cars profitably.  So they imported.   Isuzus were sold as Chevies or something called a "GEO".   GM partnered with Suzuki and Toyota, Chrysler with Mitsubishi, and Ford with Mazda.

Oddly enough, only Toyota survived the debacle intact.  Isuzu is no longer in the car business, nor is Suzuki.  Mitsubishi is hanging on by a thread.   Funny how that worked out.

But in the interim, these captive imports provided a pathway for "American" car-buyers to buy an American branded car while not feeling like a traitor to US manufacturing.   And what they found were cars that were better made than their US counterparts (which is saying a lot, considering the quality of Suzukis, Isuzus, and Mitsubishis).   When they traded in their captive imports, it may have been on a Honda or Toyota.

So, captive imports from China and India may be the camel's nose in the tent.   Pretty soon Chery motors of China (if they can get around the trademark issue - Chery and Chevy are very similar names!) may directly import a small car.  Of course, the Chinese are already selling cars here - they are called Volvos.  And the Indian company Tata, who already sells cars in the USA under the Land Rover and Jaguar names, will likely start to build their brand awareness here as well.   Whether Americans will buy a car with a name that is slang for a pair of breasts remains to be seen, however.

Oh, but wait, President Trump to the rescue!   Trump will enact 35 or 45% import duties (depending on which speech he was giving) and "force" American car manufacturers to bring small car production back to America.

Nice fantasy.  It ain't gonna happen.   Why?  Cost of labor.   The cost of assembling a car is about the same for a large SUV as it is for a small one.  Yes, there is more steel in a bigger car, and some components cost more.   But the manufacturing cost of a small car is not significantly smaller than a large one - not like "half as much" or even close.

And yet the prices are half as much.   So that means small cars have small profit margins, and often lose money for the manufacturers.   So the "Big-3" won't make small cars, or if they do, they will make de-contented crapmobiles like the Vega and Pinto, which was the only way they could make a profit on a small car line.

And the cost of cars (and everything in general) will skyrocket once Trump starts a trade war.   But of course, this assumes that Trump can start a trade war.   Traditional Republicans are usually in favor of free trade and are not interested in enacting tariffs.  Their corporate overlords will make sure of that, or their re-election slush-funds will be cut off.

In the meantime, the taps have been opened just a crack, and a trickle of Chinese and Indian cars are now coming to the States.   That trickle could turn into a flood in short order.