Monday, January 30, 2023

Is China a Threat?

Is China going to take over the world?  We said the same thing about Japan back in the 1990's!

A reader writes, citing an article that shows China is now a net exporter of cars.  Is this something to be worried about?  I mentioned before how the Japanese made big inroads into the US market back in the 1970's - and the Koreans followed suit in half the time.  Would China and India be next?  After all, they already have imported Chinese and Indian made cars into the USA.

Could the Chinese "take over" like the Japanese and Koreans did?  New tariffs have put that idea off, at least for the time being.  One thing is for sure - China and India will be sources of auto parts for most cars made, worldwide.  Your 'Merican pickup truck may have a lot of Chinese parts in it - particularly microchips.  And your new Ford Ranger?  Assembled in Mexico with an engine made in India.

The final assembly of a car is really the least important part - but the part everyone wants to see.  It is the eye candy part, where metal stampings are welded together and then rustproofed and painted and then an engine and drivetrain installed and then all the trim and interior bits are added until, well, suddenly it becomes a car and rolls off the assembly line like magic.

In the old days of body-on-frame cars, the real "eye candy" part that factory tours liked to show was the "body drop" where the finished body (sans fenders and hood) would be rapidly dropped down from the floor above via a hoist, onto a waiting chassis.  It was the moment that all those pieces became a car.

But making all those pieces is just as important as the sexy part of final assembly.  And over the years, as I noted before, the "Big-3" automakers went from the Sloan "vertical integration" model, where, for example, GM made every part of the car, other than tires, motor oil, and the gasoline in the tank, to the Japanese-style captive-supplier "Keiretsu" model, where independent suppliers are pitted against each other for the lowest prices on every part.  For some companies this means even body stampings are farmed out to local suppliers.  As a result, assembly plants look neat and sexy, while the dirty work (e.g., casting and forging) is done elsewhere.

Initially, it may seem scary that China is exporting cars - it sounds like an alarming headline until you break it down.  As a "net exporter" that means only that they sell at lest ONE car more than they import.  But of course, they are starting to export more than that - just not to the United States (with one present exception).

China doesn't import a lot of cars - anymore.  Sure, at first, BMWs and Mercedes were imported, but over time, most "foreign" manufacturers set up factories there - much as the Japanese, Koreans, and Germans all have plants in the USA (we live near a car port - cars are imported, but also exported from here).  Similarly most "foreign" car companies have factories in China now - and not much in the way of imports.  And this was by design - high import tariffs meant that domestic production was the only way to go.  Even Tesla has a factory there - in fact, it is probably their most profitable.  GM (Buick) was making a majority of their profits in China, from cars assembled in China, in a typical Chinese joint-venture.

But if you want to buy a "Chinese" car, in America, you can do so today - at your local Buick dealer.  The Buick Envision is still made in China.  China has large import tariffs (and other barriers as Japan did) to limit imports.  We slapped a 25% tariff on imported cars from there, in retaliation in 2018, which has delayed plans to bring over more Chinese-made and Chinese-branded cars (I think they will have trouble with the latter, due to emotional reasons).

But if those tariffs are lifted, you could expect a flood of cheap imports, "captive" at first (branded with US brands) and then maybe Chinese makes. The prices would be so attractive that many Americans would likely swallow their pride and buy one.  They would capture the lower-end of the market, where the "Big-3" refuse to play anymore.  Hell, the big-3 have even abandoned the small truck and SUV market these days!  Hmm... a similar thing happened back in 2008.  How did that work out?

India is the other country to watch, and yes, you could buy an Indian-made car today at your Ford dealer (used) in the form of the EcoSport.  Alas, it left the market in 2022 and Ford is closing its assembly shop in India (after a disastrous foray, ditto for China).  But it could be done, with the right product and the right brand.  India has some problems, apparently, with infrastructure - building the cars isn't the problem, getting them from the factory to the port and on a ship, is.

Ford really screwed up in India.   My understanding is that Ford expanded way too rapidly and overbuilt plant capacity.  Meanwhile, its products were not well received in the Indian market.

So the "threat" of exports from China and India seems to have abated, for now.  Of course, Ford has other plants overseas that export to America - notably the Transit van plant in Turkey.  Classic case of "Tariff Engineering" too!  But maybe that will come to an end as well.

That being said, China and India have been and will continue to be a source of PARTS for "US Made" cars for a long time.  Ford may be closing its car factory (assembly plant)  in India, but the engine plant is remaining - and exporting engines for the Ford Ranger, which is assembled in Mexico. Merica!  Fuck Yea!  We gave up on small cars - we can't even profitably make small trucks! 

And China?  Heck, most "American" cars are chock full of Chinese parts as well - as we all found out during the pandemic when "supply chain" issues meant that trucks and SUVs were leaving the factory without engine management computers.  They sit in lots, waiting for parts, before they can be shipped.  Ford is building a semiconductor plant in the USA (in Malta New York of all places) to avoid this issue in the future (a return to vertical integration?) and maybe it is more than pandemic-induced supply-chain issues at stake.  With the political situation in China, it may be a smart move to inshore parts production, lest an embargo cripple your industry.

Incidentally, Ford also dropped the ball in China - one of the few "foreign" car companies to not capitalize on the burgeoning Chinese market.   Although I hear they are now making a Chinese-market version of the Mach-e in China, so maybe they will turn things around.  Quite frankly, given the rise of nationalism in China and the emergence of Chinese-branded automobiles in that market, it may be seen as unpatriotic (and against the party!) to be driving a "foreign" make of car in the next few years there. At that point, GM may have to walk away from its investment, if it fact it is not nationalized by the Communist government in some sort of tit-for-tat diplomatic dust-up over Taiwan.

That is sort of the downside of globalization.  It is fine and all to set up factories in India, China, Romania, Russia, and Turkey - where labor is cheap and regulations are lax.  But these are also politically unstable areas, and many companies have walked away from Billions in investment in Russia already.  War is bad for business, in a globalized age.   But then again, we went through this before.  The Japanese bombed Pearl Harbor because we stopped selling them oil.   IBM continued to supply Germany with punch card machines (which were used in the death camps, as well as slave-labor factories) up until America's entry in the war - and they collected back royalties once the war was over.

I mentioned before that prior to WWII, the tiny instrument bearings used in artificial horizons and other aircraft instruments were all imported from Germany.  America had to go on a crash program to develop the machinery and factories to make them.  The best machines for making such small bearings all came from Germany (and probably still do - or did back in the 1980s anyway).   It isn't hard to get caught with your pants down if you put 100% of your production overseas with an unreliable supplier.

That being said, it seems unlikely - or just plain stupid - for China to cut off its number one customer over political issues such as Taiwan.  Then again, it would seem just as stupid for Russia to piss-off the largest customers for its oil and gas.  Political leaders are often short on logic.  Often they are preoccupied with two main issues - acquiring power and maintaining power.  Everything else is secondary.

And maybe it is just plain stupid for America to put such heavy reliance on unstable or nationalistic foreign governments for components that are critical and essential to our economy.