The American Car Industry

Tokyo.

Never has the American car industry had a poorer press. No epithet these days seems too contemptuous in referring to  the industry’s managerial competence and no policy proposal too heartless in addressing the industry’s high labor costs.

The American commentariat’s “let-them-eat-cake” attitude was summed up by Mitt Romney in a New York Times editorial page article last week in which he unapologetically advocated that the entire industry be allowed to go bankrupt. Yet the main “benefit” of a bankruptcy is merely that the industry’s surviving businesses would be allowed to walk away from billions of dollars in obligations to retirees. One wonders how Romney would react if some ideologue casually suggested his  pension benefits be incinerated on a bonfire of free market theory.

Yes, some of  Detroit’s injuries are self-inflicted. But no industry is perfect. Not in the United States and not anywhere else.  Even the American financial services industry — so recently  held up as a poster boy of supposedly world-class management — is now seen to be less than infallible.

There was once a time — some of us remember it well — when Detroit led the world in both labor productivity and R & D. What has changed? The most important reason for Detroit’s downfall has not been incompetent management — the executives been running the industry lately have been hewn from much the same timber as their predecessors in the 1960s. As for “greedy unions,” labor seems far less grasping these days than in the 1960s, when Detroit’s wage rates  ran nearly four times those in Japan.

The elephant in the room is unfair foreign trade practices. Though you would never know it from the way the news has been reported, for forty years the Detroit companies’ foreign competitors have systematically pursued predatory pricing in the American market. They have thereby starved Detroit of the adequate returns necessary to invest in new, more efficient production technologies.

The Japanese in particular have used unfair trade practices to devastating effect. On the one hand they have kept their home market as a protected sanctuary, where they often garner superrich profits. On the other  in the American market they have often sold their products at little more than marginal cost.

All Japanese government denials to the contrary, the Japanese domestic market is heavily protected. Thus the high pricing there is reserved for Japanese producers.  Two German manufacturers, Mercedes-Benz and BMW, enjoy  token positions at the top end but have been  strictly boxed in to ensure that for more than two decades the combined share of all foreign makers has been kept to a mere 4 per cent.

Even Korean car makers are shut out (though they sell effectively against Japanese competition everywhere else). It is not as if the Koreans and Japanese don’t trade with each other in other  industries. Actually they do a huge trade:  Korea is Japan’s third largest trading partner and Japan is Korea’s second. The fact is that as a matter of policy on both sides, cars are not traded (Korea’s car market is even more protected than Japan’s and even more hostile to American imports).

For students of Japanese protectionism perhaps the most telling point is that though France’s Renault company, through its stake in Nissan, nominally controls Japan’s second biggest showroom network, it has never been allowed to sell more than a few hundred of its French-made products in Japan.

A rigged world market apart, another factor that has worn Detroit down is an unrealistically high dollar. Again the problems go back to the late 1960s. It was then that American trade first showed signs of weakness but American policymakers have consistently resisted dollar devaluation until it has been too late.

Because of unfair trade and an overvalued dollar, America lost the so-called incumbent’s advantage — its historic position of productivity leadership based on being first into the business  — in the early 1980s. Thereafter Detroit needed not only a fair world market but lower wage rates than its main foreign competitors to have any chance of fighting back. Its pleas for a lower dollar have gone  unheard, in part at least because members of the American elite wanted to enjoy the benefits of a high dollar when they travel abroad. The result is the desperately weakened industry we see today.

All this is well understood in foreign capitals, particularly in those of the major East Asian nations. So, yes, the American car industry’s fate reflects in large measure American incompetence — but the main source of this incompetence has not been the engineers of Detroit but the commentators of New York and Washington.

EAMONN FINGLETON is the author of In Praise of Hard Industries: Why Manufacturing, Not the Informnation Economy, Is the Key to Future Prosperity (Boston: Houghton Mifflin, 1999) and In the Jaws of the Dragon: America’s Fate in the Coming Chinese Hegemony (Thomas Dunne Books 2008). He can be reached at   efingleton@gmail.com

 

 

 

 

 

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