Chinese Dragon at Detroit's Gate

In light of China's rise and the prospects of soaring oil prices Congress faces two options: help Detroit save itself now or bail it out later.

Published: 18-Jan-2006

The Chinese debut at the Detroit Auto Show with Geely, a mid-sized sedan planned for sale to budget-conscious American families for less than $10,000 by 2008, should be viewed as the opening shot in what is likely to be a clash of titans between the American and Chinese auto industries, one that could send Detroit to the ropes.

With their market share sliding, their bonds downgraded to junk and their quarterly reports showing 10-digit loses, the Big Three - DaimlerChrysler, Ford and GM - are facing a challenge far more formidable than the Japanese onslaught of the 1970s. With 1.3 billion people, an economy growing at a sustained rate of 8-10 percent a year and with a middle class larger than the entire population of the U.S., China is car crazed. Millions of Chinese with growing disposable income can now abandon their bicycle in favor of a family car. As a result, China’s auto market is growing by leaps and bounds and it is by far the world’s fastest growing. In 2003 demand for automobiles soared by 75%. Last year it slowed down to a sustained growth level of around 15%.

China is already the world's fourth-largest car market with sales of 2.3 million cars in 2004 and it is projected to overtake Germany by the end of this year and Japan by 2010. It will not be long after that China passes the U.S. For now, China’s auto industry sells most of its cars domestically, but this is about to change soon. Honda is already selling in Europe 200,000 Chinese made automobiles every year. Toyota is building a plant that will shortly manufacture the highly successful Prius. The Chinese Nanjing Automobile bought the British MG Rover and is planning to build under the MG marque sports models and small and medium sized vehicles. And now Geely.

Despite the fact that a Chinese auto worker earns 20 times less than an American and the health benefits are nowhere near those in the U.S., American automakers believe that the quality and appeal of their products will defend them against China. It is an industry sport to deride the Chinese cars as unattractive and years behind the market. And indeed China still has a way to go before it can produce cars of quality comparable to that of the Big Three. But the quality gap is closing rapidly. China trains four times as many engineers as the U.S. while systematically violating patent laws and replicating technologies. The Chinese allow foreign automakers to operate in their country only through joint ventures with domestic manufacturers. This allows them to learn new manufacturing techniques and to gradually improve the quality of their products. China’s auto industry is also pushing into advanced green and high efficiency technologies. It could take as little as a decade for China’s auto industry to become competitive with Western manufacturers not only in terms of cost but also in terms of quality and fuel efficiency.

Detroit’s dismissive approach toward the Chinese resembles a similar attitude toward Japanese pioneering technologies in the 1990s. While the American manufacturers gorged on short term profits from gas guzzlers, far sighted Asian manufacturers broadened their product mix and took the kinds of technology risks that their American competitors were unwilling to accept. GM and Ford laughed openly at Toyota's hybrid technology and derided the "$20,000" subsidy per car that Toyota allegedly invested in early production. Today, with unprecedented profits and long customer waiting lists for their hybrid cars Toyota is the one laughing. The U.S. automakers failed to recognize the huge and growing customer demand for hybrids. Their public rebuke of what is becoming this century's primary drive train is, in the words of former assistant secretary of energy Joseph J. Romm, "one of the biggest blunders in auto industry history."

GM’s answer to the mounting challenge from Asia is the fuel cell vehicle, a much-touted technology which still faces daunting technical, economic and infrastructure issues. Despite growing consensus that the hydrogen fuel cell vision is not likely to come into practical use for at least another 25 years - a recent MIT report predicts that the fuel cell cars will not be commonly used before the middle of the century - GM is still committed to produce 1 million fuel cell cars powered by hydrogen. With its staggering losses it is not clear whether GM could stay in business long enough to see the first hydrogen car rolling out.

In light of China’s rise and the prospects of soaring oil prices Congress faces two options: help Detroit save itself now or bail it out later. Based on the 2005 Energy Policy Act Congress prefers the latter. But continuation of the laissez faire policy toward the industry could be a risky gamble which could end up costing taxpayers dearly. A recent report by the University of Michigan's Transportation Research Institute shows what could happen if oil prices remain high while Detroit automakers continue with their current business strategy. The study projects a decline in sales volumes of between 9 and 14 percent, the closure of 14 auto factories, primarily in the Midwest, and the loss of close to 300,000 jobs. Last year’s announcement by GM and Ford on plant closedowns and layoffs as well as the Department of Energy’s projection that oil prices will remain over $50 a barrel for many years to come validate the study’s predictions.

In post-Katrina America no one expects Congress to sit idly by while tens of thousands of angry unemployed autoworkers riot in the streets of Dearborn, particularly not in an election year. To avoid the bailout of the century Congress should seek new ways to help Detroit to maintain its competitive edge against an emerging Chinese auto industry. This can only be done by encouraging domestic manufacturers to produce and consumers to purchase, U.S.-made hybrid vehicles, plug-in hybrid electric vehicles, advanced diesels and flexible fuel vehicles which can run on alternative fuels like electricity, biodiesel and alcohols like ethanol and methanol. Failure by Congress to push Detroit to offer cars that fit the changing realities in the global oil market will leave Americans no choice but to buy the $10,000 fuel-efficient-made-in-China cars that will soon be coming to a Wal-Mart near you.

Gal Luft is executive director of IAGS and Co-chair of the Set America Free Coalition.

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