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Detroit’s Depressing DC Ride
It was a promising Tuesday for the biggest New York stocks. The Dow Jones Industrial Average and its 30 blue chip companies have led a recent valuation rally through record levels. Too bad, then, that on the same day the pillars of American industry acted like orphans in the Oval Office.
The heads of the Big Three American automakers met with President Bush on Tuesday to discuss their plight. Japanese automakers like Toyota and Nissan have consistently chiseled away domestic market share from GM, DaimlerChysler, and Ford during the Bush years, and no one wants to go down as the ship captain who missed the iceberg.
The answer, of course, is to blame those who succeeded in beating us at our own game. I was surprised to hear the term "undervalued" attached to a new currency name during much of the day’s news. Anyone who has tracked the legislative and commercial corollaries of modern trade liberalization is well aware of the suspicion with which many view the Chinese yuan. But Tuesday it was en vogue to call the Japanese yen "artificially low." Luckily, the yen, yuan, and Korean won are linguistic and cultural cousins, so the transition is easy.
And in each case, currency complaints are the easy way out of a corner we have backed ourselves into.
When We Don’t, They Do
In the past six years, the Big Three have seen their share of US car sales drop by over 11%. Guess whose market share picked up by almost the same amount? That’s right, the top three Japanese carmakers are doing a booming business, and it’s far too much of a gap to be explained by currency stagnation alone.
Take a look at a key measure of corporate management effectiveness, called return on equity, or ROE, and you can better read between the lines of protectionist chatter.
Nissan, a Japanese company with manufacturing plants in Mississippi and Tennessee, has an ROE of 19.35%. General Motors registers a woeful -4.06%. GM is, as you probably already knew, losing money.
Bush has astutely called for Detroit to try harder to generate a "product that’s relevant." Relevant means not only giving out flash-in-the-pan "employee discounts" to stimulate sales, but generating ideas that are sorely in need in a world with a future of high fuel prices.
That’s right, the tealeaves portend continuously climbing gasoline prices. But rather than developing the best-in-class fuel-efficient and hybrid sedans (another advantage left to the Japanese), Detroit deliriously roots for a boost in SUV sales every time oil drops a quarter per barrel.
Remember the 80s?
There was a time when China only generated the cheapest of plastic toys, not high-end televisions. And there was a time when Hondas, Hyundais and Nissans elicited chuckles from drivers of American-made "boats." But things changed, and on showroom floors we got a choice between Cadillacs and Acuras, then between Excursions and Priuses.
Competitive choice is what capitalism is about, and so when choice is not part of a company’s strategy that company will eventually suffocate in the box it has constructed for itself.
There are overt signs that the Big Three now recognize their folly in dismissing foreign competition’s ability to convert a loyal American populace.
Though they would surely prefer to preach the "Buy American" dogma, Chrysler’s ad people have recently centered campaigns around Dieter Zetsche, a.k.a. "Dr. Z.," the mustachioed German chairman of Chrysler and partner Daimler, to give new American models an air of Teutonic trust along the lines of Mercedes.
Does German mean better? More reliable? More valuable? To many disappointed drivers of Yankee clunkers, it does.
Reverse Fifty Years to Go Forward Five
There is no better microcosm of the problems confronting the United States in this post-election period than the auto industry presents. Health care reform is a hot topic of national concern. Over $1000 of the sale price of an American car goes to employee health care. And more is spent on health care than on steel, which itself is getting more expensive as a result of the China-led commodity price boom.
The economic health of the nation pivots on the rust belt.
Automotive impresario Malcolm Bricklin, who introduced the Subaru to the US, is expected to bring us affordable Chinese cars within the next few years. The domestic auto industry will then surely enter a tailspin unless management innovates its way out of a coffin soon.
And it is certainly of consequence that the Democrats were elected partially on a platform of dissatisfaction with existing US free trade agreements with foreign countries.
The incoming head of the House Energy and Commerce Committee is none other than John Dingell, the Detroit Democrat who has served since the post-WWII big-car craze that made the Big Three so complacent. He has been vocal about the rights of his constituents who work on the assembly line, and since he took office in 1955 he is better equipped then the corporate honchos to say where the industry has been and where it should go.
In this age of liberal trade policy, many have harped on America’s changed role, saying that we are a generator of ideas and not of industrial products. According to that model, the Big Three cannot discount anyone’s designs if they hope to get back in gear.