The June 14 issue of The Economist has “Extinction of the Car Giants — Why America’s car industry is an endangered species” on its cover. The magazine predicts the death of GM, Ford, and Chrysler at the hands of Honda, Nissan, and Toyota. The Economist cites statistics such as the $1000 per car cost to GM of pension benefits. Perhaps if they were to look 10 years out they would see a lot more turmoil.
Home Depot sells window air conditioners for $80. They are made in China. When it breaks you throw it out. Twenty years ago a window air conditioner cost $1000 in today’s money. When it broke you called the repairman.
You can buy a 27″ TV for less than $200. It is made in China. If someone asks you what brand of TV you have, unless you’re a geek with no life, you won’t have a clue. You don’t see ads for Daewoo or Apex TVs. When it breaks you throw it out. Forty years ago the TV industry employed at least one million Americans. TVs were made here. They cost so much that they needed to be financed, thus creating jobs in banks. If they broke every neighborhood had a TV repairman to come out and service the machine. Some of the most expensive advertising campaigns of the day were for cars. Consequently, consumers were intensely brand-loyal and proud to own an RCA, a Philco or whatever.
Once something can be assembled in China out of 100% Chinese-made components it can sell for approximately 1/10th the previous price.
Let’s look at cars. According to http://www.autoalliance.org/ecofacts.htm the auto industry employs at least 5 percent of Americans. People have jobs making cars. Because cars are so expensive people have jobs financing them, repairing them, and insuring them against collision and theft. Because cars are so expensive, people have jobs marketing and advertising them (more than $1000 of the price of a normal car has gone into advertising, probably closer to $5000 for a Mercedes or BMW).
Within 10 to 20 years the Chinese will be able to sell a car that is very similar to today’s rental car: 4 doors, 4 seats, air conditioner, radio, new but not fancy. It will cost between $2000 and $3000 in today’s dollars. With cars that cheap it will be unthinkable to manufacture in the U.S. Consumers won’t bother to finance a $2000 purchase separately (maybe they’ll add it to their credit card debt). Drivers will still carry liability insurance but won’t bother with collision or theft coverage. With cars that cheap it won’t make sense to advertise. If Ford or Toyota tried to sell the average person a $25,000 car they would simply laugh, much as a Walmart shopper would think you’re crazy if you tried to persuade him to spend $2,000 on a TV.
People react with disbelief to this idea. Americans love their cars and identify with them. Consumers will pay for prestige and image. All true, of course, but think of how liberating it is to drive a rental Camry or Taurus with the Collision Damage Waiver. You don’t lock it. You don’t worry about it. You’re care-free. You don’t say “this is the greatest driving experience of my life” but the car is more than fine for sitting in traffic, which is mostly what urbanites do. After three years when it begins to require service you re-export it to Latin America and buy yourself a new one.
So it is true that there will probably still be a market for $50,000+ cars that say “I’m a rich bastard and can afford to squander money”, just as there are still $4000 plasma TVs in an era where most people spend $200 at Walmart. But the market share will be negligible. It is one thing to step up from a $27,000 Honda Accord to a $45,000 BMW. It is another to say “I think I’ll give up the vacation cottage and restaurant meals so that I can upgrade from my Crawling Tiger car to an American or European car of roughly the same function”.
Aside from vast job losses the implications of the $2,000 car are profound for the U.S. Parking and traffic jams, already hellish, will get far worse. If the U.S. ever develops an appetite for information technology again we’ll charge people for using the roads during periods of congestion (using Fast Lane/EZ-Pass style sensors). If not, the government will force people to buy a $3000 annual “right to drive” disk like they have in many European countries. The alternative will be most U.S. urban areas descending into a Bangkok-like snarl.
[If George W. had only declared war on urban traffic congestion instead of Iraq! We’d have sensors in the roads talking to navigation systems in the cars telling drivers which streets to avoid (London is doing this right now). We’d have computer-organized ride-sharing systems. Instead of handing out cash to people who hate the U.S. we’d hand it out to people like http://www.zipcar.com/ (I’d be a user of the service myself if not for the fact that you’re not allowed to bring a dog). We might have ended up saving enough gasoline that we wouldn’t have needed to add Iraq to our collection of overseas possessions.]
Well there are certain consequences, some of which are already being felt:
* If more manufacturing is exported, then goods will certainly become cheaper. However, we will have fewer jobs and lesser money to pay for them [we will not have auto workers with money to spend in our economy]. Therefore the benefits are unclear.
* In general the wave of outsourcing everything concerns me: our water comes in from France (Perrier, Evian); our food comes in from all over the world (look at the labels on produce in your supermarket), our cars are made by Japanese but it is a matter of time before the Chinese drive them out, our electronics come from Taiwan and China, our airplane manufacturers are taking it in the chin from Airbus. Pretty much the only growth industry left is defense.
Postscript: I can absolutely, positively, guarantee one thing: CEOs will be richer in the future at the rate of about 15-20% each year.
Jagdeesh, the CEO kleptocracy is really another variant of slash-and-brun farming. Once the nation’s economy has been thoroughly pillaged, they won’t have anywhere left to go either.
Food and water – people are going to want stable, safe supplies. These will move closer to your home over time. Here in the Pacific NW there is already a significant community leading this effort. It originated with the “back to the land” movement in the 1970s, but over the last ten years has become much more established and many participants are executives and “soccer moms (and dads)”. They led the recent federal “organic” food standards. Now Frito-Lays sells “organic” chips and salsa. Corporations understand this, at least enough to want a slice of the pie, which is expanding.
People will increasingly realize the same is true of energy. For about $10,000 USD you can become a net contributor to “the grid”. This takes place mostly in “2nd and 3rd world” these days because there is enough need that there is a cost advantage or no alternative. In these places, introducing local/neighborhood/home energy sources are financed, resulting in monthly payments just like a utility bill instead of an upfront investment.
An alternative could be the “nuclear power plant per week for the next 40 years” plan which is what the nuclear industry has been cooking up with the Bush administration. When people put 2+2 together, I don’t think they’ll go for this kind of risk to terrorism, health, or cost.
The coming era will be a test of how well we can innovate our way to doing more with less. Not losing essential comforts (or providing them anew to areas of unrest), to avoid riots, unemployment, etc. So far in the American experiment, we’ve been expanding and not generally had to be concerned with excesses. Can we contract just as successfully? Hopefully more so.
The times are changing, now by necessity, but the changes are not too visible yet. Large corporations and governments can lead or stand in the way. Long-term interests or short-term gain. It’s their choice… does capitalism have a long view?
Do you have any sources for the economics underlying this theory? If China really can make $2000 cars then it certainly will dramatically transform society in a way like you describe. But is China really going to be able to make $2000 cars. Standard economic theory as I understand it says that as an economy expands and becomes more productive wages will rise. So by the point in time that China is making cars that can be sold in America the wages they are paying will have increased significantly, reducing much of their competitive advantage. 60 years ago wages in Japan were dramatically lower then those in America, and they made similar cheaper products. As their productivity increased, wages rose and now Japanese cars cost the same as American cars.
On top of all that, cars are still *industrial* products, the economies behind building a car are not particularly akin to those of electronics like DVD players. I wouldn’t be surprised if the price of shipping a car from China to the US was close to $2000 in itself. Not to mention the cost of getting the steel to the factory, and shipping around tons of raw material.
My guess is that Chinese cars are going to cost closer to what Korean cars cost today. Its a bit of deal, but its not a deal breaker…
Abe: Good theory on the wages but China has an effectively infinite labor supply. So wages may not rise that much even if many more people are employed (they are already the factory to the world for everything besides cars and wages aren’t getting anywhere near the US). As for shipping cost it should be around $500 because that’s what it costs to bring a car in from Japan (the rule with surface transportation is almost always that it costs more to go across three states in the U.S. than to ship from Australia or Israel or wherever to NY or LA).
I work at a U.S. manufacturer of commodity housewares made by plastic injection molding. Our parent company is Japanese, with a factory in China, so we really have a worldwide choice of where to manufacture things.
For a period I worked as a cost analyst, and the products we could manufacture in China weren’t cheaper overall than what we could manufacture here in the U.S. One problem was the higher cost of quality raw materials in China; another was shipping. Yes, labor costs were lower, but that was offset by higher costs for old technology like injection molding machines. We’ve been able to stay competitive with our Chinese operation with some simple automation.
I wonder if what Philip’s identifying isn’t unique to big-ticket items that haven’t yet experienced strong market demand to reduce prices across all manufacturers. Our market is extremely competitive, but I’m not afraid for my job here in the U.S.
Not much evidence that this will happen, Philip. Cars are not electronic items. Their manufacture does not follow Moore’s law or achieve economies of scale with pre-fabricated integrated circuits. There is nothing that makes 2013 more likely for this scenario than 2003 was ten years ago. If anything, the experience of Korean car manufacturers of the 1990s make it less likely.
That said, if we do get $2000 cars by 2013, then you could speculate that GM will be able to reduce pension payments accordingly!
Philip, I’m not so sure about the “effectively infinite labor supply”, a quick look on Google indicates that the unemployment rate in China is pretty much comparable to the US. This article [ http://fpeng.peopledaily.com.cn/200302/13/eng20030213_111583.shtml ] puts it under 4.5%. So under most economic settings an increase in productivity in China will lead to an increase in salaries, regardless of the raw size of the labor force.
Patrick Logan:
Somebody correct me if I am wrong, but I am pretty sure there hasn’t been a new nuclear power plant started construction in over 25 years. And it is going to hurt us in transforming to a hydrogen based economy. We need nuke plants to convert sea water to hydrogen. Do you think all of the coal burning power plants that we have (probably in the hundreds) is healthy?
TS,
while one can certainly look at the energy suuply issue, and make arguments for and against a variety of technologies, the fact iof the matter is that you will not live near a nuclear waste disposal site by choice. the stuff has to go somewhere. but, i beleive that the argument is more about usage. reduced usage has been proven to be possible and effective. look at california. we live in a selfish economy.
with respect to bush waging war on traffic congestion, good luck getting a republican administration of the reagan ilk to fund public transportation or attempt to tax auto usage. that type of program is very european, and in conjunction with a great public transportation system can effectively cut traffic congestion. how many europeans live over an hour away fom work by car?
When products become commodities then yes price becomes the major variable. Sounds to me like the US Government should mandate sophistication in areas such as pollution control, navigation and traffic controls. In this way cars are de-commoditised, costs are kept up and the cosy duopoly of Detroit is maintained. If the Government is going to support Detroit then the pay off has to be cleaner air and traffic easement. Unfortunately the Bush Administration is doing anything but encourage these initiatives. The writing is on the wall (re excessive fuel consumption); why can nobody read it?
Specifically to the points of “cheap cars” = “more cars” and what urbanites use them for (“sitting in traffic”)…
I’ve had cars for most of the last 25 years, and haven’t ever paid more than $4,000 for one. I’m not a mechanic DIY kind of guy, just an urbanite who rarely puts more that 6K miles on a car in a year. If I bottom-feed, I assume others do, too (there’s a big bottom out there) – and so I wonder how many folks in the US who want a car don’t already have one. Maybe lots and lots, but that’s not so obvious to me. I’d guess that more used (relatively cheap) cars than new (relatively expensive) cars are sold on any given day, but I don’t have a stat to point to.
Re urbanites sitting in traffic… in this perfect Urb (NYC) most ites who own cars take the subway or bus to work. Most of the folks sitting in the traffic I see are SubUrbanites, deliveries, tradespeople, and taxi patrons either treating themselves to some sunlight or exhibiting a true fear of C.H.U.D. (For the too young, that would be cannibalistic human underground dwellers.)
The Great Wall vehicle manufacturing company is already selling mini-pickups in the Mideast. They are indistinguishable from Nissans or Toyotas. Current price is about $7500. No choice of options, no choice of colors. Can’t be brought into the U.S. because they don’t comply with U.S. safety standards (all this means is that they haven’t paid for the testing). What could keep the Chinese out are trial attorneys and our tort system. For that reason Renault left, and Citroen didn’t come it. Alfa wasn’t reassured either. On the other hand, it’s very difficult to collect from these companies.
Looks like Daewoo/GM is going to be manufacturing in China. It will be interesting to see how they price their product.
I would like to add another comment if I may. In the year 2002, Ford manufactured 4.4 million vehicles in North America. Ford’s payroll was a little over $11 Billion dollars for 161,000 employees in North America. Add another 80% for employee benefits (Ford’s own figures) and you’ve got almost $20 Billion for 4.4 million vehicles manufactured. That’s about $4,500 per vehicle. Now according to Ford’s annual 10K filing in EDGAR, in order to keep their pension plan somewhat funded, this year (2003) they will contribute $1 Billion to the pension fund. Normally, through investments Ford expects *NOT* to have to contribute to their pension fund because, well, their actuaries are darn good investors. So, if Ford makes another 4.4 million vehicles they will have to contribute $227 per vehicle manufactured for this years pension fund. Far from a $1000 wouldn’t you say? In normal years through good investing, they won’t contribute anything. As an aside, Ford spends 15.1% of the vehicle gross sales on selling expense (advertisement, sales incentives, etc.).
Here is the link:
http://www.edgar-online.com/bin/edgardoc/finSys_main.asp?dcn=0000037996-03-000013&nad=
So well, China flood us with cheap cars? Maybe. Maybe not.
It won’t happen. This isn’t even a new idea. Back in the late seventies and early eighties this was a popular view of Japan. They would introduce cheap cars and destroy the American market. The result was strict legislation limiting the number of cars that can be imported in any year. This forced the Japanese to open plants inside the US staffed with US workers. The chances that your Toyota was made in Japan are very slim.
I’m not so sure about this … if price is so important, why aren’t we all driving Kia’s? It looks like $10K would get you a 4 door sedan with AC.
And will the government let these Chinese cars into the US? I’d sure like to try some of the small European cars (VW Lupo, etc), but they aren’t imported.
I’m not quite sure how the rental car with Collision Damage Waiver is so liberating? I would still lock it, to protect my personal crap, and to keep bozos out. And I drive a 2000 minivan, I don’t obsess over collision damage to it. I just hope there are no injuries, if there is an accident – and in ~30 years of driving I’ve never had much beyond a fender-bender.
And these traffic jams – I live in Michigan, away from Detroit. It just doesn’t seem like a problem to me. I’ve driven maybe 750,000 miles and can only think of one time I was stopped for more than a few minutes. (an accident on I-75; OK, there were a few slow periods going thru downtown Chicago at rush hour, but hardly ever at a standstill) And don’t like 90% of people with a drivers license already have a car available? So it doesn’t seem like cheap cars will cause worse jams for most of the country.
Tony Stevenson: “Sounds to me like the US Government should mandate sophistication in areas such as pollution control, navigation and traffic controls.”
Tony – Pollution controls and safety features *ARE* mandated on all new cars sold in the US, and have been for years. In fact, this is one of the primary reasons that I think the “$2000 Chinese crap car” scenario is unrealistic. These features cost money – lots of it. They can add hundreds, if not thousands, of dollars to the manufacturing cost of a vehicle. There’s also the fact that this market segment (cheap junkers) is already filled just fine by older used cars.
– Firebug
Chinese cars will invade USA. And I’m saying more: Chinese (and Indian) stuff (not only cars) will invade USA and Europe.
There are a lot of signals for this thesis.
1) Asian wages will stay low for a lot, because in those countries “standard economic theories” just doesn’t apply: China is a “communist” country, the government can keep low wages at will. In India I don’t see much a trade union for things being different.
2) They have both more than 1 billion population, so they are the world biggest future market. This means that USA and Europe will permit their goodies to be imported, for exporting ours there.
The $2000 car will never happen. The liability for safety related issues alone costs more than that per car. Sounds like more left wing crap to me.
The $2000 is feasible (hell, even Clancy predicted it in The Bear and The Dragon) but the issue of congestion needs to be dealt with first. When I worked for my previous employer I telecommuted at least half my billed hours per week, and was on flexible scheduling. Still, I was driving 300 miles per week of hellish Washington DC beltway traffic jams. I switched jobs and lucky me, the new company is located so close to a metro station that one of the tunnels from the station ends right in front of my lobby. 12-minute train ride ($1.20 to $1.60 depending on time of day), plus a 30-minute bus ride to my doorstep for 25 cents (with transfer, in the morning it is 75 cents). After a month I decided to donate my commuting car to a charity and got a nice tax credit. We still keep one car but I never use it to work, I would rather spend the 84 minutes reading and listening to music (or napping) than sitting in traffic. Plus my transportations costs for work come nowhere close to what I was spending on gas, garage and insurance.
The saddest thing is I am a total car nut, but this town just sucks for recreational driving. You could be driving a $100K+ sports car and your commute will still suck.
Sorry for the late contribution – but I just came across this discussion – and couldn’t resist adding my 5 cents worth…
I think some of you are naive to dismiss the thrust of this weblog – whether we actually get a $2000 car or a $3000 car is not the issue – the trend seen in TVs is already happening in cars.
Buying an average car in the US today costs 29% LESS today than it did in 1994, after rebates and zero percent financing. Yet currently US automakers are sitting on 3.9 million unsold cars – the largest backlog in US auto history!
So the current trend is unlikely to stop… and, for those who believe that the government will block this overseas threat, ask yourself – will the US consumer be happy to pay 5 times as much for a comparable “basic” car as consumers in other countries??
Finally, TS Jones made some points on the cost of Ford funding its pension liability each year. But this only refers to a “normal’ year and assumes a starting point of a fully-funded pension fund – clearly not the current position!!
Earlier this year, General Motors suffered a downgrade in its corporate credit rating – because of its pension funding expenses. Reason: Lousy pension fund returns over the previous 36 months (combined with over-optimistic assumptions about projected earnings rates). Indeed, GM’s unfunded pension liability (based on GM’s own current earnings projections) more than doubled in one year, from $12 billion in 2001 to a staggering $28 billion last year.
Ford has the same problem. It had unfunded pension liabilities of $7.3 billion (based on their pension fund actually achieving Ford’s future projected returns) at the end of last year. Even after it contributed another $1 billion this year it is still way behind. This shortfall has to either come from surplus investment returns or further contributions…
We live in interesting times.
Its already here – but in India not China. Quote: “industry analysts say Western consumers would never put up with such cheaply made vehicles” – I have to assume the industry analysts are in the pay of the automakers.
http://www.business2.com/b2/web/articles/print/0,17925,663955,00.html
Here is another pertinent article – about the difficulties of importing “Smart Cars”. Basically importing cars to the US is like importing sugar – protectionism causes all sorts of problems. The US is too damn socialist.
http://www.autoweek.com/cat_content.mv?port_code=autoweek&cat_code=carnews&loc_code=index&content_code=04298935
The only vehicles that can be produced in China cheaper than US or Europe are very unreliable and would never meet any of the US, Japanese or European regulations for safety or air quality. I work in the Chinese automotive industry and knowing the cost structure over, it will never happen. The comment that China is a “communist” country is a clueless remark. China is a socialist state that has 8 political parties, but the controlling party is the communist party. They do not control wages. Wages in the automotive industry have risen on average 8% per annum over the last 5 years. The efficiency of the chinese worker is much lower than western counterparts. Most raw materials are imported since the steel and plastics suppliers have more incentive to produce for non-automotive markets like construction. The biggest thing that is and will continue to drive the US auto industry down is the ignorance of the “Big Three” and the unions. The attitudes that they continue to embrace are what is driving them out of business, not the threat of China or Korea.
I suppose that you’re assuming oil is going to be $35 a barrel ten years from now. And its obvious you assume that the Chinese don’t use raw materials to build cars. I think your argument for a $2000 car in today’s dollars 10 years from now is bogus. The only thing you can think about is cheap labor.