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.] Full post, including comments