Monday, November 17, 2008

China and the American Automotive Follies

Liberated by Barack Obama’s election from the full-time job of belaboring the Bush administration, progressive blogger emptywheel has a very interesting and knowledgeable discussion of China’s possible role in a General Motors bankruptcy.

She floats the possibility that GM’s main Chinese partner, Shanghai Automotive Industry Corp. or SAIC, might scoop up GM brands and technology at a bankruptcy auction and sell cars into the U.S., eventually migrating the production of virtually a full slate of GM vehicles to China, and exploiting and licensing GM’s Volt electric car technology.

But I think that the Chinese are probably hoping that GM will get its bailout and stagger on into the next decade. Picking over the bones of GM might turn out to be an indigestible meal for the Chinese auto industry.

And bankruptcy would be a disaster both for the American economy and GM’s workers and retirees. Especially GM retirees, who are facing the evaporation of the $33 billioin health care benefit package that the UAW had negotiated for them.

Right now, the Chinese automotive industry is anxiously waiting to see if GM funnels profits out of its Chinese ventures back to the beleaguered headquarters, instead of reinvesting them as it has done for the last eleven years.

Today, GM sold its stake in Suzuki for $230 million dollars. The transaction was seen primarily as a symbolic distress signal meant to elicit action from Washington, and not a measure that would offer meaningful help to GM, now hemorrhaging money at a rate of about $250 million a week.

And if GM really goes tits up, I suppose the Chinese will show up to sift through the wreckage.

However, the mantra in the auto industry is “world car”, which presumes large plants selling a few platforms globally to maximize economies of scale.

Currently, SAIC is partners with GM in a world-car production base in Shenyang to produce the Chevrolet Cruze, GM’s belated effort to get the compact car right and save the company with a vehicle that can compete with the Honda Accords of this world.

Daewoo is already making and selling the car in South Korea. India’s supposed to make it, too. GM will try to take a bite out of the European market, especially Russia and the eastern countries by assembling it in St. Petersburg. And then, if GM is still around in 2010, the Cruze comes home to North America, to be made in Lordstown, OH.

China + South Korea + India + Russia is a good recipe for World War III but not a global automotive consortium. GM, for all its faults, is in a better position to handle these myriad bilateral relations than SAIC would be.

The Chinese auto industry also faces plenty of opportunities and challenges on the domestic market.

AFP reports that sales are forecasted to hit a relative trough of 3.8% in 2009 and recover somewhat to 6.4% in 2010. Car dealers are dealing with excess inventory (the highest in four years) and one-third of China’s car dealers might be forced out of business in the coming months.

The slowdown will probably serve as an excellent opportunity for the Chinese government to reduce overcapacity and streamline the inefficient automotive sector, which has over 100 companies, many of which are small enterprises propped up by local governments.

China’s economy runs on a boom and bust cycle. In flush times, local producers pump out cheap, dirty, and profitable vehicles to meet insatiable demand and disregard government handwringing about inefficiency, pollution, and entrenching a technology based on import of a feedstock whose price has seen fluctuations of 50% in the last few months.

Now, in a bust period, local money and credit are relatively scarce, government money is needed and the central government has more levers to channel demand and influence supply.

Fact is, a bailout is probably on the way for the Chinese automotive industry—especially its big, technologically advanced, and well-capitalized sector--and I suspect the government will focus on the infrastructure and environmental constraints of China’s domestic situation, while cutting off the smaller producers and giving lower priority to integrating with an international market that’s falling off a cliff.

China Daily reports:

Speaking at the 2008 International Forum on Chinese Automotive Industry Development held in Tianjin between November 7 and 9, Chen Jianguo, an official from the National Development and Reform Commission (NDRC), China's top economic planning body, said the NDRC has met high-level management from over 10 major automakers to discuss support policies.

"It is possible the government may announce policies" to help revive the industry, Chen said. “China's auto industry is facing severe challenges, and stock market and housing market boosting policies have been launched, but there are still no policies to save the auto industry," he added.

Chinese carmakers have been forced to slash prices, even as steel costs have risen, to compete among the 52 brands on sale, the most in any country.

SAIC Motor Corp, China's biggest automaker, had a 78 percent drop in third-quarter profit. Chongqing Chang'an Automobile Co, the Chinese partner of Ford Motor Co, had a third-quarter loss of 107 million yuan ($15.67 million), compared with a 68.4 million yuan profit a year earlier.

China's auto sales rose 11.11 percent in the first 10 months, compared with a more than 20 percent increase for the whole of last year.

Part of that national restructuring will perhaps involve China’s auto industry taking a step back from globalization as it responds to government demands for more fuel-efficient hybrids and, eventually electric cars.

China’s Minister of Science & Technology, Wan Gang, recently announced that China would promote the development of hybrids and electric cars. Specifically, the Chinese government has abandoned the alternative route of clean diesel, since it would a) involve the expensive retooling of Chinese refineries and b) threaten the supply and price stability of diesel to China’s farmer.

It will be interesting to see if the government’s stated priorities provoke a change in the attitude and investments of China’s big auto manufacturers, the joint ventures with GM, Toyota, Volkswagen, and Ford.

Bonus for American readers:

If GM does go bankrupt, I imagine the courts will have to deal with a hefty $33 billion claim from an aggrieved creditor before any remaining goodies can be divied up.

The debate over whether or not to bail out the U.S. auto manufacturers will probably include an acrid argument over funding GM’s obligations to the VEBA (Voluntary Employee Beneficiary Association) health care trust fund established in an agreement with the United Auto Workers.

A relentless talking point for the automotive industry has been that “legacy health care costs”—their obligations under union contracts to pay the medical expenses of their retired workers—have eroded their competitiveness.

The UAW in its wisdom agreed to accept a payout of $50 billion from the Big Three over the next few years—about half of the anticipated health care expenses over the next few decades—and grow its tax-exempt endowment with the right combination of skill, probity, and luck to meet the needs of perhaps 1,000,000 retired workers.

In return, the UAW agreed to one of those enlightened two-tier systems where the newer employees are treated like dirt wages-and-benefits-wise compared to the older fellas but still recognize that the true enemy is those non-union Japanese transplant operations down south.

Only problem is, GM hasn’t anted up yet—and now it says it’s going bankrupt.

That’s something that the UAW might have thought about when they marketed the VEBA to the rank-and-file as…bankruptcy protection.

A November 10 article with the matter-of-fact title UAW's VEBA Board: Autoworkers’ Health Care Benefits in Peril in Workforce magazine relates:

[I]n July, GM deferred paying $1.7 billion into the VEBA, angering GM retirees.

“What we were promised in the last contract in 2007 in exchange for very deep concessions was that our health care would be guaranteed in the event of bankruptcy,” says Gregg Shotwell, 58, a former GM plant worker and union member who retired last month. “That was a lie. Because no money actually changed hands. Here we are today on the verge of bankruptcy and the VEBA is not funded. I’ve already been at the back of the line with [former GM subsidiary] Delphi. I don’t want to be at the back of the line in my retirement.”


On the one hand, holding back on its VEBA obligations is perhaps a tactic to make sure that labor is pounding down the doors of the soon-to-be overwhelmingly Democratic Congress to make sure that GM is kept afloat.

On the other hand, the UAW is making a politically problematic attempt to piggyback a VEBA bailout on top of the $25 billion or so bridge loan that the auto makers say is needed to keep the doors open until the good times start rolling again.

From the perspective of the Left and Right, there is potential hay to be made.

From the Left’s perspective, the UAW apparently entertained hope that the actuarial illogic of a risk pool composed entirely of aging and dying auto workers that it had agreed to set up would encourage the government to Do Something in the national health care line in order to save the retirees’ bacon and UAW president Gettlefinger’s posterior.

However, I’m afraid that the UAW may have shot itself in the foot by decoupling the health care obligation from the automakers’ political fortunes. With GM’s enthusiastic backing, health care stood a chance in the Clinton administration. With the UAW holding sole, unfunded custody of the auto workers’ health care obligations, the alignment of political forces even in an Obama administration isn’t all that rosy.

Elements of the Right, disregarding the fact that GM is reneging a second time on the health care promises it made to the people who built their cars, and are trying to cast the entire bailout, including both the industry and VEBA elements, as a payday for a gang of undeserving union loafers.

In fact, I read an analysis by the Center for Labor Renewal that the Republicans are gunning for the VEBAs to fail in a spectacular fashion, so that the UAW is pushed into the politically disastrous position of forcing the victims of the underfunded VEBAs to take what’s left of their interest to buy health insurance in the private market..

If even unionized factory workers with negotiated benefits can be sent into retirement with a personal health insurance purchase credit and a farewell kick in the ass, then the dragon of fully-funded healthcare may be slain once and for all