Monday, December 15, 2008

New Article Up at Japan Focus

I have a article up at Japan Focus entitled Mumbai Aftermath: U.S. Tilt Toward India Alienates Pakistan and Undermines War Prospects in Afghanistan.

The "Made in Pakistan" label is by now pretty firmly affixed to the Mumbai outrage.

The most significant development in the story, however, has been the determined efforts by the United States, grudgingly supported by India and enthusiastically echoed by Pakistan, to divert any attention from the possibility that state actors e.g. the notorious Inter Services Intelligence directorate or ISI and its supporters in the government and inside Pakistan's elites were implicated in the attack.

The United States has openly stated its fear that an understandable escalation in hostilities between India and Pakistan could provide Pakistan's army the excuse to abandon the unpopular anti-Taliban adventure in the west in exchange for a more traditional and much less destabilizing eyeball-to-eyeball confrontation with the Indian military to the east.

Therefore, the line has been drawn, clearly if somewhat arbitrarily, to limit international condemnation to "non-state actors" such as Lashkar-e-Taibi (which supplied the manpower for the Mumbai attacks), while not scrutinizing potential ISI involvement in an attack which was meticulously and expensively planned inside Pakistan and did nothing to try to advance LeT's stated goals in Kashmir.

In case India and the United States thought that the pro-U.S. Zardari administration could be employed as an effective tool to remove the pro-Taliban/pro-al Qaeda rot inside Pakistan's ruling elite, they were quickly disabused of the notion.

The fallout of the Mumbai siege inside Pakistan was not a wave of sympathy. Instead, there was a series of manufactured outrages blamed on India but apparently generated inside Pakistan that allowed Pakistan to play the victim card (at least in its own eyes) while India was still reeling from the bloody attacks.

Chief among these "incidents" was the apparently groundless rumor propagated by the Pakistani media and its sources that Hamid Gul, the retired head of the ISI who plays the Darth Vader role in the U.S.-Pakistan saga, had been targeted for arrests or sanctions at the behest of the American and/or Indian governments in the aftermath of the attacks.

The story found its way into the Washington Post before being denied in its various forms by Secretary Rice and Pakistan Prime Minister Gilani.

To me, the primary motive of the Gul story and other rumors appears to be a shot across the bow of the Zardari administration, which had made precipitously conciliatory statements and offers of cooperation with India at the behest of the American government.

Apparently any attempts to treat the Mumbai attacks as a watershed moment in the Pakistani-Indian relationship and Pakistan's role as an anti-terror democracy that might a) infringe Pakistani sovereignty and b) challenge the policy and prerogatives (and deniability) of the ISI would excite powerful popular and institutional opposition within Pakistan.

When I read the stories in the Pakistani media about Gul, accounts that morphed Indian requests into unacceptable "demands", the supposedly threatening phone call to President Zardari from Indian foreign minister Pranab Mukherjee, etc. etc., I recalled the Gary Larson cartoon, "How Nature Says, 'Do Not Touch'".

To the warning rattle of a rattlesnake, the distended display of a pufferfish, the hiss of an angry cat with its fur on end, and a guy on a street corner dressed in an overcoat, a horsehead swim tube, a shoe on his head, and a bazooka, add the enthusiastic and uncritical fulminations of the Pakistan media concerning affronts to national sovereignty, dignity, and security that haven't even occured.

The Zardari government played along with the anti-Indian agitation sweeping the media.

I expect it made its own calculation that it could not afford (or survive) a confrontation with its security apparatus on behalf of the Indian government and U.S. policy and, even if it did think about standing up to the ISI, the likely outcome would be a protracted and traumatic process that would, among other things, enmesh Pakistan in the web of U.N. and U.S. sanctions and blacklists reserved for terror states.

For now, at least, the scope of rhetoric and action has been carefully circumscribed to encompass Lashkar-e-Taiba and a Muslim charity. India has publicly applauded Pakistan's actions, while grumbling about President Zardari's weakness.

Before we condemn the Zardari administration's spinelessness and the inexplicable pro-terrorist sympathies of Pakistan's security apparatus, we should remember that the U.S. security policy for Afghanistan has been a catastrophe for Pakistan, corrupting its government, foreclosing its most viable options for dealing with Pashtun unrest, exposing its citizens to terrorist attacks, and contributing to the collapse of its economy.

All this misery has been in the service of a single-track counter-insurgency strategy that hasn't worked in Afghanistan, and the U.S. government is on the brink of abandoning there--but insists on escalating inside Pakistan.

Given this context, we should be saddened but not too surprised that there is a dearth of sympathy inside Pakistan for the United States' Global War on Terror, or for the victims of Mumbai.

Friday, December 05, 2008

Playing With Fire

Yesterday’s post, The Mumbai Paradox, placed the Mumbai attacks within the context of America’s persistent efforts to rein in pro-Taliban elements of Pakistan’s ISI and neutralize unsympathetic and powerful ex-ISI officers like retired General Hamid Gul.

Gul was Director General of the ISI during its salad days running the anti-Soviet mujihadeen effort in Afghanistan. Gul is a chief architect of Pakistan’s security policy of using proxy extremist and terrorist groups—like the Taliban in Afghanistan and the LeT (implicated in the Mumbai attacks) in Kashmir–to reduce the attention and resources India could devote to direct military confrontation with the much-smaller Pakistan army. Now Gul bookends his traditional anti-India views with virulent opposition to U.S. GWOT policies in Pakistan and Afghanistan.

I argued that the Mumbai outrage might have been a provocation engineered by the ISI to heighten tensions with India and provide a pretext for abandoning the alliance with the United States that is destroying Pakistan’s security and society and, not the least importantly, threatening the power and prerogatives of the ISI.

The ISI has no qualms about using terror as a weapon or accepting battle-level losses and collateral damage inside and outside Pakistan in the struggle to protect the nation, and the honor and objectives of the ISI.

I wrote “It does not appear that anyone—inside or outside of Pakistan—can mess with the ISI or Hamid Gul lightly.

Well, it looks like we’re going to find out how big everybody’s balls really are.

From today’s The News:

Foreign Minister Makhdoom Shah Mahmood Qureshi has met Lt-Gen (retd) Hameed Gul and assured him that the government would seriously look into the issue of Washington’s move to include the names of ex-ISI officials in the list of international terrorist through UN’s Security Council.

Gen Gulís name is said to on top of the US’s sponsored recommended list of international terrorist for being former chief of the ISI and an outspoken critic of the US policies and its controversial war on terror.

Gul said the enemies of Pakistan are presently targeting the ISI to weaken the institution of Pakistan Army and to attain the ultimate objective of de-nuclearising this only Muslim nuclear state in the world.

Gen Gul said Makhdoom Shah Mahmood Qureshi assured him that the government would seriously look into the matter and take appropriate measures. The United States has recently sought from the UN Security Council the inclusion of the names of five ex-ISI officials, including the name of Lt Gen (retd) Hameed Gul to put them on the list of international terrorists.

A few observations:

First of all, the United States either believes that Gul was directly involved with the Mumbai attack, or is trying to use the event as a galvanizing event to get Pakistan’s civilian government to acquiesce to dropping the UN hammer on Gul and his ex-ISI buddies. I suspect that there’s some smoking-gun intel, either generated by the U.S. itself or obtained through India, that would encourage the U.S. to make such an overt, incendiary move against Gul.

Second, it doesn’t look like Gul is a paper tiger used as a cutout by Saudi millionaires or a retired sorehead general with no domestic clout or reach. Pakistan’s Foreign Minister was dispatched to personally stroke Gul and make sure he concentrates his ire on the United States and India and not the Pakistani government. Taking on Gul may have bloody consequences that Pakistan’s elite understands well but the United States, which has an unhealthy misconception that using the U.N. to harass and infuriate its enemies is relatively blowback-free, may find difficult to appreciate.

Third, the Pakistan government no doubt finds this situation one excruciatingly embarrassing. They want to please the United States, but they don’t want Hamid Gul and everybody in the ISI and army who think as Gul does at their throats. So the Foreign Minister is dispatched to personally reassure Gul that the government is not going to…well, they are going to “seriously look into it”, which means that Asif Zardari will weasel and equivocate for the next few weeks and hope the whole problem goes away.

Fourth, Gul’s not just sitting in his La-Z-Boy expecting that the feckless government will stand up for Pakistani sovereignty and save his bacon.

Gul told the news that he and Qureshi had

discussed the idea of convening an immediate session of the Organisation of Islamic Countries (OIC) where Russia and China should be invited as observers to discuss the challenges confronting Pakistan, including the latest anti-Pakistan and anti-ISI campaign launched by India after the recent Mumbai attack.

In other words, Gul is proposing an alternative political and diplomatic roadmap for Pakistan. Instead of cleaving to the United States, as the Zardari government has done, and buying into the whole anti-Taliban and anti-al Qaeda strategy that is devastating Pakistan, Gul is proposing a alternate tie-up with two strategic competitors of the United States—Russia and China.

Given the fundamentals of Pakistan right now—growing dissatisfaction with the Zardari government, a dislike of the U.S. security strategy that is approaching hatred, a burgeoning economic and security crisis, and a feeling of desperation and persecution that now finds India as well as America as its focus—Gul will find fertile ground for his rhetorical seeds.

I expect the OIC initiative is going to go exactly nowhere, but it provides a viable, valid, and politically popular context for whatever Gul and his ISI buddies do next if the United States and India persist with their efforts to sanction him.

Given what the ISI has done in Kashmir, Afghanistan, and India, don’t expect what comes next to be small, peaceful, or bloodless.

Thursday, December 04, 2008

The Mumbai Paradox

As India Bleeds, Pakistan Gets Pushed Closer to its Breaking Point

The rhetoric of the Global War on Terror doesn’t seem to have its old magic anymore.

In the aftermath of the horrendous Mumbai attacks, it seems there were just as many articles in the papers saying this wasn’t Mumbai’s 9/11 as there were efforts to raise the bloody flag of America’s catastrophe over the carnage.

The most conspicuous example of 9/11 exhaustion is Pakistan.

According to the GWOT mythology, Pakistan experienced its galvanizing moment in the suicide bombing of the Islamabad Marriott Hotel, and the people and government of Pakistan are now standing shoulder to shoulder with the world’s democracies to combat extremism.

However, after the initial shock of the Mumbai attack wore off in Pakistan—and the international narrative that the attackers were Pakistani coalesced--there was an immediate and emotional rejection of the idea that long-suffering Pakistan should be further destabilized under U.S. and Indian insistence that the miscreants be pursued inside Pakistan’s borders.

A common theme in Pakistan’s media is that the Mumbai attack was carried out by Hindu extremists, or even was a false flag operation carried out by India’s Research and Analysis Wing (RAW) to provoke a conflict with Pakistan.

One commenter opined, Maybe this wasn’t India’s 9/11. Maybe it was India’s Oklahoma City.

That’s very bad news for the United States and its covert struggle inside Pakistan against government and public apathy concerning the Western struggle to stabilize Afghanistan, and to neutralize pro-Taliban and pro-al Qaeda elements in the notorious Inter Services Intelligence directorate (ISI).

Pakistan’s Zardari government, which is almost doglike in its desire to please the United States, is nervously playing word games about cooperating with India as the United States demands, while it drags its feet in order to keep in step with its domestic constituency.

The U.S. is fully aware of the fragility of the Zardari government, and popular resistance to U.S. aims in the region, and is trying to tread carefully, eschewing the rhetoric of the war on terror.

However, by the momentum of its policies, the desperate need to keep Afghanistan from going down the tubes, its pro-India tilt in South Asia, and the discovery of another perceived lever to compel Pakistan’s cooperation, the United States appears determined to disregard or steamroll over Pakistan’s obvious anxieties.

In India, Secretary of State Condoleezza Rice condoled with India, as AFP reports:

"Pakistan needs to act with urgency and with resolve and cooperate fully and transparently," Rice said during her one-day visit to India.

"The response of the Pakistan government should be one of cooperation and action. That is what we expect and we have been sending that message," she said.

And, according to the U.S. embassy via AFP, Admiral Mullen passed the same message to President Zardari:

[Mullen] urged Pakistani leaders, including President Asif Ali Zardari, "to investigate aggressively any and all possible ties to groups based in Pakistan," the US embassy said in a statement.

Seemingly eager to demonstrate that he possesses an invincible tin ear when it comes to Pakistani politics, Admiral Mullen took advantage of his meeting with Zardari to press Pakistan’s participation in what is possibly the only initiative less popular than assisting the Indians in a murder investigation—America’s bloody counterinsurgency campaign against the Taliban and al Qaeda in eastern Afghanistan and western Pakistan.

Admiral Mike Mullen urged Pakistan on Wednesday to investigate all possible links between the Mumbai attacks and Pakistani groups and to broaden its campaign against militants.

Trouble is, the War on Terror dog doesn’t hunt anymore where it matters most—Pakistan.

Today the rhetoric of the war on terror is irretrievably linked to the United States, its failed strategy, its dubious objectives…and Islamabad’s coerced participation in a U.S.-orchestrated military, political, economic, and security drama that threatens to rip Pakistan apart.

The result is skewed narratives, distorted policies, an unavoidable but counter-productive American reliance on arm-twisting instead of persuasion, and a visceral Pakistan opposition to U.S. policies that is reaching the point of desperate revulsion.

And, triumphant Democrats be warned, it doesn’t look like things will improve in an Obama administration.

The horror perpetrated in Mumbai might be the work of al Qaeda, Kashmir separatists, some previously unknown Islamic extremist group indigenous to India, or an obscenity committed by Indian gangsters or Hindu ultra-nationalists.

But to me it looks a lot like blowback from the U.S. campaign to rein in Pakistan’s Inter Service Intelligence (ISI) apparatus and orchestrate an anti-Taliban/anti-al Qaeda united front of democracies stretching from Kabul to Islamabad to New Delhi.

Any proven involvement by Pakistani state institutions in the Mumbai attack would be a catastrophe for Pakistan-India relations.

It would immediately provoke the shift of Pakistan’s military focus and resources away from a conflict it detests—the U.S. imposed counterinsurgency in west Pakistan’s Frontier and Tribal Areas (FATA)--to an arrangement much more comfortable for Pakistan’s army: the familiar display of ritualized hostility and the deployment of a conventional order of battle on the eastern border with India.

Therefore, despite some hard-to-explain anomalies, there is a determined effort by the United States, with the obliging assistance of the media, to squeeze the Mumbai outrage into a conventional South Asian narrative: a brutal episode in the proxy war between Pakistan and India over Kashmir, with militants of the Lashkar-e-Taiba (LeT) Kashmir independence organization nurtured by Pakistan’s ISI serving as shock troops in the struggle.

Indeed, LeT’s fingerprints are apparently all over the operation. The single captured terrorist, Ajmal Amin Kamal, has been identified as a Pakistani citizen and LeT fidayeen. A satellite phone that had made calls to the LeT operations chief was allegedly recovered. According to details of Kamal’s testimony leaked to Indian media, he was trained and indoctrinated in TeL camps.

However, analysts are undoubtedly wondering why the LeT attackers, while slaughtering almost 200 random Indian victims, targeted Americans, Britons, and Jews.

And they are wondering why no mention was made of Kashmir by the attackers.

The e-mail taking responsibility for the attack, ostensibly from a previously unknown group, the Deccan Mujahideen, and a cell phone conversation between an attacker and Indian media during the incident both couched the incident in terms of the Hindu-Muslim relationship inside India proper: the alleged mistreatment of the head of a radical Islamic group, the Students Islamic Movement of India, one Abul Bashar Qasmi, by the Indian police; the provocative destruction of a mosque, Babri Masjid, by Hindu nationalists; and the plight of “mujahideen” languishing in Indian prisons.

Decca is, perhaps conveniently, at exactly the other end of India from Kashmir.

A possible answer to these puzzling questions goes well beyond Kashmir and has disturbing implications for U.S. policy in India, Pakistan, and Afghanistan.

The Mumbai operation was carefully planned over an extended period—perhaps a year—apparently in Pakistan.

Targets were carefully scouted ahead of time—the owner of the Taj Mahal Palace hotel said the attackers knew the layout of the hotel, its kitchens, and service areas better than the Indian commandoes—and apartments and rooms were rented ahead of time.

The circumstances of the alleged transit from Pakistan’s main port of Karachi to Mumbai argue a chilling level of planning, resources, professional capability, ruthlessness, and a professional fighter’s talent for improvisation.

From The Hindu:

Based on the continuing interrogation of arrested Lashkar terrorist Ajmal Amir Kamal, investigators believe the 12 terrorists who left Karachi on a merchant ship hijacked a fishing boat to facilitate their final assault on Mumbai.

According to Kamal, the group hijacked the Porbandar-registered Kuber to avoid detection by Indian Navy and Coast Guard patrols, which had a considerable presence in off Mumbai.

While one group of terrorists used the hijacked boat to land at Sassoon Docks on the eastern coast of Mumbai, a second group used a fibreglass lifeboat to row west to the Cuffe Parade fisherman’s colony.

Before leaving the fishing boat, the terrorists beheaded its captain, who Gujarat authorities have identified as Balwant Tandel, from Una village in the Union Territory of Diu. There is no word on the fate of the remaining crew of five.

To recap: the terrorists had an entire merchant ship at their disposal, as well as an arsenal of weapons. Their complex plan to evade detection by the Indian military involved locating and hijacking a suitable vessel. They got their vessel, executed the hapless captain (and apparently his crew), and continued on their mission.

Further reports indicate that the attackers left timed explosive charges in the two taxis they took to reach their targets, in order to kill the drivers and further cover their tracks.

The subsequent assault culminated in near simultaneous attacks on multiple targets and a protracted siege at the Taj Mahal Palace hotel where the attackers held off Indian commandoes for sixty hours.

No wonder that people are thinking that al Qaeda or Pakistan’s ISI are the only two organizations that could have carried out such a massive, well-planned assault.

Efforts to paint the attack as a LeT initiative are less convincing.

The New York Times dutifully reported the spin provided by “U.S. intelligence and counter-terrorism officials” concerning the Kashmir angle, while admitting that the targets of the Mumbai attack—Americans, Britons, and Jews--don’t quite fit with the supposed objective of advancing TeL’s military and political objectives in Kashmir:

Lashkar-e-Taiba is not known to have singled out Westerners in past terrorist attacks, as the gunmen in Mumbai seem to have done. But one counterterrorism official said Friday that the group “has not pursued an exclusively Kashmiri agenda” and that it might certainly go after Westerners to advance broader goals.

As to how LeT could cobble together a boat hijacking and a commando-style amphibious operation:

An American counterterrorism official said there was strong evidence that Lashkar-e-Taiba had a “maritime capability” and would have been able to mount the sophisticated operation in Mumbai.

Kashmir is, as that counterterrorism official is undoubtedly aware, landlocked.

Clearly, the elephant in the room is Pakistan’s ISI, which has supported LeT as a proxy in its struggle with India.

The ISI, which nurtured the anti-Soviet mujahideen in Afghanistan (with U.S. aid) and supported the Taliban government is not sympathetic to America’s faltering effort to create an anti-Taliban bulwark in Kabul.

It is especially unhappy that the United States has abandoned any pretense of even-handedness in the Pakistan-India relationship.

Washington has overtly tilted toward New Delhi.

An eyebrow-raising nuclear giveaway negotiated bilaterally between the U.S. and India allowed India to normalize its relationship with the international nuclear and non-proliferation community even while the Bush administration denied the same facility to Pakistan.

Even more dangerously, the United States has chosen to allow India to establish itself in Afghanistan—Pakistan’s only regional geopolitical asset and ally, at least when it was controlled by the Taliban--at Pakistan’s expense, thereby coupling a long-term American presence and the fate of the Karzai regime with New Delhi’s continued influence inside Afghanistan.

Now that the battle in eastern Afghanistan has become desperate and Taliban have been exploiting their safe havens in Pakistan’s tribal areas, the U.S. has been pulling all the political, military, and economic levers at its command in order to compel Pakistan’s active and effective cooperation in the struggle, and to force Islamabad to accept a security condominium in South Asia by which the U.S. is the dominant power, India its ally, and Pakistan a disrespected client of dubious loyalty and reliability.

A wake-up call for Pakistan was undoubtedly the American response to the suicide bombing of India’s embassy in Kabul in July 2008.

Rather than tacitly understanding Pakistan’s right to punish Indian meddling in its Afghan/Muslim back yard, or just shrugging its shoulders at yet another episode in the brutal South Asian dance of death between New Delhi and Islamabad, the United States came down openly and unequivocally on India’s side, dispatching a CIA official to confront Pakistan over the matter and, significantly, leaking the news of intelligence linking the ISI to the attack to the New York Times.

With the fall of Musharraf, the U.S. disenchantment with Pakistan appears to have intensified.
When Musharraf was forced from office despite heroic U.S. measures to prolong his reign, the United States lost a relatively capable ally with strong links to his country’s military and intelligence services.

Instead, it now finds itself forced to work through a willing but undeniably feckless and unpopular civilian government led by Benazir Bhutto’s widower, Asif Zardari.

Recognizing Zardari’s weakness, the United States has apparently made the decision to insert itself more directly into Pakistan’s internal affairs.

Pakistan’s sovereignty has been eroded by the United States to a degree that is not generally appreciated in the U.S.

It’s not just the U.S. military incursions into Pakistan, and the drone attacks that have recently spread beyond the tribal regions to take out Taliban and al-Qaeda elements in the North West Frontier Province.

It also involves the United States asserting more and more overt direction of events inside Pakistan in order to compensate for Pakistan’s manifest lack of enthusiasm for a polarizing and high-stakes battle against the Taliban in Pakistan’s west.

It is difficult to look at the public humiliation that the United States has subjected Pakistan to on the issue of an IMF loan without wondering if it is part of a plan to bring the civilian government to heel.

Indeed, in an event that is either the sign of the ever-increasing militarization of U.S. foreign policy or a signal that international aid to Pakistan must conform to America’s security strategy—or both—none other than the head of the U.S. Central Command, General Petraeus, discussed Pakistan’s needs at the IMF annual meeting.

When energy and food price bubbles, the global recession, and a healthy dose of government mismanagement and inaction pushed Pakistan on the brink of defaulting on its foreign debt in November 2008, the United States forced Pakistan into the arms of the IMF—considered inside Pakistan a symbol of national humiliation that compromises its status as a proud regional power.

The IMF conditions for its $7.6 billion loan, including a slate of price and tax increases in a severe recessionary environment seem wrongheaded enough to exacerbate the crisis and force Pakistan’s government to become even more dependent on the so-called “Friends of Pakistan”, the group of nations that the U.S. has corralled to control the flow of further international assistance to Pakistan.

Since Zardari’s backing from the army is almost non-existent, the U.S. has apparently also taken military matters into its own hands, coordinating its anti-Taliban strategy—and delivering its demands for actionable intelligence—in direct meetings with Pakistan’s Chief of Army Staff Ashfaq Kayani, most memorably summoning the general to a meeting on board the aircraft carrier Abraham Lincoln with Admiral Mullen and General Petraeus in August of this year.

As veteran South Asia reporter and analyst Syed Saleem Shahzad pointed out in a recent article in Asia Times, a U.S. decision to bypass the Foreign Ministry and brief Pakistani legislators directly raised some eyebrows:

Last week [mid November 2008—ed], the NATO commander in Afghanistan, General David McKiernan, visited Islamabad to brief parliamentarians, but several of them, including those of the dominant Pakistan People's Party and Federal Minister Raza Rabbani, refused to attend.

They called the meeting a serious breach of Pakistan's sovereignty as no military official of another country is supposed to approach parliamentarians without the Foreign Office's mediation.

The riskiest element of the U.S. strategy is an effort to rein in the notoriously independent and pro-Taliban Inter Services Intelligence apparatus of Pakistan’s military. Taliban sympathizers inside and outside the ISI have presented roadblocks to U.S. efforts to pursue Taliban insurgents and al-Qaeda assets aggressively, and the United States has been looking for ways to bring the refractory intelligence service to heel.

The Zardari government is apparently not up to the task. Prior to his state visit to the United States in August—during which he received a pointedly-leaked “charge sheet” from a deputy director of the CIA describing ISI—Taliban links-- Pakistan Prime Minister Gilani proudly announced that the ISI would henceforth report to the civilian cabinet.

It was an assertion that he was forced to retract in the most humiliating and public matter imaginable within 24 hours.

As Shahzad reports, reining in the ISI and its supporters is a consistent U.S. objective:

High-level meetings between US intelligence and Pakistan's Inter-Services Intelligence (ISI) have already been held at different levels to devise plans to cripple the support systems of the Taliban and al-Qaeda in Pakistan.

Two prominent names came under discussion at these meetings: retired Lieutenant-General Hamid Gul and a former ISI official, retired Squadron Leader Khalid Khawaja.

Gul, a former head of the ISI, is suspected of providing political and moral support to the Taliban-led resistance in Afghanistan. Last year, former premier Benazir Bhutto named him as a suspect for the October 18 attack on her life in Karachi. She was subsequently assassinated in December.

Khawaja was the first person in the country to assist the displaced families of Arab fighters who fled to Pakistan after the US invasion of Afghanistan in 2001. He fought their cases in court, arranged temporary housing for them and assisted them in departing to their countries. Khawaja is active in the cause of missing people (those detained without trial for years) and wants to register cases against the former chief of army staff and president, General Pervez Musharraf, and his military aides for abuses allegedly committed during their eight years in power.

Tightening the noose around people such as Gul and Khawaja and the like is one way to cut off support for the Taliban.

The battle has begun in earnest in preparation for next year's showdown.

Maybe the showdown over the ISI’s more-than-tacit support for the Taliban began a little earlier than expected—in November 2008 in Mumbai.

Hamid Gul, the ISI advocate mentioned in Shahzad’s article, is a genuine hard case.

Gul headed the ISI from 1987 to 1989, during the height of the mujihadeed insurgency against the Soviet occupation of Afghanistan. He has spent 20 years organizing insurgencies and terrorism in Afghanistan and Kashmir. He conceived and executed the ISI’s successful campaign to organize a right wing Islamacist party to oppose the PPP in the 1980s. In a letter written in late 2007, Benazir Bhutto named him as one of the three likely organizers of her anticipated assassination. He’s violently anti-Indian and the architect of the Kashmir insurgency. In the aftermath of America’s abandonment of Afghanistan in 1989 and U.S. sanctions on Pakistan’s nuclear program, he’s passionately anti-American, turning against Musharraf when he became, in Gul’s view, too accommodating to the United States’ Global War on Terror demands.

In retirement, Gul speaks for a powerful conservative political and military constituency that values Pakistani independence, a hard line against India, and disdain for the anti-Taliban policies the United States is pushing on the PPP civilian government.

His views probably resonate more with Pakistani public opinion than the pro-U.S./India-accommodating policies of the Zardari government.

It does not appear that anyone—inside or outside of Pakistan—can mess with the ISI or Hamid Gul lightly.

In reviewing its South Asia policy—and trying to keep the fragile rapprochement of the Indian and Pakistan governments from shattering into a million bloody pieces in the aftermath of the Mumbai attack--the Bush administration may be acquiring a belated understanding of how its overt pro-India tilt and heavy-handed approach toward Pakistan have combined to create an atmosphere inside Pakistan charged with bad things: feelings of persecution, humiliation, encirclement, and peril.

The equivocal and delicate position of the ISI—and a popular Pakistani hostility toward India and, by extension, the United States that goes well beyond “ambivalent”-- was strikingly demonstrated even before the Mumbai siege had ended.

On November 28, Indian Prime Minister Manmohan Singh asked his Pakistani counterpart Yousuf Raza to dispatch the Director General of ISI, one Lieutenant General Shuja Pasha to India to receive Indian findings concerning the TeL links of the attackers and “share information”.

Gilani agreed.

This request does not seem unreasonable, given that Pakistani citizens had apparently turned the center of India’s greatest city into a three-day abattoir. Nevertheless, the request—ineluctably morphing into an intolerable “Indian demand” in Pakistani news reports--ignited a political firestorm inside Pakistan. The dominant civilian party in opposition, Nawaz Sharif’s PML-N, questioned the government’s decision to send the DG. Islamicist parties lambasted the idea.

Even Gilani's own cabinet piled on, in the process displaying its exasperation that India was getting a chance to play the victim card even as Pakistan was in danger of coming apart at the seams:

On the domestic level, thanks to the uncalled for Indian allegations, some ministers of the Yousuf Raza Gilani cabinet got an opportunity to criticise their prime minister on his face for giving an assurance to India that the ISI chief will go to New Delhi without consulting even his cabinet colleagues.

Angry ministers told Gilani clearly in Saturday’s cabinet meeting that his decision was not good and he should concentrate on “institutionalised decision-making” rather than going for solo flights in the future. Gilani was forced to change his decision. The cabinet, after discussing the Mumbai carnage and the Indian allegations in detail, also advised the prime minister that no ISI official should be sent to India in the near future.

It was discussed in the meeting as to why the militants made a ridiculous demand of liberating the Hyderabad Deccan (Andhra Pradesh). This issue was never raised by any hardline Muslim militant in India or Pakistan in the past. Why did they not demand the liberation of Kashmir, which was the prime objective of banned Lashkar-e-Taiba in Pakistan?

The Indian government claimed that these militants reached Gujarat from Karachi by boat through a 500-km sea route. Why did the Indian Navy fail to stop this boat? The cabinet unanimously agreed that Pakistan will not come under any Indian pressure but efforts will also be made to decrease tensions without annoying the public opinion.

One minister was of the view that the Indian media war against Pakistan had helped Islamabad indirectly as the local media ignored all the domestic political issues and got involved in the tension created by India.

And who was there to throw another anvil the government’s way? Hamid Gul, of course.

“Former military dictator Pervez Musharraf had bowed down to the US immediately after 9/11 and had let the nation down and now the sitting rulers have humiliated the nation by bowing down to India,” said Lt-Gen (retd) Hamid Gul, former chief of ISI, while commenting on the development.

“We are losing our position. The decision of sending the ISI director-general to India should have been taken through diplomatic channels,” he added.

Saying the preliminary information suggested that “some elements” in Pakistan were responsible for the terror strikes in Mumbai, Indian Prime Minister Manmohan Singh on Friday asked his Pakistani counterpart Yousuf Raza Gilani to send ISI chief to Delhi to share information on Mumbai terror attacks.

The former top spymaster of the country said India should not have demanded Pakistan to send the ISI chief to New Delhi. He said had Pakistan needed help of the Indian intelligence chief, they would have never allowed it.

“It seems there is no authority in Pakistan. It is not information-sharing but in fact an interrogation of the ISI chief and the United States is doing this behind the scenes,” he said. “Washington wants India and Pakistan to wage its so-called war on terror,” he remarked.

Lt-Gen (retd) Hamid Gul said in view of his experience as top spymaster of the country, he could say confidently that it (the Mumbai attacks) is an inside job to pressurise Pakistan. “The summoning of the ISI chief is a pretext that is part of the greater objective of getting the ISI dissolved,” Hamid Gul said. “It is a credible institution of Pakistan and sentiments of the Pakistani nation are being hurt by making a mockery of this institution,” he said.

The former ISI chief said he would also raise the issue in the next meeting of the Pakistan Ex-Servicemen Society because the rulers could not be allowed to play around with an institution like the ISI.

Gul used the Pakistan Ex-Servicemen Society as a platform in his campaign to bring down Pervez Musharraf, a fact that Asif Zardari is certainly uncomfortably aware of.

In an eerie reprise of the August scenario, the Zardari government subsequently backed down and announced that the ISI DG would not go to India.

If the Mumbai massacres were organized and condoned by the ISI as a provocation, I suppose we can say “mission accomplished”.

The fundamental hostility between India and Pakistan has been affirmed, the inability of the PPP government to back up its U.S.-mandated good wishes toward India with meaningful action has been exposed, and the willingness of the ISI to meet challenges to its power with brutal violence has been revealed.

And by targeting Americans, Britons, and Jews, the attack was overtly linked, not to the never-ending squabble between India and Pakistan over Kashmir, but to the U.S.-led security policy for Afghanistan and South Asia

According to Pakistan’s The News, the Taliban in western Pakistan responded to the heightened tensions with India with a suspiciously prompt and unanimous offer (met with an suspiciously prompt and positive response from the government) to cease operations so that Pakistan’s army could shift its resources to the east:

All main militant groups fighting in Fata, from South Waziristan to Bajaur and from Mohmand to the Khyber Agency, have contacted the government through different sources after the Mumbai bombings and have offered a ceasefire if the Pakistan Army also stops its operations.

And as a positive sign that this ceasefire offer may be accepted, the Pakistan Army has, as a first step, declared before the media some notorious militant commanders, including Baitullah Mehsud and Maulvi Fazlullah, as “patriotic” Pakistanis.

These two militant commanders are fighting the Army for the last four years and have invariably been accused of terrorism against Pakistan but the aftermath of the Mumbai carnage has suddenly turned terrorists into patriots.

A top security official told a group of senior journalists on Saturday: “We have no big issues with the militants in Fata. We have only some misunderstandings with Baitullah Mehsud and Fazlullah. These misunderstandings could be removed through dialogue.”

Pakistan’s normally fractious media has also circled the wagons on the nation’s behalf in denigrating the Indian allegations, earning rare praise from the military:

The change in the attitude of the Pakistani military establishment is remarkable. Thanks to India, the security officials, who used to criticise the Pakistani media, are now praising its role in the recent days, saying: “You have proven that you are patriotic Pakistanis.”

Last year, the same officials were part of a decision to impose a ban on many Pakistani TV channels because of their alleged anti-state behaviour. Meanwhile, Army Chief Gen Ashfaq Parvez Kayani has made it clear to President Asif Ali Zardari and Prime Minister Yousuf Raza Gilani that if India escalates tensions, then Pakistan has to move its troops from the tribal areas to the eastern borders and it would not be possible to continue the war against terrorism.

Top military officials conveyed the same message to the media representatives on Saturday.

Asia Times’ Syed Saleem Shahzad has presented a highly circumstantial account of the the background of the Mumbai attack, presenting a narrative of al Qaeda Bangladesh hijacking plans for a ISI-organized, LeT-executed outrage in Kashmir and transplanting it to Mumbai.

However, one can be forgiven if one wonders if the narrative presented is possibly a self-serving attempt by the ISI to shirk responsibility for an attack organized not only under its nose but by its own officers and shift responsibility for the incident that has aroused global outrage to the broad shoulders of al Qaeda:

Zakiur [LeT’s Commander in chief] and the ISI's forward section in Karachi, completely disconnected from the top brass, approved the plan under which more than 10 men took Mumbai hostage for nearly three days and successfully established a reign of terror.


Even if the Mumbai attack was not choreographed by elements within the ISI to generate a confrontation with India and give Pakistani elite and popular opinion an excuse to back out of the bloody and unpopular campaign it is pursuing at America’s behest in FATA, the result appears to be the same.

The Zardari government’s capitulation to its domestic critics on the issue of dispatching the ISI Director General is a bad augury for the United States. Pakistan is threatening to backtrack on rapprochement with India and active participation in U.S. security operations in the west.

As The News reported:

The Indian allegations against Pakistan have suddenly forced the military establishment in Pakistan to finally accept that they are not fighting an American war inside the Pakistani territory.

On another level, the parliamentary leader of the 12 Fata members in the National Assembly, Munir Orakzai, has expressed optimism in this regard, saying: “I see a bright ray of peace in the tribal areas and if we come out of the American pressure, I can guarantee that there will be peace in the tribal areas in a few days and we will be ready to fight against India on the eastern border along with the Pakistan Army.”

The news from India? Not good either. The prestige of the ruling Congress Party has been rocked by the Mumbai attacks.

Although America’s transparent desire to keep a lid on the crisis (and Pakistan’s troops fighting on the Afghan border) has forestalled the usual martial chest-thumping and deployment of Pakistan and Indian army divisions eyeball to eyeball, the Indian government could not resist summoning the Pakistan High Commissioner to the External Affairs Ministry to receive a demarche (protest note) containing a list a laundry list of 20 bad guys, apparently including a key TeL operative, that India wants extradited from Pakistan.

A new government even more eager to wave the bloody shirt may be in the offing.

The virulently Hindu-nationalist BJP is waiting in the wings to put India squarely on a confrontational, anti-Muslim footing.

From The Hindu:

By the time he landed in Mumbai, Leader of the Opposition in the Lok Sabha L.K. Advani had begun expressing mild criticism of the government for not being hard enough on terror. Before the evening wore out, the BJP had finalised its new election campaign for New Delhi, which appeared in many newspapers on Friday morning: “Brutal terror strikes at will, weak government, unwilling and incapable.”

While one senior BJP leader admitted that the first reaction to the Mumbai incidents was that it would appear wrong on the part of the party to criticise the government when it faced a “war-like” situation — Mr. Advani himself initially described the terror attack as a “full-scale war on India” — the leadership felt that it could not let go of the opportunity to electorally cash in on the episode.

That’s the dilemma for the United States.

Its security policy is not particularly popular in South Asia. Washington is trying to orchestrate support for those policies through democracies that are weak and/or equivocal about loyally toeing the U.S. line. Finally, the heavy-handed approach and frequent resort to violence it has resorted to in the region routinely unleashes forces that America cannot consistently channel and control.

And the real danger for U.S. interests is that, as the U.S. continues to lean on the weak reed that is the Zardari administration, Pakistan will opt out of a war in Afghanistan and an American security policy for South Asia that looks like a disaster for Pakistan’s military, economy, and society.

In a recent article, Asia Times' Shahzad presents a worst-case scenario that is as bad as it gets:

The situation in NWFP is spiraling out of control, with militancy spilling over from the tribal areas into this province.

In the past four days, militants have abducted a record 60 people from the provincial capital Peshawar, most of them retired army officers and members or relatives of the Awami National Party (ANP), which rules in the province. The Taliban have butchered many people with affiliations to the ANP or those with relatives in the security apparatus.

Meanwhile, North Atlantic Treaty Organization supply convoys passing through Khyber Agency en route to Afghanistan have come under increasing attacks. In the most recent incident, militants destroyed 40 containers in supposedly secure terminals in the middle of Peshawar.

In this anarchic situation, the Jamaatut Dawa (LET), with its well-defined vertical command structure under the single command of Saeed, could commit its several thousand members, virtually a para-military force, to the cause of the anti-state al-Qaeda-linked Pakistani militants.

What has stopped the anti-India orientated group from doing this is its under-riding loyalty to and support from Pakistan. If the authorities start to mess with the LET, beyond the routine rhetoric, all hell could break loose inside the country.

Similarly, if pressure is placed on the ISI, there could be a severe reaction from the more hardline elements in that organization, as well as in the military.

To date, the authorities have not given any indication of their plans. If they do indeed resist the overtures of Mullen and Rice, it is most likely that the Pakistani armed forces will withdraw from the Swat Valley and Bajaur Agency, leaving that area open for the Taliban-led insurgency n Afghanistan. Militants can also be expected to launch further attacks on India, with dire consequences for whole South Asia region.

Yet the alternative of cracking down on the LET is equally unappealing, and potentially as disastrous.

It isn’t just the Pakistani leadership that’s faced with a tough decision.

Faced with the Mumbai outrage, the U.S. can reconsider its South Asia approach—and its secret war against pro-Taliban elements in Pakistan--or intensify it.

However, as John McCain and Condoleezza Rice fly into India to express their outrage and sympathy, the FBI, and Scotland Yard put their forensics teams at India’s disposal, and the Indian government, perhaps with the backing of both the Bush and incoming Obama administration, threaten to enmesh Pakistan in the toils of the international investigation, censure, and sanction mechanism usually reserved for America’s enemies, the United States does not appear to fully understand that Pakistan is getting pushed closer to its breaking point.

Thursday, November 20, 2008

GM, Toyota, Japan, and National Health Care

The so-called auto company bailout debate has turned into a piece of cynical posturing by Republicans eager to reclaim their fiscal responsibility/small government/right to work credentials by sneering at a bridge loan for the Big Three and the UAW—even as the transplant operations they champion so enthusiastically send billions in profits to Japan.

As Paul Krugman pointed out, even if the Detroit automakers deserve some tough love, pushing them into bankruptcy in the middle of a severe economic downturn and exacerbating the recession is not the way to do it.

Assume that a bridge loan to help the Big Three weather the downturn is going to happen, perhaps when the current crop of congresscritters has left Washington and the bailout can be hung around the neck of the Democrats and the Obama administration.

Maybe in February, we can have a serious discussion about fundamental problems and systemic solutions.

And the whole debate might not hinge on greedy unions, electric cars, CAFÉ standards, on brain transplants for auto executives.

It should be about national health care.

A key difference between GM and Toyota isn’t unions.

It’s national health care in their home markets.

When they go overseas, both corporations are global and have done a pretty good job of wringing regulatory concessions out of local governments, keeping unions either toothless or out of their plants, and limiting responsibility for retiree incomes and health insurance to the bare minimum.

In the homeland, it’s a different story.

In the United States, GM paid $4.6 billion in 2006 in health care costs for 350,000 retirees. A lot of those retirees were employees who were downsized in a series of restructurings.

In an effort to whittle away at this number, GM changed its policies so white collar retirees have lost their lifetime GM health insurance and will be pushed into Medicare upon reaching 65, saving GM $1.5 billion. Health care for union retirees will be pushed into a UAW-administered trust—a Voluntary Employee Benefits Association or VEBA—into which GM will pour $33 billion.

Even with these changes, GM has a hefty, multi-billion dollar yearly bill in retiree health care costs it has to work through.

If GM doesn’t go bankrupt first.

The story’s different for Toyota in its home base in Japan.

In Japan, Toyota pays health care for its retirees for two years after they leave the company. That’s less than 3,000 workers per year. The health care costs are so small they don’t show up on Toyota’s balance sheet.

Then the Japanese National Health Insurance—the government-operated facility that covers the retiree and non-worker end of Japan’s universal insurance system--picks up the tab.

That’s important.

The interesting little secret about Toyota is that, like GM, its home base operations are not especially profitable, even with the health care subsidy.

Japan is an expensive place to have a factory. When bonuses are factored in, Toyota and GM workers both make yearly incomes in the $60,000 range.

Even with massive exports of Japan-built cars, the Japanese operations account for about 1/3 of global profits while posting 50% of worldwide sales.

In the first quarter of FY 2006, Toyota’s home operations brought in about US$1 billion of its total profits of $3.23 billion.

That’s roughly what GM was paying per quarter on retirees’ health care.

Both Toyota and GM suffer from high-cost manufacturing facilities in their big home bases. GM bears the additional burdens of a) no national health insurance and b) apparently having done quite a thorough job of bungling the fiscal consequences of its promises to the UAW retirees since the 1950s concerning their health care.

For both countries, the primary money-making action is overseas.

Toyota North America brought in $2 billion on almost half the sales. In other words, 50% of worldwide profits on 30% of global sales.

GM made $2 billion in its strategic Latin American and Asia/Pacific sales while struggling in Europe.

So you have two companies almost identical in size and scope of operations, and equivalent in profitability outside the homeland.

But Toyota has, by a combination of skill, luck, and circumstance, successfully navigated the hazards of running an enormous industrial operation in a high-cost homeland with a tradition of labor militancy while successfully globalizing.

GM, on the other hand has been less successful in working through its challenges in the homeland, even though it has done a pretty good job overseas, and now is getting flattened by the truck of a brutal recession.

National health care plays not insignificant role in keeping Toyota profitable and its absence plays an important role in keeping GM unprofitable.

As Gina Hamilton argued in a thoughtful piece in the Coastal Journal:

Toyota and its Japanese cousins started out with a benefit package that GM, Ford and Chrysler had to purchase themselves. In short, Toyota, Honda and Nissan had a government 'bailout' from day one in terms of health care and retirement pensions.

It could also be argued that GM’s financial woes have distorted its behavior in the North American market.

In a bow to the laws of comparative advantage, GM’s cost disadvantage forced it to surrender the field in North America to Toyota in the particular market that Japan was interested in—sedans and compacts—and concentrate on the heavy iron instead. When high gas prices and a recession materialized, GM was in the worst position possible.

It may turn out that the secret to restoring rationality and competitiveness to the global auto manufacturing industry is extending to the retirees of the Big Three in the United States the same privilege that their brethren at Toyota, Honda, and Nissan enjoy in Japan—national health care.

Wednesday, November 19, 2008

“Buying a Sick Horse and Turning It Into a Dead Horse”

Correction: I misidentified the industry website that posted the "Breaking News--Chinese May Buy GM and Chrysler" story. It's "The Truth About Cars", not "All About Cars". My bad. CH

That’s the basic Chinese take on the idea of a Chinese automaker taking over GM.

The tubes of the Internet have been abuzz concerning a report on the auto industry website headlined “Breaking News—Chinese May Buy GM and Chrysler”.

I took interest in this report because it contradicted my take on Chinese interest in GM—that it was too big and problematic a meal for China to swallow.

I think I'm still on the correct side of this argument. The Chinese appear to have no plans to acquire GM. And perhaps Allaboutcars was getting vigorously massaged by Deloitte-Touche, which has a vested interest in all things M&A, China-wise.

The source for the Allaboutcars post is an article in the 21st Century Business Herald which, as AAC points out, is a respected Chinese language economic newspaper.

And 21st Century Business Herald did run a report quoting an official in the Chinese Ministry of Machinery and Information Technology stating that GM’s troubles might inspire the Chinese automakers to try to acquire some of its assets.


Not the company.

And the Chinese version of the article title is上汽与东风有意接盘并购通用汽车等巨头资产 “SAIC [Shanghai Automotive Industry Corporation] and Aeolus are interested in taking over major assets of GM and others”

A truncated form of the article—highlighting the statement that China might purchase some GM assets--was posted on China’s governmental automotive industry website, Autoinfo, which is where AAC might have picked it up through some industry newsletter.

The full text of the article, China’s respect for intellectual property being what it is, has already been posted on about a thousand bulletin boards. It has a different thrust and makes clear that the Chinese government a) sees that China’s machinery industry is headed for restructuring and tough times b) efficient and well-capitalized enterprises might strengthen themselves by acquiring selected assets of GM and c) making a bid to take over GM is virtually inconceivable.

China has swooped in before to purchase valuable assets from beleaguered U.S. auto and steelmakers for decades--entire steel mills, engine plants, etc.. So I don’t see much new happening.

If China decides to make a big move on GM operations, it will start by buying a bigger share or all of the GM joint ventures in China, not trying to take over the whole company.

I suspect that Deloitte-Touche—which is quoted in the article—is interested in goosing its China-related M&A business and may be spreading loose talk of a Chinese bid for GM in order to inspire some rain-making action.

AAC’s man in China, Bertel Schmitt, did run a follow-up post admitting that nobody was confirming the story as he reported it—of a purchase of the company--so perhaps some walkback is in the offing.

Anything can happen. But I don’t think SAIC is going to buy GM. And the article that’s at the bottom of the fuss doesn’t really support it.

I’ve translated some choice excerpts from the article below.

A few points to consider:

1) The article reports that GM wants to sell some assets to Toyota, but Toyota is hesitating. In fact, the lede of the Business Herald article is that Toyota is the most likely beneficiary of GM woes. I haven’t seen anything about this in the U.S. press, however.

2) It’s acknowledged that GM is doing pretty well in China and outside the U.S. And the car business is a world business. It’s a perspective that an obsession with GM’s troubled North America operations obscures.

3) China’s disbursement of its large foreign-exchange reserves will be on a businesslike basis. The Chinese government remembers how Japan pissed away its reserves and clout through its reckless overseas acquisition binge in the 1970s.

If SAIC wants to buy GM, they’ll have to put together an iron-clad business case for the acquisition. I find it difficult to imagine that SAIC or any other Chinese automaker--all of whom manufacture primarily in China--can make a convincing case to a skeptical government that they are ready to take over one of the planet's largest, most complex--and troubled--globalized industrial enterprises.

China’s facing a slowdown of growth of its own and the need to stimulate and restructure its own economy to prevent social unrest. Big strategic expenditures (i.e. money put out without a clear and realistic return on investment) will be domestic and infrastructure/employment-related and probably not for immense, politically sensitive, foreign acquisitions of unprecedented scope and difficulty.

Here are the quotes from the 21st Century Business Herald article:

With the continual worsening of the world financial crisis, GM and Chrysler face the danger of global bankruptcy. As to who will take over their operations in the end, currently the loudest voices are on Toyota's behalf. At the same time, some Chinese car builders are also making proposals to take over operations.


On November 15, Industry and Information Technology Ministry Equipment Industry Division Chief Zhang Xiangmu revealed to correspondents that SAIC and Eastern Motors have interest in taking over some assets. [emph. added--CH]


Asian Manufacturer’s Association Secretary Luo Jun also stated that the world economic crisis may bring an opportunity for China’s equipment manufacturing industry to upgrade. There’s going to be a shakeout of lower value added enterprises and a group of innovative and financially strong enterprises will emerge. When European and American manufacturers are in difficulty, the resistance to globalization by Chinese enterprises is reduced. Over the next two years it is possible that some Chinese manufacturers will successfully internationalize.

亚洲制造业协会秘书长罗军也指出,金融危机对中国装备制造业的产业升级形成了倒逼。大量低附加值企 业在产业洗牌中淘汰出局是一种必然,经过这轮洗牌,国内装备制造业将出现一批自主创新能力强、资金实力雄厚的企业。而在欧美制造企业出现问题的时候,中国 企业进行跨国并购的阻力更小,未来一两年可能出现一批中国装备制造业企业进行国际化并购的成功案例。

During the consolidation, Chinese enterprises could begin by purchasing GM suppliers and GM’s China joint ventures, Deloitte Touche China believes.


GM wants to ask Toyota to purchase some assets…but Toyota’s management is taking a cautious attitude.


With GM’s helplessness and Toyota’s hesitation, there would seem to be an opportunity for China’s automakers to get their foot in the door.


“…this is an opportunity for Chinese capital to get into the U.S. auto industry ‘on the cheap’”, specialists of the China Automative Association stated. “We already have the precedent of Chang Feng Automotive announcing it will compete to buy GM’s Hummer brand”.
[Note: Apparently GM has been shopping Hummer to India, Russia, and China since August of this year, considering the brand without a future in the age of high gas costs.—CH]


China Academy of Social Sciences Deputy Chief and Chairman of the Asian Manufacturers’ Association Cheng Jiagui believes that the chance to buy entire manufacturing lines is “an unattainable dream”. With China’s limited capability and experience in globalization, it could be a case “taking a sick horse and turning it into a dead horse”.


Jin Jian [of Deloitte Touche] points out, China could begin by buying GM’s China’s joint venture companies or component manufacturers. GM is unwilling to go into bankruptcy, so it’s realistic to sell some assets in order to get operating capital. Looking at the capabilities of China’s automakers, it’s realistic to begin by buying some assets and buying out GM’s interest in the China joint ventures. It’s just too big a risk to try to take over the entire enterprise and the chance of this happening look slim.

金建指出,可以从并购通用在中国的合资公司或者配套产业开始。而通用方面也不愿意破产,出卖部分资 产换取流动资金是其现实的考虑。从中国装备制造业企业的能力来看,从并购部分资产开始,并购在中国的合资工厂是现实的选择。选择整体性的全面并购,因为整 合的风险将加大,从既有案例来看,也鲜有成功。

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