How US auto companies can survive and thrive
10:22, December 21, 2010
John Milligan-Whyte and Dai Min
America's domestic automakers will have unsustainable business, revenue and profit models so long as they do not accept major investments from Chinese companies nor form joint ventures with Chinese companies. Currently, the U.S. government and U.S. automakers are hostile to the acquisition of large stakes in U.S. companies by Chinese companies. As a result, less than 1 percent of China's rapidly-growing foreign investments is in U.S. companies.
U.S. automakers' ability to remain in business is part of massive, unsustainable U.S. government interference in global market functions. The New York Times stated on Sept. 15, 2009 "the U.S. government is the biggest lender, insurer, automaker and guarantor against risk for investors. Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation's economy - 26 percent - than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government. If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank."
General Motors and Chrysler currently survive only due to U.S. government interference in the normal global auto market processes of weeding out unsuccessful companies.
General Motors and Chrysler became insolvent in 2008 and survived by becoming American "state-owned companies." Such companies are called "SOEs" in China. Ford escaped becoming an SOE so far because it mortgaged every asset it has, including its logo, to raise 18 billion U.S. dollars before the U.S. economy plunged into the "great recession."
Chrysler, the smallest and weakest of the three, received 7 billion U.S. dollars in financing and is 10 percent government owned and its sales fell below 1 million automobiles in 2009 for the first time in half a century. The New York Times also reported that in the U.S. market in 2009, Chrysler and General Motor's sales declined more than 30 percent and Ford's sales declined 14 percent. Today General Motors and Ford are profitable only because of their sales and profits from China.
The era in which U.S. companies could successfully use wholly-owned subsidiaries or joint ventures only in China is in ending. The first stage of the globalization of the U.S. economy began with the first U.S. companies going global and ended on Sept. 16, 2008 when the U.S. Federal Reserve Chairman and Treasury Secretary told the world that the U.S. and global financial system was about to collapse.
The United States began a new era in its history when iconic insolvent American global banks, insurers and automakers had to become American government-owned enterprises. Some Americans say that the U.S. government should have allowed market forces to operate and let U.S. automakers fail. That is easier to say than experience. The United States desperately needs a viable auto industry and more manufacturing jobs. Who but the U.S. government would have saved General Motors and its employees from its unsuccessful management and auto design, marketing and financial failures? Who else would invest 50 billion U.S. dollars in General Motors in 2008 or today?
Once General Motors had 54 percent of the U.S. automobile market and was the world's largest automaker and America's largest company. It took pride, even after the oil crisis in the 1970s, that it did things "the General Motors way." It looked at the future of the global automobile market through its rear view mirror and lost market share steadily to Japanese and European companies that built smaller, less costly and more efficient cars.
Year after year it drove itself in slow motion into bankruptcy. China did not cause General Motors failure. China has not even begun selling cars in the United States. General Motors' sales and profits in China are all that is preventing its second bankruptcy.
General Motors remains an American state enterprise trying to compete with state and private owed automakers in 157 countries including China. General Motors was only able to continue to try to compete with the world's other automakers because of massive temporary U.S .government financing and temporary policies like "cash for clunkers."
It is a moribund American state enterprise with dubious future prospects. It can easily fail commercially again either because of its inability to compete with other automakers or because of U.S. government policies or decisions that make U.S. automaker's sales in China implode.
General Motors conducted a post-bankruptcy IPO on Nov. 16, 2010 raising 11 billion U.S. dollars to repay part of its debt and reduce the U.S. government's ownership of it to 43 percent. The Shanghai government owns China's largest automobile manufacturer SAIC, which acquired approximately 1 percent of General Motors in the IPO. Was General Motor's IPO a good investment for investors, such as its employees? Or will General Motor's investors, debtors and employees be wiped out as their pension fund was by General Motor's first bankruptcy in 2009?
SAIC and General Motors, which today are both state-owned companies, have been manufacturing cars together for twenty years for the Chinese market, which is already the largest in the world. SAIC indicated it would like to purchase up to 10 percent of General Motor's stock in the post bankruptcy IPO. Why would the U.S. government allow such a reciprocal economic globalization transaction? Are General Motors and other American global automakers' independence not essential for U.S. economic and national security?
The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.
John Milligan-Whyte and Dai Min are the executive producers and co-hosts of the Collaboration of Civilizations television series adapted by the eight books they wrote in the America-China Partnership Book Series published in English and Mandarin in 2009-2010. They founded the America-China Partnership Foundation and Forum in 2008 and the Center for America-China Partnership in 2005. E-mail: info@CenterACP.com