Evans On The Economy -- China As Detroit?

Go East, young man. if asked to give advice to heavy manufacturing firms, especially those in the motor vehicle industry, that would be it. Go East. The U.S. auto industry is facing the battle of its life -- and with more missteps it could be in 20 years what the U.S. steel industry is today, a pitiable wreck. Automakers have borrowed sales from the future with their zero-interest-rate financing tactics this year. The industry has sold a lot of cars by making consumers the proverbial offer they couldn't refuse. If the choice is between driving a two- or three-year-old vehicle that carries a monthly payment of $350, and a brand-new vehicle with the same monthly payment and no early termination penalty, most consumers will drive away in a new vehicle. Marvelous. Just what does Detroit plan to do for an encore -- when short-term U.S. interest rates are 4% to 6% and not 1.75%, and monthly car payments are $450, not $350? It doesn't take an automotive genius to figure out that most consumers will keep their existing vehicles for an extra year or two. The auto industry used to survive by offering "deals and steals" during recessions and then jacking prices back up during booms. But because of the increased pressure of foreign competition and the general lack of commodity inflation in the worldwide economy, that won't work in the future. The profit margins of the past aren't coming back. Even worse, the industry is facing huge unfunded pension liabilities, which can only balloon as the ratio of domestic workers to retirees continues to decline in the years ahead. It's possible that in 20 years the auto industry could be petitioning Washington for the means of survival, just as the U.S. steel industry is now. Enter the Dragon, the People's Republic of China. If labor costs in China are 10% of those in the U.S., if workers are not forced by unions to follow unproductive practices, if health-care benefits are minimal, if pensions are not offered or plans need not be funded for 30 years, and if the Chinese government makes convincing promises that firms can repatriate their earnings, how much more incentive do U.S. auto companies need to move most of their operations overseas? Unions wouldn't like it. Fine. Let the automakers sell their plants to the unions. Let the unions try to make profits on their own. Even better, let the automakers give their plants away. They can write-off useless assets and start over again in a country that encourages profitability. Still, some consumers say they will only "buy American." OK. Let the cars keep their clearly identifiable American nameplates. Most customers don't know where the engines, or the transmissions, or the CD players are manufactured, and even if they did know, it wouldn't make much difference. Whenever I deliver this scenario, I am always asked, "What can be done to forestall it?" In answering the question, I ask, "What should the steel industry have done 30 years ago?" The answer is consolidate, boost productivity and stop raising prices. But consolidation means something different in autos. It means international mergers. General Motors Corp. and Ford Motor Co. eventually will have to be absorbed by the likes of Toyota Motor Corp. and Nissan Motor Co. Ltd. Chrysler has already been absorbed by Daimler-Benz. There'll be a few global companies, and most of the production facilities will be in Mexico, South America and East Asia -- especially China. There will be very few U.S. jobs left in the motor vehicle industry. You could call it another chapter in the story of the hollowing-out of America. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.