Is GM Moving to China?

by Mitchell Clark, B. Comm.

I still think the cash for clunkers incentive is one of the best ways to provide stimulus to the economy. The fact is, you don’t want the government running car companies or unions, but you do want people coming into showrooms to buy new cars.

If we get meaningful new car incentives from government, the industry might actually find itself in the peculiar circumstance of
having a shortage of vehicles. New vehicle production is dropping like a stone right now and there are all sorts of plants on idle because of the recession. A wave of new car buyers would quickly eat up any excess inventory and manufacturer incentives might disappear entirely. If there is a new buying incentive from the government, consumers will have to act fast.

There was a very interesting report that recently came out of Shanghai about General Motors (GM/NYSE). Quoted by the Associated Press, Shanghai Securities News reported that GM is planning to export new vehicles made in China to U.S. shores within two years. According to the story, GM plans to sell some 17,335 made-in-China cars in the U.S. market by 2011. Exports from China are then expected to triple to more than 51,000 vehicles by 2014.

This would no doubt help GM in terms of producing vehicles at a much lower cost. As well, legacy costs like retiree health care and pensions would be much less of an issue, because China is still a developing country. So, we could have the peculiar situation whereby American cars are made in China, exported to American customers, and the American parent company actually does better financially than it would building the cars at home. This is the Wal-Mart world we now all live in.

Of course, Chinese car manufacturers have been wanting to export their vehicles to the U.S., but have not been able to produce vehicles that meet much more stringent U.S. safety standards. But, like the Chinese always do, they’ll just take a Chinese-made GM car bound for the U.S. market and reverse-engineer the product. There’s no doubt in my mind that Chinese vehicles will be selling in North America in the not-too-distant future. The future of automobile and parts manufacturing in China is very bright. Unfortunately, it will all be at the expense of Detroit.

GM is currently operating profitably in China, the rest of Asia, and in Latin America. North American and European operations are the ones losing money. I suppose the biggest issue for a car company selling to Western nations is legacy costs. Most Asian automakers don’t have unionized manufacturing plants. In China, worker standards are significantly lower.

So, the entire domestic auto industry is going to be experiencing massive change over the coming years. The consumer will benefit by the increase of choice in the marketplace, but the long-term outlook for domestic autoworkers isn’t good. Right now, we need the cash-for-clunkers incentive more than ever.