Posted by: David Welch on May 14, 2009
General Motors said this week that the company has plans to build more cars in China and other low-cost countries for sale in the U.S. And out came the drama. Some critics argue that if GM is getting government loans to stay afloat, it shouldn’t be cutting jobs here and adding work in China.
The United Auto Workers have had their say, as well. UAW Vice President Bob King has already criticized GM for its decision to build more cars in the China, Korea and Mexico while cutting workers here. And the union asked the U.S. Treasury Department to reject the company’s restructuring plan because it closes plants here while building more overseas. GM CEO Fritz Henderson then buckled to the pressure and told Bloomberg that GM could cut planned imports from China to keep help secure union concessions.
Unless GM was just using import talk as a bargaining chip to pressure the union—which is possible—this is problematic. For sure, the government and the UAW are playing a role in building a new GM, with Uncle Sam loaning money and taking an interest in GM while the union concedes thousands of jobs and cuts benefits. All that said, GM management has to be allowed to run the company. And there are two cold hard realities to business these days that support building cars in other countries and selling them here.
One is cost. Not even the Japanese and Koreans make fat profits on small cars in the U.S. The pricing isn’t there and the total cost isn’t that much different for making some larger models. Many carmakers lose money on their compacts. The other is the very global nature of the car business. Plants and workers are expensive. If one market goes soft, a company needs to be able to sell the production elsewhere. Toyota has done this for years, toggling between selling the production from its Japanese plants in the U.S. or Japan to keep those plants running near full tilt.
GM should be allowed to do the same thing. Of course, there is a slight problem, and one that the UAW will argue with plenty of merit. The Chinese government requires local partnerships and local parts content in the vehicles sold there. American imports get taxed at a fat 25% rate. So while GM could sell Chinese-made Buicks in the U.S. easily, sending American cars made by union hands over there is a lot more costly. GM does sell some American-made Cadillac models and the Buick Enclave suv in China. But with that tax rate, not to mention higher American labor rates, it only makes sense to export expensive luxury models from the U.S. to China. That won’t keep the union happy because that won’t translate into many jobs.
So here’s a solution: The Treasury Department should ignore the bleating from labor about building more cars in China and let GM make its own business decisions. So far, Treasury has mostly been willing to do that. But the government needs to get China to level the playing field so that our cars can sell over there.