Forbes: Are You Really Buying American?

Jerry Flint's Thoughts From Forbes.Com

Detroit March 30, 2004; Sometimes I wonder where the auto industry gets its people. Perhaps Detroit does its recruiting at Dropout U or some alien world 100 billion light-years away.

The latest example: an advertising campaign for a new Chevrolet sport utility vehicle called the Equinox, launched March 20 with the arrival of spring.

The headline over the ad reads, "An American Revolution."

Here's what has me hopping mad: The Equinox is made in Canada, and the engine comes from China. This is "an American Revolution" all right, the kind that has become the number-two issue in the presidential campaign.

"We chose a campaign that communicates that something new and different is happening at Chevrolet," said Brent Dewar, general manager of Chevrolet. Right. Moving jobs out of the country and to China.

2005 Chevrolet Equinox

Let's hope Lou Dobbs of Time Warner's CNN doesn't hear about this. He's been focusing on the issue of outsourcing, and he might be very upset about that tagline. When Lou gets upset, the rest of us hear about it.

But it's not a bad time to discuss this topic. Today there's a lot of talk that, before long, the auto industry will be moving to China and importing Chinese-made cars.

So let's see what is true and what isn't:

True: Detroit is moving as much work to Mexico as it can. And work had been shifted to Canada long ago. Labor costs are much lower in both countries. (Costs in Canada are lower because of the currency and because the government picks up medical expenses, saving the companies lots of money.)

I don't see a problem here. Canada and Mexico are our next-door neighbors. The Canadian operations go back a long time and were, to a great degree, expanded by a treaty between the United States and Canada. American-made vehicles are also sent to Canada and Mexico. If we help create jobs in Mexico, we reduce the number of Mexicans illegally immigrating into this country.

Several manufacturers--General Motors; Ford Motor; Chrysler, a unit of DaimlerChrysler ; Nissan Motor ; and Volkswagen--send Mexican-made cars and trucks to the U.S. As yet the two largest foreign sellers here, Toyota Motor and Honda Motor , are small in Mexico.

Currently, there are no vehicles built in China for export here, and I seriously doubt that there will be for a long time. Labor may be cheap in China, but materials and transportation are costly and quality would be a problem. Vehicles could be built there for export to other Asian markets, but that wouldn't displace any American output, because Detroit doesn't export many U.S.-made vehicles to Asia.

False: The Japanese will export to the U.S. from Chinese plants. Although the Japanese will be building for the growing Chinese market, they might run into political issues if they tried to export vehicles to America. That's because they don't export Chinese-made cars and trucks to the Japanese home market. Automotive News just reported that a small number of Hondas built in China will be exported to Europe starting next year, but I don't think that this is the beginning of a big trend.

Another factor is domestic Chinese consumption. This is a market that's growing rapidly, and for the next several years, at least, Chinese consumers are likely to soak up almost all of the mainland's production.

While I don't expect to see Chinese-made vehicles in the U.S., it is a different story for Chinese-made auto parts. The Detroit producers (not the Japanese and Germans in this country, to my knowledge) are squeezing their suppliers to cut prices, and are suggesting strongly that they could cut costs by moving production to China. Some jobs will be lost because of this, but I doubt that it will be significant. No one likes supply lines that long.

The Chinese are likely to make more inroads in the replacement-parts business. My garage-owner son tells me that the Chinese are good at things like cast-iron parts, which are much cheaper than components made elsewhere, yet are of good quality.

Let's not forget that foreign carmakers like to build in America and are expanding here. Companies like Toyota, Honda and Nissan usually ask their home-based suppliers to build in this country, too.

Nevertheless, jobs are shrinking in the American auto industry. Today, 40% of new-vehicle sales in this country go to foreign-based manufacturers. Although the biggest foreign nameplates build many vehicles in America, these companies still import significant numbers of vehicles and parts. More importantly, most of the upscale jobs--engineers, designers, toolmakers and managers--are at the home country. Then there are the job losses caused by the vehicles built in Mexico and Canada for export here, plus a growing share of the replacement-parts business likely to be captured by the Chinese.

On the whole, however, there will be no mass exodus of Detroit jobs to China. The Equinox engine is relatively unusual, I believe. The vehicle was built in Canada to bail out a disaster of a plant run by Suzuki, one of GM's Japanese affiliates. Since it was opened, more than a decade ago, that Canadian plant has operated at less than half its original capacity.

So there's no need to worry about the Chinese taking over the U.S. auto industry. But it is still insulting to call a vehicle built in Canada with a Chinese-built engine "an American Revolution."