Troubles of the U.S. "Big 3" in Detroit: What About their European Rivals?     Print Email

In the months-long run-up to the bailout in Detroit, little was said about foreign competition. But the concern was always there. In announcing the 17.4 billion dollar loan, a White House official stipulated to the Washington Post that, “The companies will have to restructure their wage and benefit agreements so that by the end of 2009 they are competitive with foreign automakers that have plants in the U.S.”

Already in the U.S. car market, many European and Japanese car-makers are gaining market share on the strength of more efficient design and lower operating costs – a trend that shows into sharp relief the problems associated with the legacy in Detroit. (Often still called “foreign imports,” many of these European and Japanese models are actually built by American workers in U.S. plants owned by the foreign manufacturers.) Dubbed “the Little 8,” this group of firms have seen their market share climb to 52 percent of overall U.S. car sales. Overall, they seem better prepared for emerging kinds of demand and for the credit-crunch affecting car sales, consumer loans and overall confidence. Because they are relative newcomers in the U.S. market, these manufacturers are not encumbered by heavy “legacy costs” of the kind acquired by the “Big 3? in terms of pension and health care entitlements left from manufacturers’ contracts with the trade unions in better times for the car industry as a whole.

Meanwhile in Europe, as new car registrations continue their slump (down 26% in November, according to the Wall Street Journal), car-makers are asking for their own governments’ assistance. But it is not to stave off bankruptcy as it is in the U.S. Instead, the manufacturers in Europe are seeking financial support – upwards of 40 billion euros — for two different purposes: stepping up research and development and stimulating consumer confidence to boost vehicle sales.

France, Germany, Portugal, Spain, Romania, and Sweden have planned to provide additional funds to assist with research and development for their national automakers.

“We’re not talking about bailouts: we’re talking about low-interest loans and measures to stimulate the market,” the New York Times was told by Sigrid de Vries, a Brussels-based spokeswoman for the European Automobile Manufacturers Association. .

Some of the proposed European assistance is aimed at helping offset the costs to consumers of meeting new environmental restrictions. In France, Nicolas Sarkozy has offered citizens a one thousand-euro incentive to replace any vehicle more than ten years old with a new car that meets tougher carbon dioxide emissions standards.

In the U.S., this competition between “Detroit” and the “foreign imports” is being kept muted in public. But it erupts in U.S. Congressional debate when Detroit’s union leaders clash with Senators from south-eastern States (such as South Carolina and Tennessee), whose constituents benefit from the arrival of foreign manufacturers in their communities. On a recent occasion, a trade union leader complained about Congressional pressure on Detroit and its unions by saying: “It’s unfair to cut Americans to death while you’re subsidizing the foreign automakers.” Senator Bob Corker (Republican from Tennessee) shot back that he was all American auto-workers, including the growing number people in his State with jobs building “foreign imports.” He said: “These families are part of my constituencies. They’re American voters just like the American voters in Detroit. And these families are going to be hurt by this program.”

In South Carolina, BMW has opened a massive plant (whose architectural flair has made it a tourist destination). In Tennessee, Volkswagen is building a plant that will create up to 2000 new jobs, and the company has announced that its North American corporate headquarters will be transferred from Detroit to a suburb of Washington, DC.

For European implants, southern States afford considerable incentives, including not only loans and other financial inducements but also “right-to-work” laws that prevent the United Auto Workers, the main Detroit labor organization, from gaining a monopoly on workers’ bargaining power. As a result, the foreign implants have been able to invest in car designs emphasizing fuel efficiency – a trend that seems to be paying off. It is another example of the theory that foreign direct investment can help the recipient country not only by creating jobs but also by making the national market a more competitive place for established domestic producers.

Car production is a mainstay of industrial manufacturing in all the world’s leading economies. Nearly 75 million cars were produced in 2007 worldwide – roughly 15 million in Europe, 10 million in the U.S. and 12 million in Japan. For the moment, foreign car-makers manufacture only part of their cars in the U.S., using imported parts for much of the vehicle. But the “made-in-America” percentage in foreign cars is now running around 55 per cent per vehicle, according to the Association of International Automobile Manufacturers, a lobbying group in Washington.

Ultimately, the fates of car-makers of all origins in the U.S. are intertwined because they all use parts of the same overall supply chain. “Because of the tightly knit web of suppliers, a failure of GM or Ford would take the supply base down for a considerable time,” according to David Cole, chairman for the Centre for Automotive Research.