The meek shall not inherit the auto industry

China produced 9.34 million automobiles in 2008 and accounted for 17.2 percent of the world’s sales, surpassing the United States and Germany for the first time in history. U.S. production fell 10 percent. China’s advanced 8 percent.

Over the last five years, the Big Three U.S. auto companies have seen their sales revenue cut almost in half, while China’s top four have almost doubled.

With four times as many people as the United States, it is not surprising, but the speed at which China’s auto manufacturing has continued to chug along despite the recession is. The saying used to be “when America sneezes, the world catches a cold,” but the relative health of Brazil, Russia, India and China (the BRIC), as we suffer the economic flu, makes a mockery of that concept.

So what does it all mean?

For the U.S. auto industry, it means a profound shift that could idle half of the 51 domestic auto plants. It is doubtful that the U.S. will ever return to the 17 million-plus vehicles which were sold in 2000. It is more likely that after the economic crisis the number of vehicles sold will level off around 9 million to 10 million units. Higher production, resource and labor costs; stiff competition from foreign competition in both the low cost and luxury segments; consumer debt issues; and changes in driving behavior will continue to batter the domestic market.

Plants that remain in the United States will have to counter lower overseas wage and production costs with efficiency and technological superiority in areas consumers are willing to pay for.

Road repair and construction could slow down while mass transit could increase. U.S. cities which grew over the last 60 years were based around the car. Shifts in driving habits will change lifestyles and economics. Last year, people drove 1 billion fewer miles than the year before and used mass transit 5 percent more. These trends are already having an effect on where people live and how they shop and entertain themselves.

One effective counter to this trend would be a reasonably priced efficient vehicle that could offer mobility at a lesser cost. The other is that the radical restructuring of the auto manufacturing industry could lead to a more dynamic and responsive set of competitors.

For China’s auto industry, it could be the beginning of a new era where its top domestic brands like China First Automotive Works Group Corp (FAW), Shanghai Automobile Industry Corp (SAIC), Dongfeng Motor Corp (Dongfeng), Guangzhou Automobile Industry Group Co. Ltd, Chana Auto Co Ltd (Chana), Beijing Automobile Works Co Ltd are able to follow the example of their Korean and Japanese neighbors and grab a slice of the international market as they continue to expand domestically.

China will be a player

It could also be a catastrophe in the making if China’s economy falters or its products are undercut by new sources of foreign competition. What is certain is that China’s automakers are going to be part of the news lexicon for the foreseeable future.

As these changes occur, opportunity knocks. Already, vast numbers of suppliers have been bankrupted or severely weakened by the turmoil. As the industry struggles to its feet, the few remaining suppliers will have more business than they can handle. The same will be true about critical resources which will see their prices skyrocket as demand increases.

The recession has been brutal; consolidations and lost capacity have decimated capacity and put what remains in the hands of fewer players. As the economy starts to recover, the ensuing race for resources will ignite inflation pressures and further rounds of market cycling.

The critical triangular relationship between resources, production and markets will be the dominant economic force. Economic growth and displacement will create new political challenges as nations pursue their individual and regional interests. The “new” factor which has yet to be defined is the effect of the BRIC nations. As they sort out their respective economic and political roles, they will create new political and economic norms that could leave the developed world at a disadvantage.

The BRIC is an interesting group. On one hand, you have Brazil and Russia, resource-rich countries that have the internal expertise and means to control and export their sources (just ask the Eastern Europeans who are at the mercy of the Russian gas pipe or the steelmakers who are eyeing Brazil’s mining consortium). On the other hand, you have China and India, resource-poor, rapidly expanding consumer markets with vast low-cost production capabilities. Obviously, resources and markets go together. The only question is where the value is added.

Are you relevant?

The challenge for the United States and Europe will be to make themselves relevant to the triangular equation. One area where the developed world has an advantage is in intellectual property and process knowledge, but how we use it to make ourselves relevant is a strategic issue which we have not seemed to come to grips with yet.

Locally, ideas like the Water Council, Milwaukee’s effort to leverage its water processing expertise, are laudable but they have to be focused and funded if they are going to succeed. Academic endeavor and industry cooperation are good concepts, but they have to be viewed as an investment which creates value. Right now, China has authorized over $30 billion for water pollution projects, over two thirds of which will be dedicated to cleaning up rivers and lakes. Other economic groups like the Germans and French are doing market assessments and bidding for projects. What are we doing to advance the ball?

All the issues discussed above have one commonality: They point to the fact that the way we did business in the past will not be the way we do it in the future. Politically, economically and socially, the world has changed, and there is no way to turn the clock back. Those businesses which can adapt to the times as they are will survive. So, if you’re a SME, this will be a time of great opportunity if you are prepared for it. 

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