Wheels of Recession

Intricate global links among industries and suppliers mean the failure of one industry can be devastating for many others around the globe. “Outsourcing and off-shore production have changed the ecosystem of auto production so dramatically that the fate of millions of jobs all over the world hinges on a decision in Washington,” writes YaleGlobal editor Nayan Chanda in his column for Businessworld. About 10 million US jobs are linked directly or indirectly to the auto industry, Chanda reports, and more than half the parts in vehicles labeled as “Made in America” come from Mexico, China, South Korea and elsewhere in the world. Outsourcing increased efficiency and interdependence, and that means the difficulties in the US auto industry will not limit damage for industries in Europe, Latin America or Asia. – YaleGlobal

Wheels of Recession

Nayan Chanda
Monday, December 22, 2008

What is good for General Motors, in the immortal words of its president in 1953, is good for the United States. As the battle to save GM, Ford and Chrysler was fought out on Capitol Hill last week, Charles Wilson’s words have acquired a new significance. Not only millions of auto workers in the US, but millions others abroad in related industries kept an anxious eye on the outcome of the battle to bail out US auto giants. Outsourcing and offshore production have changed the ecosystem of auto production so dramatically that the fate of millions of jobs all over the world hinges on a decision in Washington.

It is ironic that in 1908 it was the entrepreneurial and engineering genius of Henry Ford that ushered in a new industrial revolution with his assembly line production of Model-T, introducing ‘Ford-ism’ into the vocabulary of managers. It was the then chairman of GM, Roger Smith, who introduced the practice of employing outside suppliers in order to lower his company’s labour costs, and predicted in 1981 that the practice known as “outsourcing” would become common throughout the automobile industry. And indeed it has. ‘Made in America’ cars now contain more than half the parts made outside the US — from Mexico, China, South Korea, Canada and, more recently, India. While the outsourcing model has increased efficiency and lowered costs, the US’s overseas competitors have overtaken them in design, innovation and profitability. While foreign car makers based in the US have captured much of the domestic market, the country’s home-grown giants have been reduced to begging for taxpayers’ funds.

Were it a different type of industry with less importance to the global economy, the Big Three would have been shown the door and instructed to restructure and revitalise themselves under the protection of Chapter 11 bankruptcy proceedings. But even the companies’ staunchest critics, who would have recommended the tried and tested capitalist medicine of ‘creative destruction’, are now hesitant to push them over the cliff. While the Big Three employ nearly 400,000 people worldwide, the livelihoods of some 10 million people in the US alone may be directly or indirectly linked to the auto industry.

Although the foreign subsidiaries of US automobile companies are in better shape than home operations, a collapse in the US would endanger them as well. GM owns Vauxhall in the UK, while Ford owns Sweden’s Volvo. Given the close linkages between the US parts suppliers and their UK and European subsidiaries, the jobs of tens of thousands of workers worldwide would be at risk if the US operations went under. European governments are now being pressed for some $50 billion in loans by a group of car manufacturers including GM and Ford. Tata, which recently became the owner of Jaguar and Land Rover, is a relatively new entrant in the European car market, but it is also lobbying for millions of pounds in loan guarantees. Canada, which is effectively part of the US automobile market, is in similar immediate danger, as a collapse in Michigan could threaten 30,000 auto workers and millions of others on the northern side of the border. The crisis in the US automobile industry has already claimed a victim in China, with Chrysler cancelling its joint venture with Chery, a local producer of small vehicles.

Even India, which re-emerged as a manufacturing exporter barely a decade ago, is now intimately integrated with the global auto industry. In 2007, India exported auto components worth $3.6 billion, almost one-third of which was destined for US manufacturers. Despite this seemingly small proportion of US-bound exports, the sharp fall in worldwide auto production that a US collapse would produce is likely to deal a blow to India’s growth, not just to the auto parts industry but in IT services as well.

Worldwide concern over the fate of the US auto makers is rooted in the vast and complex ecosystem of supply chain that now feeds the industry. The Big Three not only touch almost every sector of the economy — from metallurgy to chemicals, from leather to electronics, and from sales to advertising — they are intimately connected to the finance and banking industry. Hundreds of thousands of car dealership have been critically interdependent on the mortgage industry. Given the industry’s thickly interwoven nature, the collapse of the Big Three would be nothing short of an economic tsunami, with its impact reaching far corners of the world economy.

Thanks to the globalisation of the auto industry, what is bad for GM, Ford or Chrsyler is now bad for the world.

Nayan Chanda is director of publications at the Yale Center for the Study of Globalization and editor of YaleGlobal Online.

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