General Motors Death Watch 28: Distant Waters

Last June, Rabid Rick Wagoner unveiled his five-point plan to rescue The General. He promised to downsize GM's production capacity– then let normal attrition take its course. He promised thrilling new products– then accelerated production of gas-guzzling SUV's. He promised he'd cut union benefits– then didn't. He promised to end incentives– then launched the Employee Discount for All program. And lastly, Rabid Rick promised to build cars using cheaper parts made in China. This he's doing. Unfortunately, it's the one promise he shouldn't have made.

A quick reminder: China is a dictatorship. There is no freedom of speech, movement or association. There is no independent judiciary. "Workers' rights" exist entirely at the ruling party's pleasure. It is, in truth, a police state. On the positive side (at least from GM's point-of-view), the country has a large supply of men, women and children who are willing to toil on an assembly line for $1.50 an hour without legal protections, health care or a pension.

Let's put aside the moral issue of investing in a communist country– something consumers, the mainstream media and GM's stockholders seem happy to do. On the face of it, Rabid Rick's decision to improve the company's bottom line with low-cost Chinese labor is a no-brainer. If Chinese parts are up-to-snuff, who cares where they're made? Given a bit of time, GM could replace entire UAW-made vehicles with Chinese-made vehicles and poof! The US health care and pension crisis is gone. As long as American consumers don't kick up a fuss, as long as GM doesn't have to hit-up the US government (triggering embarrassing questions from union-supported politicians), they're golden.

Perhaps. Perhaps not. Imagine that President Hu Jintao and his mates suddenly decide that all China-based automakers should be owned and operated by The People's Republic, to create vehicles exclusively for the domestic market. Who's going to stop them? I'm sure GM's high-priced international analysts have officially discounted the possibility, but I wonder if they could name one communist/socialist country that HASN'T nationalized a key industry– including England (British Leyland) and France (Renault). In countries where the armed forces have a say in, um, everything, business conditions can change very, very quickly.

And what of supply lines? The challenges involved with producing key parts for the US automotive industry in an agrarian society that's 6637 miles and 12 times zones away from Detroit seems fairly major to me. Wayward ships, miscommunication, disease, political unrest, general disorganization– I reckon there's plenty of scope for a complete break in the supply chain. Did I mention military action or natural disaster? If the Taiwan situation heats-up, if the region suffers a killer tsunami or typhoon, I don't think Chinese cars or car parts will get first priority.

There are also daunting cultural issues. The world's best manufacturing facilities depend on feedback from the factory floor to eliminate waste, improve quality and create innovation. What are the chances that a class-bound, politically-repressed Chinese worker is going to be a "team player", as explained to him by a Western plant manager? The Chinese automotive worker's pay may be microscopic in comparison to a UAW member, but it's a fortune by local standards. Surely this imbalance places an enormous pressure on Chinese workers to keep their mouths shut in all situations.

Basically, GM is investing billions of dollars in an amoral, unstable, creatively infertile economic environment. What's more, they want their suppliers to do the same. On September 20th, GM purchasing poo-bah Bo Andersson will meet with the company's 250 top suppliers and "recommend" that they cut costs by opening more factories in low-wage countries– especially The People's Republic of China. Bo's suggestion will be backed by an 'aggressive restructuring" of GM's supply base. In other words, get on with it or goodbye.

Sometime before October 17th, parts supplier Delphi will file for Chapter 11, saddling The General with approximately $9b in legacy costs, and proving that managerial incompetence, union intransigence and corporate insolvency are a logical progression. But the correct response to this conundrum is NOT outsourcing to China. Non-UAW American companies have the technology, expertise, flexibility and will to produce parts right here in the USA that can meet or beat the price set by foreign-based operations– without a language barrier or the risks of dealing with a fantastically long supply chain and a totalitarian regime. And that's without any kind of discussion of quality, creativity. national self-interest or, God forbid, morality.

GM's desperation is leading it to reckless adventurism far from home. One way or another, the automaker will pay the price. As an ancient Chinese proverb says, distant water won't help to put out a fire close at hand. Or, more appropriately, once you climb on a tiger's back, it's hard to get off.