No Fixed Abode: The Case For the American Car Abroad
It will be a day or two too late by the time you read this, but: Happy Independence Day! It’s been a very long time since I felt compelled to cloak my appreciation of this country in the kind of irony frequently employed by my autojourno colleagues on Twitter and elsewhere, and I certainly won’t start now. The United States is far from perfect and I am afraid that some of the changes made here over the past fifty years have been profoundly negative in their effects, but it remains the proverbial city on the hill for many of the world’s citizens. As the song says, I’ve been around the world and I, I, I, I… haven’t seen any other place where middle-class families own property, start businesses, and create wealth like they do here.
While I certainly understand how many of my coastal friends and acquaintances no longer feel that the American Dream exists for them or for anyone else, I also feel compelled to note that we are doing just fine here in the Midwest. Where I live, four-year-old children play unsupervised outside and the police shake your hand in the street. Some time ago I accidentally left a $275,000 Ferrari out in front of my house overnight with the windows down, the keys on the center console, and my wallet next to them. Needless to say, nothing happened. I know that’s par for the course inside Mark Zuckerberg’s gates but my neighborhood consists mostly of stay-at-home moms and mid-five-figure household incomes. Come back to the real America, if you like, but leave your emotional support animals, your addiction to food-as-virtue, and your army of domestic staff behind you. Out here, people raise human children instead of “furbabies,” thoughtlessly consume GMO produce, and clean their own bathrooms. It’s considered character-building.
I know you won’t do it. Nobody is going to change sides. We are too deeply divided now into Blue And Red Tribes. We judge incoming information based on how well it conforms to our existing beliefs. Want an example? How about this: For over six decades, the automakers have been predicting that increased emissions, safety, and fuel-consumption standards would have a negative impact on the bottom line. The media alternately ignored and lampooned them for saying so. Now those same automakers say that Trump’s policies will have a similar impact and the media is treating it the way the Catholic Church once treated an ex cathedra pronouncement.
My response to that? It’s this…
If you’re at work and can’t click the link, it’s what Rhah said to Charlie Sheen’s character in Platoon: “Wrong? You ain’t never been right!” Automakers, by their very nature, are permanently focused on winning their own little internecine sales squabbles. Everything other than that, from a 5-mph bumper beam requirement to the Tesla Model S, constitutes an Outside Context Problem and is therefore impossible to handle without severe consequences.
There are reasons for this. Competition is bloodthirsty and margins in the business are low, although they tend to rise in lockstep with the ground clearance of whatever is being sold at the moment. There’s more customer loyalty than what you get in most industries, but the penalties for making a mistake are also much higher. Facebook causes one-third of divorces and God knows how many suicides but somehow they’ve never paid a dime in a related liability settlement. Compare and contrast that with Ford’s Firestone/Explorer mess. In other words, the automotive environment is something like the Cretaceous Period. Everything that has survived up to this point is vicious, the stakes are high, and nobody has evolved a defense against asteroids.
No wonder, then, that the automakers consider President Trump’s ideas to be risky. But not all of their reasons are particularly admirable. To begin with, they’re all deeply invested in China and therefore have quite a bit to lose should the (mostly one-sided) torrent of commerce between the United States and China falter in any way. Today’s cars contain more Chinese components than ever before. It is no exaggeration to say that the automakers are addicted to Chinese manufacturing; I can’t think of a single company that could build a car six months from now if China closed its borders today.
The automakers are also addicted to the speedball-like combination of “free trade” (that mostly favors China) and “free movement of labor” (that mostly favors low-wage countries). It’s a hell of a business model: You buy your parts from China for dirt cheap thanks to currency manipulation and you do your assembly in Mexico for half price and then you sell the product in the United States for debt-based American dollars. It literally cannot be a permanent business model, any more than a game of Monopoly can be, but that doesn’t bother executives with an ADHD quarterly approach to profits.
Americans are in no way obliged to ensure the continuation of this strategy. Nor is this country obliged to continue supporting the Chinese economy by borrowing their money and then using that money to buy their stuff. We have been giving away the proverbial store since the Marshall Plan. Nothing’s changed, except for the fact that we can’t afford it any more.
If President Trump’s proposed tariffs are met with equal-and-opposite tariffs from elsewhere, that’s not great news for the shareholders. And your local economist will very sanctimoniously tell you that the return of local production to cities and rural areas across America cannot possibly equal the amazing and delightful utility of paying lower prices for toilet paper at Wal-Mart. But that’s not an outcome I want to discuss here. Instead, I want to talk about what happens if Trump actually manages to flatten some of these astoundingly uneven “bad deals” that we’ve made with everybody from Germany to Japan. Do we have anything to sell that anyone else would want to buy?
A recent discussion on this topic here at TTAC got deep into the weeds of whether an F-350 Super Duty would be easy to park on the Ginza strip. Then, of course, it devolved into an endless parade of holier-than-thou liberal-arts types solemnly assuring us that the superior beings of Europe and Asia would never buy anything as laughable and pathetic as an American car.
Let’s assume they are right for a moment, and that despite the evidence of my own eyes and the eyes of others, there is zero useful market for American cars elsewhere in the world. Could a flat-trade market benefit American autoworkers? Absolutely, for one simple reason: They work longer, and cheaper, than their European or Japanese counterparts. It’s cheaper to build the same car in America and ship it to Europe than it is to build the car in Europe.
Of course, China is cheaper still. But America offers advantages that China can’t match. We take property rights, including intellectual property rights, seriously here. Despite what you see on television, we have far less civil unrest than most nations do. We don’t protest the construction of factories. American workers have proven remarkably able to adapt to modern ideas about quality process and procedures: an American-made Honda Accord is a more reliable proposition than a German-made Ford Focus, for example. We are unlikely to begin nationalizing factories any time soon. You can drink the water in most places. All of these advantages are real.
It is also true that shareholder activism is on the rise, and much of that shareholder activism is environmentally motivated. So why not shut those shareholders up by moving your production to the land of the EPA, which despite the much-ballyhooed reductions in staff and scope still towers over its counterparts in China and elsewhere? Last but certainly not least, where do your executives want to live while they supervise your factories: Shenzhen, Mexico City, or Savannah?
So the desirability of American cars doesn’t need to be a factor at all in these calculations. But let’s not overlook the fact that it is really the combination of tariffs, currency manipulation, and outdated joint-venture requirements that keeps American cars out of China. Don’t you think that all those prosperous middle-class Chinese folk would just LOVE to have an F-150? Sure they would, particularly if they own small businesses. The Chinese market should have been open to whole importation of automobiles for decades now. Instead, the Chinese government made it almost impossible to succeed with anything other than a joint-venture business — and the same firms that are being lions when it comes to Trump’s administration went to the Chinese slaughter like lambs, because they wanted access to that market. Well, maybe we will have a flat trade world where a Chinese person can buy an F-150 for a price roughly equivalent to the American price. When that happens, the Louisville plant will have to double in size to keep up with the demand.
Oh, and wouldn’t they really rather have an American Buick, assuming that Buick can be bothered to build any here? Sure they would, and for the same reason that you’d rather have a Swiss Rolex instead of an American one. Don’t forget Corvettes, Mustangs, and all the other uniquely American vehicles that might find a home overseas once it didn’t cost half again as much to buy them as it does here. That’s why Elon Musk has spoken out in favor of flat trade regulations. Given the choice, he’d rather expand the American Tesla factory than build a satellite in Shanghai. And who can blame him for that?
But wait, there’s more. Even a modest increase in international sales for American sporting cars would drastically increase the business case for making more of them. I’ve been beating the drum for a four-cylinder “mini-Corvette” — that’s a great international product, one that would do very well against the foreign competition if it was priced fairly. We might even see a Mustang that returns to the “international size” of the 1979 Telnack design. Somebody out there might even buy a Cadillac ATS-V. The possibilities are endless.
The point of all this? Simple. It’s not insane for President Trump to want a truly level playing surface. It is insane to think that America can survive a tilted-table approach to trade indefinitely. And America is now ready to compete on the world automotive stage, both as a producer and as an innovator. Stop being ashamed of your own country. Give us some credit. If you’re experiencing some doubt about that, book yourself a test drive in a Corvette ZR1, Shelby GT350, or widebody Hellcat. If you can find any unsold examples, that is. This is still a pretty decent country, filled with good people and good ideas. Happy Independence Day. See you next week.
[image: Ford Motor Company]
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Excellent article and great insights. I hate to quibble and this is a very minor point that does not impact your thesis, but Louisville has two Ford assembly plants, one that makes the Escape and MKC, the other that makes Super Duty trucks as well as the Expedition and Navigator. F-150's aren't assembled there.
I hear arguments on both sides of the fence here and find things to agree and disagree with in both major policy interpretations. I don't know which side is right and I'm willing to entertain the idea that a course correction may be a good idea. Here's the thing: I get paid in part to see patterns in data. And the only pattern I see here is the creation of uncertainty at every possible opportunity. I get the idea that Trump could be cultivating chaos deliberately to stake out an untenable negotiating position that he can quickly abandon when the other side moves. The problem I have is this uncertainty has very real short-term costs. Any system that has been in place for any length of time finds an equilibrium where the loopholes and nuances are understood and exploited. Blowing that up on short notice rather than in a measured phase-in means everyone involved except the fat cats at the top will get squeezed and many smaller companies that live in those loopholes may not be able to weather steep changes in material or compliance costs until infrastructure shifts to meet the new parameters. You may feel safe enough in your situation that you think you won't be affected, but that's a feeling I don't share.