Cars take the sting out of protectionism

There are three reasons why it is wise of Daimler-Benz to follow the example of BMW and build a plant in the US. The first, and least important, is to reduce problems created by movements of the mark/dollar rate. The second, and much more significant, is that there are lower labour costs in the US, particularly the social security charges. The third, though it is not nice to say it, is a latent fear of US protectionism.

Currency fluctuations can be tackled, for there is a wealth of financial instruments available that will iron out their effect. Labour costs are tougher, but improvements in the efficiency of German plants - bringing them up to best Japanese practice - should bring German costs within 10-15 per cent of the US. Consumers will pay some premium for quality, and provided German design can retain some edge, high manufacturing costs ought to be sustainable. But protectionism would be a killer.

Before one goes further down this line of argument, a world of caution. On present plans, it will be a new four-wheel-drive vehicle that Daimler-Benz will be making in the US. It already makes lorries there, and the plan may simply involve converting an existing plant to the new vehicle, rather than building a new factory from scratch. Unlike BMW, there seems to be no present plan to build regular cars in the US.

But the step has more than symbolic importance, particularly at this stage of Germany's economic cycle. The recession in Germany, as measured by the fall in industrial production from peak, is far sharper than in the UK or US. Yet here is Germany's most-admired industrial company planning to shift jobs abroad.

But this is the way the world automotive industry is going. It is becoming a truly global market, either with manufacturing located near the point of sale, or with exports balanced by imports. Britain's experience, where Japanese investment should make the UK a net exporter of cars around 1997, is widely known.

But we are seeing the effects of Japanese overseas investment rather later than the Americans. The New York Times recently reported that by 1996 Toyota expects to export 95,000 US-built cars back to Japan. Already this year it is planning to ship 9,600 Kentucky-built Camry estate cars to Japan, where they are being promoted as 'American cars' on the grounds that the Kentucky plant is the only one that makes them.

The effect of local production in the US is to take the sting out of protectionism. The cost advantage of US production at present exchange rates is up to dollars 2,000 to dollars 3,000 per vehicle, which is useful enough.

More useful, though, is the ability to demonstrate that it is not entirely unpatriotic to buy a car called Toyota. The US, unlike the UK, has little prospect of becoming a net exporter of Japanese cars in the foreseeable future, but some local production at least softens the argument.

A study* of how the world car market might evolve was recently carried out by two economists at the Federal Reserve Bank of Chicago. They concluded that 'transplants' would continue to grow in the US, along with what is euphemistically called 'downsizing' by domestic producers, but that the most dramatic developments would take place in Asia.

Korea had practically no motor industry in 1980. It now produces 1.6 million cars a year and exports 400,000 of them. The authors pointed out that vehicle sales 'exploded once per capita income reached approximately dollars 3,500 a year' and that income levels in southern China were now above dollars 2,000 a head. They predict 40 million cars being registed in China early next century, against 5 million today.

This raises an enormous issue of international trade. Daimler-Benz can defuse American gripes about EC protectionism by building passenger vehicles in the US. Toyota can do the same by exporting more US-built cars to Japan.

It is acceptable for both the US and the EC to take small numbers of cars from countries such as Malaysia or Korea because they are not yet perceived as a threat. But it is not easy to see this relatively relaxed attitude being sustained if the established manufacturing countries are faced with large quantities of Chinese-made cars.

This raises the further issue of whether it is really a sound industrial strategy to have a large domestic motor industry.

It is not politically correct to suggest that Britain has been fortunate to run down its domestic industry and then replace it to some extent with Japanese transplants. But the authors of the Chicago study suggest that Japan, with its large export-oriented motor industry, may face a most difficult adjustment. It has to find new markets and it is not at all clear what these might be.

The same, of course, could be said for the German motor industry. It accounts for some 42 per cent of EC production but needs the further stimulus of exports outside the EC to justify its present size.

Daimler-Benz is following a sensible strategy in starting to build up US production, but all the experience of the US domestic producers, and even the Japanese, is that the more successful these plants are, the greater the need to 'downsize' at home.

But the alternative is worse: it is the possibility of being shut out of markets, not so much by formal trade restrictions but by the informal powers of consumer unease, which must to some extent account for the fall-off of sales of Mercedes cars in the US.

*'Assessing Global Auto Trends', Paul Ballew and Robert Schnorbus, March/April issue Economic Perspectives, Federal Reserve Bank of Chicago