The US Car Industry Can’t Beat China Without Canada And Mexico - The Autopian
My grand thesis out of the automotive industry, espoused many times in The Morning Dump, is that the most pivotal and yet under-appreciated force in the car world is currency. The ability to build cars in a cheaper currency and sell it in a more expensive one has been to the great benefit of carmakers […]
My grand thesis out of the automotive industry, espousedmany times in The Morning Dump, is that the most pivotal and yet under-appreciated force in the car world is currency. The ability to build cars in a cheaper currency and sell it in a more expensive one has been to the great benefit of carmakers from South Korea, Japan, Mexico, and now China. With President Trump refusing to sign the United States-Mexico-Canada Agreement and otherwise prioritizing US production over the supply chain built up between the three North American nations, he’s made it harder to compete with Chinese cars. As proof, look at how well Chinese cars and trucks sell in Mexico, evenafterthe country pushed for higher tariffs to slow down Chinese companies. Ford’s Jim Farley agrees, which is why the company is still putting money into Canadian production. This isn’t to say that there isn’t a place for production in the United States, and we’ll certainly see more of it, with Honda possibly expanding. In sad news, the automotive journalism world lost a great voice last week. Chinese Cars Now Account For About 17% Of Sales In MexicoPhoto: CheryChina was the first North American market to open itself up to Chinese car sales, and the result has been incredible. I remember visiting my family in Texas a couple of years ago and marveling at the number of Mexico-plated Chinese cars I saw. Automakers in China have a number of advantages, especially on cost, and Mexico is a market that’s dominated by affordable car choices. Understanding thethreat posed by Chinese automakersto the general North American car market, Mexico has largely sided with the United States. After a massive freak out by American automakers and legislators, the Mexican governmentmade it that much harder for Chinese companiesto build plants there (a move seen as a prelude to entering the American market). More recently, Mexican authorities leveled their own tariffs against Chinese cars. What’s happened since those tariffs went into place? Chinese car salesjumpedby 30% in the first half of the year. This is maybe a little misleading,as authorities tellReuters:Mexico’s Deputy Foreign Trade Minister Luis Rosendo Gutierrez told Reuters the sales data is misleading because Chinese automakers began the year with sizable inventories in Mexico after front-loading shipments ahead of the tariff increase. The real impact of the tariffs, he said, is evident in a 43% decline in imports of Chinese-brand vehicles during the first five months of the year compared with the same period last year. “What’s important is not the sales figures. What’s important is that the measures have halted imports of vehicles from Asia,” Gutierrez said. It’ll take a while to figure out exactly where Chinese brands land once they run out of pre-tariff imports and costs (maybe) rise. ‘A Revised USMCA Is Critical’ Says Ford CEO After Signing Deal With Canadian WorkersPhoto credit: SpotifyTrade and economics are complicated topics. On the one hand, a nation requires a lot of manufacturers to keep people employed and for national security. On the other hand, it’s beneficial to move up the ladder of industrial sophistication so your citizens enjoy both robust employment and cheaper goods (seemy thoughts on Ricardo’s Law of Comparative Advantage). What happened with the United States, if you’ll allow me to be glib and oversimplify things a lot, is we climbed super high on the ladder of industrial sophistication and reached the place where we had a lot of service sector employment (and hollowed out the industrial parts of the country, leading to a populist backlash and all sorts of other negative outcomes). The pandemic showed the shortcomings of this strategy. By opening up trade with Mexico and Canada via NAFTA, the government arguably made things cheaper in the United States but at a cost (though, I’d argue, opening up trade with China was the biggest shock). The USMCA, put in place by President Trump, was designed to cover for a lot of shortcomings in NAFTA and make trade a little fairer. It largely worked, but amid all the tariffs, President Trump has made it clear he’s largely against renewing it (much to the chagrin of automakers). While Mexico has made a lot of concessions to the United States, Canada has gone in the opposite direction, and responded to an increasingly bellicose foreign policy byinviting Chinese automakers into the country. With a contract deadline coming up, Ford has signed a new $499 million deal with Canada’s Unifor union to keep building engines, big trucks, and to eventually expand. Ford’s reasoning comes viaBloomberg:“This agreement is about investing in our people and Canada’s future,” Ford Chief Executive Officer Jim Farley said in a statement. Farley also spoke out in favor of the US-Mexico-Canada Agreement, which the Trump administration has so far refused to renew. “A strong, integrated North American manufacturing system is essential to our competitiveness, and a revised USMCA is critical to fending off the cost and currency advantages enjoyed by imported vehicles from Korea and Japan,” he said. That last bit is critical. Without getting into a detaileddiscussion of the Law of One Price, many importers to the United States benefit from cheaper input costs and cheaper currencies (whether naturally or unnaturally), which means they build cars on the cheap inwon(for the Koreans) and then sell them in dollars. The trade deals that President Trump has made give anadvantage to some of these countries, as they remain competitive even with the tariffs, and maybe even more so than cars built in Mexico or Canada (or with a lot of parts from those countries) under the USMCA. What Canada and Mexico allow,as I’ve pointed out, is for American carmakers (or foreign carmakers in the US) to compete with those other countries for production by using some built-in advantages different countries have, including cheaper energy costs in Canada (for processing metals) and lower-cost labor in Mexico. As always, there’s a balance, as it’s not worth completely losing production capability in one or the other country. China has a cost advantage and a currency advantage, as do most other countries, which was somewhat counterbalanced by the lower trade barriers and shared production of the North American market. Without somethinglikethe USMCA, the United States risks pushing Canada and Mexico into the hands of Chinese automakers willing to extend production across the ocean. If the market was entirely shut off from Canada and Mexico, we’d be likely making cars a lot more expensive for a small amount of jobs. Honda Might Build Another Plant In the United StatesPhoto: HondaThis has all happened before, and it will all happen again. Both Japanese and South Korean automakers built a market with imports and then, due in no small part to enticements and trade barriers, built plants in North America. Honda was one of the biggest, and has a huge footprint in Ohio. A footprint that Honda CEO Toshihiro Mibe said might expand, as hetoldYomiuri Shimbunthis weekend:Regarding North America, which he considers a key market, he said, “We need another production base,” and expressed his intention to strengthen the production system, including the construction of a new factory. Although development of an electric vehicle (EV) that was planned for the US market was canceled in March, he also indicated that the company aims to increase sales by strengthening its hybrid vehicle (HV) lineup. Honda needs the United States more than it needs any other market for its cars, and you can look at this a lot of ways. Is it the success of tariff saber-rattling? Yeah, partially. It’s also likely a measure of the importance of the US consumer and the company’s continued failure in China and weakness in other markets. RIP Mark TakahashiThis videofromEdmundsof Mark Takahashiis a great introduction to Mark if you need one. He was a prolific writer and a much-loved colleague, and we were all heartbroken to learn of his passing this weekend. FromAbigail Bassett:Mark Takahashi was one of those people who loved his friends and once you were inside his circle, he wanted to share every experience with you, and he lived life large. He used to say that his blood was mostly gravy and fine wine, and he had fantastic taste in cufflinks and cars and people. FromJonny Lieberman:I work in a weird business. I can’t count the number of times I’ve travelled the world with Mark. But two decades or so is the time frame. The last four were Spain, Austria, Healdsburg, and San Diego. Great times. We both lived in LA, and I just never made the effort. I think it was Mike Spinelli who said auto journalism is going on the world’s best vacations with people you hate. But that wasn’t Mark. The total opposite. Just reading his name on the invite list made me smile. FromLyn Woodward:My friend Mark Takahashi was a sensitive soul. He loved cars and food, and would often use them both to bring people together. He had an appetite for life, occasionally staying somewhere a day after a program to enjoy a restaurant he’d always wanted to try. He was self deprecating, perhaps to insulate himself from a world that often times for him got dark and lonely. #fatmark #awkwardmark these among others were hashtags he’d assign himself on posts. The latter he’d use on screenshots he’d take from his videos mid-talking or making a funny face. He might have poked fun at himself but he was excellent at what he did. I learned a lot watching him host videos. He worked hard even when everything seemed impossibly against him. He was joyful, had a singular laugh I’ll never forget, and whenever you saw his name on the attendees list for press drives you knew it was going to be a good trip. I have a few new hashtags for you, my friend #lovelymark #generousmark #marvelousmark You are gone from us too soon and will be remembered well. Our thoughts and prayers are with his friends and family. What I’m Listening To While Writing TMDIn honor of Mark, here’s The Beach Boys with “Fun, Fun, Fun,” which includes both a vintage T-Bird and starts with a meal. The Big QuestionWho do you know, besides yourself, who loves cars the most?Top photo: RAM,Ultimaps