Detroit: A riposte to the bashers

Detroit’s problems are partly — but only partly — its own fault. Other actors, not least the smart-alecks of America’s opinion-making industry, have played a crucial role in this tragedy. (This is a longer version of an article published at

Never has the American car industry had a poorer press. No epithet these days seems too contemptuous in referring to the industry’s managerial competence and no policy proposal too heartless in addressing the industry’s high labor costs.

The American commentariat’s “let-them-eat-cake” attitude was summed up by Mitt Romney in a New York Times editorial page article a few weeks ago in which he unapologetically advocated that the entire industry be allowed to go bankrupt. Yet the main “benefit” of a bankruptcy is merely that the industry’s surviving businesses would be allowed to walk away from billions of dollars in obligations to retirees. One wonders how Romney would react if some ideologue casually suggested his pension be incinerated on a bonfire of free market theory.

Yes, some of Detroit’s injuries are self-inflicted. But no industry is perfect. Not in the United States and not anywhere else. Even the American financial services industry — so recently held up as a poster boy of supposedly world-class management — is now seen to be less than infallible.

There was once a time — some of us remember it well — when Detroit led the world in both labor productivity and R & D. What went wrong? The most important reason for Detroit’s downfall has not been incompetent management — the executives running the industry in recent years are hewn from much the same timber as their predecessors of the 1960s. As for “greedy unions,” labor seemed far more powerful in the 1960s than it does today (after all Detroit’s wage rates in those days ran nearly four times those in Japan).

The elephant in the room is unfair foreign trade practices. Though you would never know it from recent reporting, for forty years the Detroit companies have been systematically undermined by foreign competitors’ predatory pricing in the American market. They have been thereby starved of the adequate returns necessary to invest in new, more efficient production technologies.

The Japanese in particular have used unfair trade practices to devastating effect. On the one hand they have kept their home market as a protected sanctuary, where, operating in cartel fashion and free from effective foreign competition, they have generally garnered superrich profits. These profits have been the ultimate source of the massive investments in both manufacturing technology and R & D that have enabled the Japanese to pull far ahead of the American industry in recent decades. Meanwhile teh Japanese have kept the American competition pinned down in the American market by selling at little more than marginal cost.

All Japanese government denials to the contrary, the Japanese domestic market has always been heavily protected. Thus the high pricing there has been reserved for Japanese producers. Two German manufacturers, Mercedes-Benz and BMW, enjoy token positions at the top end but have been strictly boxed in to ensure that for more than two decades the combined share of all foreign makers has been kept to a mere 4 percent.

Even Korean car makers are shut out (though they hold their own against Japanese competition in the United States and Europe). It is not as if Korea and Japan don’t trade with each other. Actually they do a huge trade — it is just that they don’t trade in cars. Korea is Japan’s third largest trading partner and Japan is Korea’s second. As a matter of “administrative convenience,” industrial planners on both sides have outlawed trade in cars. (Korea’s car market is even more protected than Japan’s and even more hostile to American imports.)

For students of Japanese protectionism perhaps the most telling point is that though France’s Renault company, through its stake in Nissan, nominally controls Japan’s second biggest showroom network, it has never been allowed to sell more than token numbers of its French-made products in Japan.

Of course, the American press has generally sided with the Tokyo authorities in presenting the Japanese market as basically open. Supposedly the only thing that has ever stopped the Detroit companies is their alleged perennial incompetence. In the view of some commentators, to even suggest that the Japanese market is protected is politically incorrect if not downright racist. A recent re-statement of this view has come from Andrew Coyne of Maclean’s magazine in Canada.

Like many others of similar ilk, he then went on to demonstrate how remarkably ill-informed he is. Recycling unchecked a shameless Japanese canard of the supposedly absurd level of Detroit’s incompetence, he suggested that the Detroit Big Three have failed in Japan because the cars they have been ” pressing upon the Japanese consumer” have been wrongly configured for Japan. Coyne goes on: “It seems Japan drives on the left. Who knew?”

Who indeed. This is a classic example of how easily unacculturated western commentators can be bamboozled by East Asian special pleading on trade. The first point to note is that the Detroit Big Three do make a full range of cars with the steering wheel on the appropriate side for Japan. These cars are made in Europe by such Big Three subsidiaries as the respected Adam Opel company in Germany. The fact is that these cars are shut out of Japan and always have been. The question for Coyne is why should Detroit spend hundreds of millions configuring its American products for a Japanese market that does not exist? In any case many Japanese buyers of foreign cars actually insist that the steering wheel be the “wrong” side and do so even in the case of Rolls-Royces and Jaguars, which of course in their “natural” state in their British homeland are configured for left-hand drive roads just like Japan’s. The rationale is that such cars’ very “foreignness” is a major part of their appeal, and the small coterie of Japanese drivers who have the money to buy expensive foreign cars (in Japan all foreign cars are expensive because of trade barriers) like to underline the point.

A rigged world market apart, another factor that has worn Detroit down is an unrealistically high dollar. Again the problems go back decades. Ever since the late 1960s when American trade first showed signs of weakness, American policymakers have consistently resisted dollar devaluation until it has been too late.

As far back as the early 1980s, the American car industry lost its so-called incumbent’s advantage — its historic position of productivity leadership based on being first into the business. This development resulted largely from being worn down by years of unfair trade. Thereafter the only way Detroit could hope to fight back was with lower wages than the Japanese competition (as well as of course a fair world market). And the only realistic way to lower its wage costs — and those of other deeply troubled American manufacturers in everything from electronics to steel — was through a drastic dollar devaluation. American manufacturers’ pleas for a lower dollar have gone unheard, however, in part because the prevailing “wisdom” among American opinion makers was that manufacturing did not matter (and even more absurdly, trade did not matter). A high dollar reduced America’s trade deficits in the short term because it lowered the cost of essential imports. It also pleased those in the American elite who wanted to travel abroad. The result in the long term, however, has been the desperately weakened manufacturing sector we see today.

All this is well understood in foreign capitals, particularly in those of the major East Asian nations. So, yes, the American car industry’s fate reflects in large measure American incompetence — but the main source of this incompetence has not been the engineers of Detroit but the opinion makers of New York and Washington.

Eamonn Fingleton is the author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Boston: Houghton Mifflin, 1999) and In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony (New York: St. Martin’s Press, 2008).

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