About The Authors

Friday, August 23, 2013

World Cars, World Trade

GM is positioning Buick as a global brand drawing upon global product. As we've earlier blogged, this will work only if there is a convergence in tastes across major markets that allows the same vehicle to be made and sold with only minor modifications. Now the brand name may not be the same; what is a Buick in China may be an Opel Mokka in Europe and not sold in the US at all – though in this case the Buick Enclave is, as detailed in this Bloomberg article.

homologation and lower tariffs would benefit us

This isn't just to lessen risk (though in the case of China, that's been upside risk!), as argued in Spreading out for a little elbow room, a post by one of my students. Partly it's a story of platforms, as a manufacturer enjoys economies of scale when the same underlying vehicle can be tweaked. But ideally it's about selling the exact same vehicle on a global basis. That then works to the benefit of global suppliers (and to the detriment of medium-sized suppliers in Japan and elsewhere that have a narrow geographic footprint), as an OEM can ask them to supply the same part everywhere, down to the plastics and steel and so on that if allowed to vary can introduce defects, defects that are thus subtle and hard to diagnose, or add on to costs for local redesign and retesting.

At present, however, there are limits. The Insurance Institute for Highway Safety imposes crash tests that are unique to the US. Europe has its rules for pedestrian impact. Headlight standards vary, and require redesign and recertification. A standard approach in Europe – lights that track as you turn, and adjust vertically ascending and descending hills, are not always allowed in other markets. And providing those functions interacts with styling. So homologation of such rules across markets can bring big benefits.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership, as well as the on-going Trans Pacific Partnership talks with Japan, Australia and others. How autos are treated could be a boon to the US industry.

And by the US industry I don't mean just the Detroit Three (though if we're precise, only GM is headquartered in Detroit, reflecting a long-run trend to exit the city). Michigan is the leader of exports within NAFTA, both to Canada and to Mexico. BMW in Spartanburg, SC leads the auto industry in exports, and has just completed a $900 million expansion. (I've been through their paint shop, which includes a PACE Award-winning innovation from PPG that eliminates an entire oven.) But Audi is opting for Mexico because as an exporter they find it a better location for the range of available free trade agreements and resultant lower tariffs. (Audi's plant will be the only one to make certain products, as discussed in The Tariff Advantage of Mexico.)

So homologation and lower tariffs would benefit us, and benefit others. We'd presumably have to lower the temporary 1963 "Chicken War" tariff on light trucks that's still in place 50 years later. But while there is convergence across markets in what people drive and in styling – as our students heard in the spring from J Mays, Ford's Chief Creative Office, reflected in their notes here and here – that convergence is not complete. Japan's "minicar" market is deeply entrenched; so are big pickups in the US. So it's really not credible threat to the Detroit Three, who hold a lock-grip on pickups (Toyota has about a 6% share, Nissan closer to 1%). There's nowhere imports could come from. So as I see it, we'd benefit from these agreements. We might see some low-volume vehicles that for now are found only in Europe, because of the cost of adapting to US standards. Low-volume however is the crucial adjective.