Globalization Continues – And Multinationals Play by Rules Set by Other Nations (Despite What Trump Says)

© 2017 Farok J. Contractor, Rutgers Business School 

Globalization is driven by two inexorable logical constructs: (1) Multinational companies go and sell where enough customers are located, serving foreign markets by whatever means possible. And: (2) Multinational companies produce (or outsource) wherever it is rational or cheap to do so following the rules of various countries (and not always their own). For all of Trump’s pronouncements to “bring jobs back home,” the actual behavior of American companies is to follow the above two logical constructs of globalization, bending to the regulations and policies of foreign governments. A good example is the automobile market.

A recent news article revealed that Tesla was in negotiations with the Shanghai government to build cars there for the Chinese market.[1] This followed Ford Motor Company’s announcement that it would build its Ford Focus model in China for the Chinese market, as well as for possible imports into the US market.[2] Ironically, early in 2017 Ford had announced it was succumbing to pressure from Trump by abandoning plans to produce the Focus in Mexico.)

Tesla and Ford’s plans reveal a number of underlying issues:

  • China is the world’s biggest automobile market by number of new car registrations in 2016 (see Graph 1).

Graph 1. Largest Automobile Markets Worldwide January–December 2016 Based on New Car Registrations (in 1,000s)

Source: Statista.com

  • China wants to show the world that it is not only observing the Paris Treaty, but is assuming a leadership role[3]—hence its receptive attitude toward Tesla.
  • Chinese firms, such as CATL and BYD, with help and subsidies from their government, are building cutting-edge battery technology they hope will dominate world electric car markets.[4] The government may perhaps install charging stations in cities to encourage the use of electric vehicles. (Tesla also has ambitious plans to build a mega-factory for batteries in Nevada, but its plans include batteries for electricity storage from solar sources when the sun does not shine.)
  • Many rich Chinese would like to buy electric vehicles—not for cost savings, but for prestige and to show nationalistic solidarity with their government’s objectives. However, electric cars in China are, so far, small, down-market, and cramped (although in 2016 China sold 352,000 electric cars compared with only 159,000 in the US).[5] Tesla’s luxury models would slake the thirst of the unfulfilled upper end of the Chinese market.

Photo: EPA/ Diego Azubel

  • China imposes high tariffs on imports of finished vehicles (25–30 percent compared with only 2.5 percent in the US), inducing or forcing foreign firms into “tariff-jumping” foreign direct investment (FDI) to produce inside China rather than import. Together with other local taxes on foreign-made vehicles, a Jeep Wrangler can cost $71,000 for a Chinese customer,[6] versus $40,000 for an American. Less than five percent of cars sold in China are imported in an assembled or finished condition. (Incidentally, this protectionist policy also applies to many other finished products, thus promoting jobs inside China.)

On the other hand, some observers calculate that in auto components, the US does export large volumes of parts to China (because Chinese tariffs on parts are deliberately kept low)—so in autos and auto components taken together, US-China trade is roughly balanced.[7]

  • China still does not allow majority-owned FDI in many sectors, including autos. This forces multinationals such as General Motors (GM) to have local partners, with whom technology has to be shared, and the local Chinese partner thereby gains strength and competence. GM has a longstanding 50/50 equity alliance with SAIC Motor Corporation Limited (SAIC, formerly Shanghai Automotive Industry Corporation), which has increased the capability of the local partner, SAIC, to become the largest auto producer (6.49 million vehicles out of a total China market of 23.7 million in 2016).

On the other hand, of the 6.49 million cars sold by SAIC, GM-branded vehicles amounted to 3.87 million in 2016, making GM the biggest-selling brand in China.[8] We should also not forget that GM was saved from going under in the 2009 deep recession, in part by a cash injection from its SAIC joint venture partner. And in my opinion, Chinese input into the designing process has transformed Buicks from what used to be fuddy-duddy cars driven by the over-50 crowd to more contemporary designs suitable for world and American markets.

A model poses beside the world premiere display of the Buick concept car Riviera during a special media opening of the Auto China show at the new China International Exhibition Center on April 21, 2008 in Beijing. The annual auto show is held from April 20–28 with 890 vehicles including 55 concept cars on show.[9]

Photo: Feng Li/Getty Images

  • Shanghai labor costs four times that in the rest of China. Yet firms such as Tesla and GM want to locate there, rather than elsewhere in China. Why? Simply put, because a company does not mind paying four times the average wage if the worker’s productivity is also more than four times the average output. The Program for International Student Assessment (PISA) ranks Shanghai near the top in the world for student academic achievement compared with the US average, which puts the US in rank 30-something among nations. (Of course, this is an unfair comparison.[10] For one thing, the Shanghai survey may exclude students from poorer families. Second, it is inappropriate to compare a top city in China with an all-American average. If, for example Cambridge, Massachusetts or Cupertino, California were compared with Shanghai, their results might be superior.) Nevertheless, companies flock to Shanghai despite its higher costs in China because of its human capital, talent, infrastructure, and ancillary supplier base.
  • Even $8–10 per hour for a manufacturing worker in Shanghai represents considerable labor savings over US labor, which averages $35 per hour. Quite a difference remains. So perhaps the Tesla and the Ford Focus can also be imported from China to the US market. Currently, precious few cars are produced in China and shipped to the US despite only a 2.5 percent tariff. But that could change in the near future.
  • Ford initially intended to assemble the Focus and other models in Mexico, but backed down under pressure from Trump—only now to consider China. What are the trade-offs in assembling cars in Mexico, rather than in China, for the US market? Shipping distance from Mexico to the US is much shorter, faster, and less expensive. But Chinese labor is still much cheaper than Mexican labor. China is a much bigger domestic market for the portion of output that will continue to be sold locally—as opposed to exported to the US. A factory in China can achieve better economies on a larger scale than a factory located in Mexico.
  • After fulminating against China during the election campaign (e.g., “They are raping our country”), Trump and Xi Jinping achieved a “harmonious” relationship based on the immense commercial ties between the world’s two biggest economies. By contrast, relations with the Mexican government remain prickly (as of 2017).

The bottom line: Multinational companies bend to the political winds, but do not lose sight of the imperatives of globalization—which are to sell in large foreign markets while rationalizing or lowering costs by orchestrating the best configuration possible in the global supply chain.


References

[1] Tejada, C. (2017). Tesla in talks to set up electric car factory in Shanghai. New York Times Online: June 22.

[2] Bradsher, K. (2017). Ford’s Signal to the Auto World: Here Comes China. New York Times Online: June 21.

[3] Siu, P. (2017). How China will gain if Trump pulls a Paris on UN Human Rights Council. South China Morning Post Online: June 18.

[4] Sanderson H., Hancock T., and Lewis L. (2017). Electric cars: China’s battle for the battery market. Financial Times Online: March 5. [Requires subscription.]

[5] Coren, M.J. (2017). China is selling more electric vehicles than the US—and it’s not even close. Quartz.com: May 3.

[6] Bradsher, K. (2017). China’s taxes on imported cars feed trade tensions with U.S. New York Times Online: March 20.

[7] Fernholz, T. (2017). If US trade with China is so unfair, why is GM the best-selling car there? Quartz.com: April 3.

[8] Davies, A. (2013). Why Chinese buyers are obsessed with Buick. Business Insider Online: April 23.

[9] Motavalli, J. (2013). Buick and BMW: very big in China. Car Talk.com: July 17.

[10] Strauss, V. (2014). So how overblown were No. 1 Shanghai’s PISA results? The Washington Post Online: March 20.

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4 thoughts on “Globalization Continues – And Multinationals Play by Rules Set by Other Nations (Despite What Trump Says)

  1. This is another example from the last 2 weeks. (June 29, 2017) GE, the Ultimate Global Player, Is Turning Local. Just look at its $200 million investment in India, which was crucial to winning giant locomotive deal.
    https://www.wsj.com/articles/ge-the-ultimate-global-player-is-turning-local-1498748430
    *WSJ subscription required.

    GE had no other realistic option. It as either build a plant in one of the unlikeliest locations possible (see article) or abandon the idea of selling 1000 locomotives or more to the transportation services in India.

    Like

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