Global Economic Crisis

It is the epitome of all ironies. A supposedly workers Marxist/Communist political entity, the Peoples Republic of China, is in reality capitalism’s ultimate creation: an authoritarian  workshop for multinational corporations, that keeps wages at  the lowest possible levels, while making strikes and plant shutdowns by workers strictly illegal. This enforced low-wage corporate model is the basis behind China’s export boom and economic ascendancy. However, despite government pressure, cracks are beginning to appear in the façade.

Strikes are breaking out throughout China. The factory of the world is in revolt, with workers unrest growing like wildfire. Most recently, plants that produce parts for the Japanese automakers Honda and Toyota have been hit by labor shutdowns. In virtually every case that has become publicly exposed, the employers have been forced to provide large pay rises as the price of ending the strike. Illegal or not, the strike has emerged as a potent and popular labor weapon across the shop floors of the factory of the world.

There are profound economic and political ramifications related to China’s growing labor unrest. Inflation is increasing in China amid asset bubbles fed by Beijing’s loose fiscal and monetary policies. The Chinese workers are becoming increasingly militant in reacting to the widening gap between rich and poor in this supposedly classless communist nation. What is at risk is the very essence of what has thus far enabled China to compete on the world stage and emerge as the primary global exporter. Also at risk is the ability of the central government to profit from a low wage economy, in the process building up huge cash reserves. In large part, these reserves are what has enabled the Chinese sovereign fund to invest in U.S. Treasuries.

This is potentially a huge story, bigger than many currently appreciate, given that the Chinese authorities have probably suppressed the news concerning most strikes and workers demonstrations in China.  What we have learned about the strikes at Honda and Toyota plants in China is merely the tip of the iceberg of labor discontent in China, a factor that may in time create severe obstacles for the Chinese and global economy.

Why is it that virtually all of the auto manufacturers are in varying states of deep distress? The answer lies in the nature of the automobile business, and strategic decisions made on the basis of dream-like optimism. This is reflected in the staggering levels of over-capacity in auto manufacturing worldwide. At present, the combined capacity of all the carmakers throughout the world amounts to more than 90 million cars annually. The deadly demand destruction being inflicted by the Global Economic Crisis has reduced purchases to about 50 million units per years, meaning that the world’s auto companies have nearly double the productive capacity that can be absorbed by current consumer demand.

The automobile business is one of the most costly and complex to run. The industry produces a consumer product annually in the tens of millions of units that is costly, complex and customized. The productive infrastructure required is both vast and exceedingly expensive. Before the onset of the Global Economic Crisis, the world’s carmakers bet heavily on a rising global marketplace that could annually absorb up to 100 million cars annually, and leveraged themselves to the maximum extent to finance the creation of the global network of assembly plants, parts manufacturing factories and distribution networks. The business model became far more globalized, adding another layer of complexity. For example, a U.S. customer who purchases a certain VW model will end up owning a car assembled in Germany, but equipped with an engine built in Mexico. In other words, a Mexican VW plant builds an engine, sends it across the Atlantic Ocean to Germany, which in turn sends it back across the Ocean in the form of an assembled car, to be purchased at an American dealership. This global supply chain is expensive, fragile, and only makes economic sense if all the manufacturing components of the business are operating at full capacity. What I just described has all the characteristics of a Rube Goldberg business model, yet virtually every major automobile company in the world conducts their business according to the pattern I have just described.

With the collapse in demand caused by the Global Economic Crisis, practically every major auto manufacturer is faced with the identical problem; over-capacity that was established with high margins of leverage, leading to massive losses with a worldwide demand for only 50 million cars each year. The reaction thus far by the automakers is to besiege their governments with requests for massive bailouts, warning that without the public purse to cover their losses, the result will be layoffs, disastrous collateral damage to the overall economy and the extinction of the industrialized base.

There is no easy solution to the massive economic problems impacting this now globalized industry. What is clear is that the auto industry is in the midst of a deep global depression. And while much of the reason for their distress lies with very bad business decisions and strategies, the leaders of the car industry are probably correct in claiming that their demise would bring about severe consequences. Unfortunately, there may be no alternative, as the issue may ultimately come down to who becomes insolvent first; the auto companies or the sovereigns being asked to bail them out.

America’s car industry is on the verge of extinction amidst the global economic crisis. The Senate tuned down a bill offering Detroit automakers a $14 billion dollar bridge loan. Now it is up to the Bush administration to grant the 3 domestic auto manufactures the money from its TARP fund for the temporary rescue of the Detroit automakers; TARP was originally set up by Congress to save the financial industry from the global economic crisis.

The downturn in the auto business is not only an American phenomenon. The global economic crisis has ravaged auto producers throughout the world. Among the major European car producers come warnings of a bleak and barren 2009. The indications are growing that the deepening crisis in the automobile sector is global, going beyond the American auto industry’s desperate life and death struggle.

Recently, the CEOs of Renault-Nissan and Fiat stated that the automobile markets would undergo sustained declines in 2009. This parallels the catastrophic sales declines that have pushed the American “Big Three,” Ford, GM and Chrysler, to beg for bailouts from the government. The global economic crisis is destroying demand for cars in virtually every market.

The world’s number one car company, Toyota Motor Corp, will be reporting a loss of about 100 billion-yen ($1.11 billion at current exchange) for October-March. This is according to Japanese media. If even Toyota is losing money and cutting automobile production, how many weaker car companies will become extinct during the global economic crisis? For the auto business, as with many other enterprises, the worst is yet to come as the global economic crisis picks up the pace of its destructive impact on the world economy and global financial system.