2006 February 19 Sunday
China May Buy Complete DaimlerChrysler BMW Engine Plant

A Chinese car company may ship an entire high tech engine plant from Brazil to China.

In the latest sign of this country's manufacturing ambitions, a major Chinese company, hand-in-hand with the Communist Party, is bidding to buy from DaimlerChrysler and BMW a car engine plant in Brazil. Because the plant is so sophisticated, it is far more feasible for the Chinese carmaker, the Lifan Group, to go through such an effort to move it 8,300 miles, rather than to develop its own technology in this industrial hub in western China, the company's president said Thursday. If the purchase succeeds and it is early in the process China could leapfrog competitors like South Korea to catch up with Japan, Germany and the United States in selling some of the most fuel-efficient yet comfortable cars on the market, like the Honda Civic or the Toyota Corolla.

The guy negotiating the deal for the Chinese car company isn't from the car company. He's a senior Chinese Communist Party official. Think about that. Of course the banks in China will probably be ordered to lend money to finance the deal. Some would have us believe that the massive US budget deficit at 5.8% of GDP is just the product of the natural workings of the market. I see currency markets and capital markets manipulated by governments and am highly skeptical of this claim.

Will DaimlerChrysler and BMW join other companies in selling the Chinese technology that'll get used to undersell them?

Ford and GM look increasingly like road kill run down by globalisation and the United Auto Workers. How can Ford and GM avoid bankruptcy once Chinese cars made with very cheap labor and embodying lots of Western technology hit the market in the United States? As things stand now GM is bleeding cash and is a few years away from bankruptcy already. That road to bankruptcy could get accelerated by events at GM's former division Delphi. Delphi's employees might go on strike when Delphi, now operating under a bankruptcy filing, cuts wages and benefits. A halt of Delphi's production lines would, in turn, stop many GM production lines. Can't build cars without engine, brake, and transmisson controllers.

About Delphi, here's what I wonder: How quickly could Delphi shift production abroad or into plants in other states in event of a strike? Also, how rapidly could GM substitute controllers from other controller makers? GM could do some engineering work in advance to qualify some controllers as drop-in replacements should Delphi go out on strike. Might be prudent to do that, especially for models that sell at healthy profits.

Share |      By Randall Parker at 2006 February 19 04:13 PM  China


Comments
Stephen said at February 19, 2006 6:24 PM:

This from the Detroit News - Delphi executives, having managed their company into bankruptcy, negotiate themselves better conditions.

He [union rep] went on to blast Miller and the Delphi board for sweetening the company's severance packages for top executives just a day before the bankruptcy filing.

"Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers," he said.

And this cogent comment from (oddly enough) a banker:

"Who is to say this is the end of the line?" he said. "If you're competing with Chinese labor, then who is to say that $10 an hour is too much?"

Jorge D.C. said at February 19, 2006 11:43 PM:

Ford and GM look increasingly like road kill run down by globalisation and the United Auto Workers.

Agreed. Let's see what Mr & Mrs America say about the coming end of auto manufacturing in the USA. On that day we will pass a major pyschological milestone indeed.

I'll look forward to reading energetic posts arguing that this is progress.

Stephen said at February 20, 2006 1:40 AM:

Maybe bankruptcy will release the capital and expertise currently tied up in making low-margin commodity products (ie Delphi also makes things like car air-filter inserts). Maybe America would be better off if that released capital and expertise was redeployed in making high-margin items.

As they say, "liberal economics is creative destruction", (at least that's what the people who aren't about to become redundant say).

Kenelm Digby said at February 20, 2006 4:23 AM:

The Chinese certainly have the intelligence, the toughness, the ambition and good leadership to make such a transaction work - and reap rich dividends.

Kenelm Digby said at February 20, 2006 4:33 AM:

While on the subject, I have noticed through anectdotal means (from studying photographs that come my way), having never set foot in a car plant, that the assembly workers in Japanese and Chinese auto-factories tend to be all young men, fit, lean and hungry young meen at that, with fire in their eyes and ambition in their belly.
Whenever I see pictures from US or European auto plants I am struck by how many of the workers are in late middle age, paunchy and unfit looking, wearing the scruffiest attire possible, the preponderence of women and minorities on the shop floor and what I imagine to be a general air of a not "quite-up-to-scratch" labor force.
Anyone agree?, anyone with first hand knowledge?, is this pure prejudice?

Bob Badour said at February 20, 2006 3:01 PM:

Kenelm,

I was born and raised in a GM town: Oshawa, Ontario. The last I heard, GM had not hired a new employee in Oshawa since 1985, unless they have hired anybody in the last year or so.

When I was a child, there were 20,000 GM workers in Oshawa. I believe by the 1990's they were down to around 5,000. According to this story, they are down to less than 4000 and soon to be zero.

Most of the jobs were replaced with robots or outsourced to non-union shops (or at least shops with less generous collective agreements) through JIT supply management. I feel sorry for all the people working at satellite businesses that will lose jobs when the plants close. It's not like they were making lots of money in the first place.

Stephen,

I can think of no higher margin industry than software where 40% ROA is not unheard of. Over the past 6 years, those jobs were largely outsourced overseas to Russia, China and India. What high-margin product did you have in mind to replace those jobs?

Invisible Scientist said at February 20, 2006 3:48 PM:

If there is a strong recession in the United States in a few years, then it is quite possible that the public opinion will be hostile to foreign imports, and there will be more protectionism.

w said at February 20, 2006 3:54 PM:

All,

Who cares what the auto workers look like as long as they are productive and do a good job? I don't see Honda and Toyota plants here in America firing the middle aged work force they have in their plants. Did you ever stop to think that these people may have a lot of practical experience that is valuable, beyond looks? Jesus Christ, what a ridiculous comment!

I'm also sick of hearing how the chinese are such fantastic workers. Their productivity per worker is less than in most first world countries. The only reason everything is being shipped there is that they work for almost nothing (in US currency, that is). The mexicans that are being hired here are not such great workers either, they're just cheap. Seems to me as if many will sacrifice quality for low cost, as if the Wal-Mart phenomenon didn't make that obvious. We have a CURRENCY VALUATION problem here in the United States--our US dollar is WAY overpriced for how many dollars are in existence and how much stuff and productivity we have to back it up. This is the direct fault of the US government and the US financial "industry" (an oxymoron if I ever heard one), which create money at an astounding pace, for the benefit of the Wall Street crowd and to finance our corrupt welfare/warfare state. All other countries and their labor look "cheap" in comparison, and the ill-informed mistake this discrepancy in currency values as a true competitive advantage in the workforce of other countries. If you need any good examples of how american companies CAN compete, and maintain high quality, and OBLITERATE their competition, look at Caterpillar. They're doing fantastically well.

US companies are chomping at the bit to shaft (otherwise referred to as outsource) the american worker and pay less wages and taxes, pollute at will, and discard with provsional abandon all who enter their factory doors. This is because the management in these companies is generally incompetent. My experience is that a company can endure crappy management far longer than an incompetent workforce, because the workers do all the work. China just lets these idiot managers look good because they increased profits by hiring de facto slave labor. People are waking up though. The huge influx of illegals and the dismantlement of our industrial base (soon to be followed by our university/R&D base and financial base) will seal the doom of the welfare state and the politicians who erected it, because we won't be able to afford it. Look for quotas ("affirmative action") to be eliminated as good jobs become increasingly hard to find. We'll see how well we all get along then. There is nothing good about this trend of globalization. The low prices you get today will be paid for by lower wages and a much lower standard of living (for us AND the following generations) in the years to come. The real problem is our politicians and the greedy do-nothings in the financial industry.

Kenelm Digby said at February 21, 2006 3:45 AM:

W,
It is not a "ridiculous comment".
As far as I understand work in an auto-plant requires hard physical labor, stamina, good eyesight, energy and perhaps acertain ambition on the part of the employees.
For goodness sake you don't see the US Marine Corps or the Seattle Sea-Hawks using men past middle-age in their A-Team, so why should a manufacturer who wants a lean, mean, strong, tough workforce do the same?
The reason that US auto-plants employ a preponderance of the aged, the unfit, the paunchy, the scruffy, minorities and women etc is due partly to "equal opportunities" laws and partially that no new workers have been taken on for years, and the workers with the jobs cling jealously to their "right" of that job, knowing full well that will never obtain such lucrative employment elsewhere.

Kenelm Digby said at February 21, 2006 3:51 AM:

Anyway,
After working various physical jobs (in my youth), with paunchy, obese, smoking, late-middle aged men with various health problems, I can assure you that aren't much cop when it comes to the continued application of sustained, hard manual labor.

W said at February 21, 2006 6:01 AM:

Of course its a ridiculous comment. Most modern manufacturing plants try to reduce the amount of physical labor required in their assembly lines for a lot of reasons, I.e. reduced injuries, ability to comply with equal employment laws (read: hiring females), etc. How in shape do you have to be to inspect a weld?

Hey, have you ever watched This Old House, the home improvement show on PBS? How fat are the guys in that show (most are middle aged pudgy guys)? But you know what, I would LOVE to have any one of those guys working on my house! Smart, hard-working, master carpenters, plumbers, electricians, cabinetmakers, woodworkers. Maybe your idea is right though. Next time I need some major work done on my house, I'll go to the nearest gym instead of finding experienced craftsmen. I'll take along a measuring tape and measure their waistlines. I'm sure this will guarantee only the finest labor. Brilliant!

Kenelm Digby said at February 21, 2006 7:26 AM:

Judging photographs from American and Asian auto-plants, one is struck with the very instinctive, gut-feeling that the Asian workers are fitter, stronger, harder working and cleaner and tidier looking, altogether "more professional" looking than the fat, aged, often female and minority inmates of American auto factories.
As far as I know most assembly jobs in auto plants, really require the sustained stamina of heavy labor, and the quality and consistency of that labor.What are termed "speed-ups" are all important in maintaining productivity and competitiveness.
Perhaps the labor is akin to that required in the cattle slughterhouse and packing plant, i'm only guessing here.
On that point, any experienced gambler on the horse races will tell you that age and the manifest physical characteristics of the horse, as evidenced through the eyes in the parade-ring, are all important as to whether the horse actually wins races.The horse that doesn't win, alas. in our harsh Darwinian world ends up in a few months' time as tins of "King Kuts" Dog food at special discount at your nearest Wal-Mart.I'm not suggesting a similiar fate for the wheezing, lumbering and stumbling US Auto-worker, of course, but I am merely trying to give an example of how harsh Darwinian selection - where money is involved - actually is in the real World and not in the cosy fantasy of Discovery Home & Leisure.

Leonidas said at February 21, 2006 11:20 AM:

The "high-margin" jobs that will replace the high-tech and manufacturing jobs currently being offshored/outsourced are: agricultural workers, tour guides, manicurists (a Virginia Postrel original), gummint workers, and a variety of other go-getter and modern occupations.

I work in high-tech and spend most of my time making co-workers in India look good. As one of the prior commenters noted, their productivity is overrated. Upper management is so vested in outsourcing that all they want to hear is good news. Indian English (written and spoken), to be frank, is not all that great either.

In order to solve many of our country's problems (including the monstrous trade deficit and size of government), I say bring back the tariff and eliminate the Federal Income tax. I find that libertarians go ballistic at the mention of a tariff, yet are lukewarm to coupling the return of the tariff to the elimination of the income tax. It would seem to me that getting rid of the income tax would be a greater boost to personal liberty than having the OPTION to buy cheaper foreign goods. The tariff (pre-16th Amendment) did a terrific job keeping our government small, while at the same time reinforcing our mercantilist economic policies.

Stephen said at February 21, 2006 7:48 PM:

Leonidas, game-out what would happen if the US imposed a wide range of import tariffs:

(1) The rest of the world will react by imposing a tariff on US goods (but not, say, equivalent goods from China);
(2) The US loses its international markets because the tariffs imposed by the rest of the world make the US uncompetitive;
(3) Manufacturers in places like China now move in and take over the former US markets;
(4) Manufacturers in China get a huge efficiency dividend because they've massively increased volumes;
(4) US manufacturers now close many of their factories because they've lost the international markets;
(5) US unemployment spikes;
(6) US manufacturers renogotiate employment contracts with remaining employees with the aim of cutting wages (because there's now a huge supply of unemployed labour)
(7) US manufacturers increase their prices up to the level of the tariff (after-all, that's the whole purpose of the tariff); or
(7A) US manufacturers can't increase their prices because the China based manufacturers are still supplying the US market because they have such huge volumes that their unit costs have dropped by more than the tariff;;

Net outcome: If (7) happens, large unemployment, wages drop, while prices increase by the amount of the tariff; If (7A) happens, massive unemployment, wages drop and US industry collapses.

Kenelm Digby said at February 22, 2006 4:59 AM:

W,
I don't know whether you have ever worked a factory or construction job, but in both cases, productivity ie the amont "produced" per man-hour is the paramount, overriding concern.
Generally construction workers are paid by "price-work" ie the number of bricks laid, the yardage of studwork erected etc, and most factories worthy of the name set production targets for the day.
A cracking pace is set up - those who can't keep up perish - and have no one to mourn them.
If the result is a $6000 luxury, high performance reiable car - that the customer wishes to purchase with *hard cash* so be it.
This is the only 'morality ' the free market observes.A point which most of us, at least those who have had to work for a living, grasp in late adolescence.

W said at February 22, 2006 7:17 AM:

KD,

I have no idea what planet you live on, but as an engineer, I've worked in both factories and construction sites, in a supervisory role in the latter case. People are paid by the hour or they take a flat fee. No one counts the number of bricks someone lays (LOL!) or how many studs have been nailed together. You've lost any credibility you had with me with the above posts. I'm sure someone, somewhere gets paid by the piece, but that's not what goes on in factories like auto plants or on construction sites. You still haven't addressed the point I made about experience and brains being valued over sheer brawn (even though a lot of pudgy guys are quite strong), especially in today high tech factories. It really digs at you, doesn't it, that you were proven wrong, even on some obscure blog message board? I'm still laughing at your comment about "good eyesight", as if someone couldn't get a pair of glasses and do just fine! You're really something.

By the way, your free market capitalism doesn't exist. Especially in the case of global trade, since foreign countries, like China and Japan (and most others), manipulate the values of their currency values downward in order to keep their export markets. The US and Europe keep their currencies higher because they want to compete for the role of world reserve currency (Euro vs. Dollar, especially petro-euro vs. petro-dollar). The result is that lots of manufacturing jobs go to the Asia, we here get high unemployment (lied about here in the US, admitted in Europe), and the asians recycle their excess dollars into buying our government and private debt and buying into our stock market. In other words, the fix is in, courtesy of Wall Street and the corrupt spendthrifts in Washington, and they are selling us out by not putting tariffs on imported goods from countries that manipulate their currencies to give themselves an unfair trade advantage. All they talk about is how inflation is being kept in check by imported foreign goods (and illegal alien labor in service jobs here in America), not admitting that eventually our incomes and standard of living will drop precipitously and be "kept in check" as well. Its all short-term, me first thinking, and its starting to come home to roost in a major way.

FYI, John Galt is fictional character, and Darwin was talking about a NATURAL process, not calculated decisions made by men. Please pull your head up out of the dirt and see reality for what it actually is, rather than what you would like it to be.

mik said at February 22, 2006 12:51 PM:

Kenelm Digby:

"Generally construction workers are paid by "price-work" ie the number of bricks laid, the yardage of studwork erected etc,"

This is got be a most idiotic comment in this thread. Do you know difference between an independent contractor and an hourly worker? Have you ever been to a small or large construction site?

My son is a finance guy in a large construction company. He has never heard about methods of payment you described.
On another hand contractors, big and small, as business owners are responsible for contracts they engaged in. If contract is a fixed-price one, they have to complete "a piece of work" to get paid.

If one has no idea about the subject, why one must post?


Randall Parker said at February 22, 2006 4:34 PM:

mik, W,

Kenelm is writing from Britain. They might pay construction work differently there. Then again, maybe not too.

Kenelm Digby said at February 23, 2006 3:40 AM:

"Price-work" is the usual order of the day amongst British sub-contractors in the "building-game".
It is normalk practice to pay per square meterage of work produced, rather than time elapsed.A surveyor measures the work, and payment is made upon that basis.
As to my remark on eyesight, precision engineering work requiring the very fine manipulation of tiny objects, yes it is found in the auto-industry, as it is found in the electronics industry, is very much dependent on good young eyes.
That's why most East Asian electronic plants employ a preponderance of young, pre-marriage women doing fine assembly.
Any sports player (billiards etc), will tell you that good eyes are a great advantage in his highly precision loaded sport, and that young men have the advantage.

Leonidas said at February 23, 2006 10:36 AM:

Stephen,

I tend to hold "free trade" in guilt-by-association with mass immigration, another modern fad, as the same people (WSJ, NYT, the professoriate) tend to support both.

I doubt the arrival of the tariff would be quite as bad as you predict (see the link below). You could find 100 different economists to give you 100 different answers about future economic scenarios. Sure, there would certainly be upheavals, but the accompanying elimination of the Income Tax would provide a boost to domestic innovation and enterprise.

Furthermore, dire scenarios always assume Belgian-sized economies and populations (oh, my, we can't possibly manufacture our own vehicles and chocolate!). Don't forget we've got 300,000,000 people in this country and we *still* have the infrastructure to make most of what we need. Of course, we have an over-reliance on foreign oil, but oil-shocks can be cured by forcing the Saudi Arabians and other savages to undergo food-shocks and western medicine-shocks through the use of naval and air blockades. We just need to learn to be as nasty and brutal as they are. Wilson and Churchill wrote the book on food blockades; they are very effective, read up on their effect on Germany during WWI to get an idea.

Tariffs, Smoot-Hawley in particular, aren't the bogeymen your globalist college professors have made them out to be:
http://www.howtobuyamerican.com/simmermaker/ba-0012-smoothawley.shtml

The point is that we need to wake up and start looking after ourselves. I'm sick of hearing about this global village and "our shrinking world" jibber-jabber. Most of it isn't true and the rest doesn't need to be.

Randall Parker said at February 23, 2006 6:23 PM:

Stephen, Leonidas,

Japan had high import barriers for years. Japanese manufacturers used these barriers as excuses to get Western companies to license them technology since the Western companies couldn't sell their goods in Japan.

Given that designs can move right past barriers and, yes, the US does have a large internal economy I think the dire predictions of what would come from high import barriers have been overstated. We'd lose some economy of scale. But at the same time companies would become more heavily incentivized to develop new methods of automation as manual labor costs went up.

Kenelm Digby said at February 24, 2006 4:23 AM:

Perhaps the strongest arugument in favor of fre trade is not the comparative advantage one first advanced by Adan Smith in he 18th Century, but an argument based strictly on libetarian motives.
Just what right does any government have to restrict and interfere in the right of an individual to spend his own money, for which he sweated for, in anyway that individual sees fit - even if that involves the transfer of money stock to a foreigner ?
Put this way, the argument based strictly on fredom and rights of the individual is unanswerable, though i can already hear some screams about the diminunition of the national money stock impoverishing everyone in the community.
But oh, I forget, following the Nick Griffin trial and America siding with the worldwide Muslim umma over the Danish cartoon row, individual rights really count for nothing with western governments.

Randall Parker said at February 25, 2006 8:20 AM:

Kenelm,

Imagine the United States took the position in trade talks that there is no need for trade talks because import restrictions violated individual rights to trade. Suppose as a consequence the US just allowed unlimited imports with 0 tariff. How would the US pursue respect for intellectual property rights? Any industrial process developed and patented by a US company could get copied in China and used to make goods that would be exported all over the world. A US company couldn't hope to get sufficient economies of scale to pay off many R&D projects. Develop a new battery manufacturing technology? Why bother? It would get stolen and cheap Chinese labor could use the process to make cheap batteries to sell all over the world.

Bob Badour said at February 25, 2006 5:13 PM:

Kenelm and Randall,

The construction trades in Great Britain are extremely inefficient and anti-competition. Or at least, they were 15 years ago.

I know this having once developed estimating software for electrical contractors and having discussed international differences with people who operated contracting companies in multiple countries. One Kenyan gentleman I recall had operated electrical contracting companies in Kenya, England and Canada.

According to him, contractors submitting bids in the UK generally have to supply a book's worth of information including the total quote for the project and unit prices for every piece in the job. As a result, estimates are a huge overhead that, of course, get passed on to the builder. A sub-contractor has to win about 25% of its bids to pay for the cost of doing the estimates. As a result, projects generally only get three or four submissions.

The books are used to award the contract to whomever the builder wanted in the first place. The builder will cite the unit prices that make the decision turn out the way they always wanted. If the contractor is not schmoozing the right people and greasing the right palms, they might as well not bother bidding, and they don't.

In North America, bids are extremely competitive. Most builders want the bottom-line and maybe a handful of unit prices. Often the unit price items are quoted directly from manufacturers and bid with little or no markup. It's understood that the quoted price is a best-price on a competive basis and that changes will involve higher mark-ups.

Projects here frequently get a dozen or more bids submitted.

In both cases, contracting companies bid on the basis of their own cost and they calculate this as piecework. However, they pay their tradespeople and labourers on an hourly basis. Contractors use the historical record of their own crews to arrive at average labour costs per piece. Subcontracting companies win bids by specializing in certain types of work so their crews become extremely efficient at these jobs, and these savings get passed on to the builder through the competitive bidding.

Some electrical contractors will specialize in schools others in retail commercial space others in commercial office space others in heavy manufacturing others in power transmission etc.

Kenelm digby said at February 26, 2006 5:37 AM:

But Randall, we already have existing patent, copyright and royalties lwas and these have been extended internationally, by agreement, for years.
I see no reason why not free-trade should not be comprimised by a binding declaration by all those who participate in this postulated free-trade area, to adhere to a common, enforceable patent regime.

nz conservative said at July 6, 2006 5:48 PM:

I think there is a good argument for a low, flat tariff on Chinese imports. Chinese manufacturing firms don't have to pay for environmental legislation, affirmative action, health and safety provisions e.t.c like western firms do. As a developing country China isn't expected to comply with the Kyoto legislation for example. Chinese farmers also receive government assistance. The money raised by the tariff could then be used to boost r and d spending in industries where the west is relatively competitive eg, farming and construction equipment, trucks, aircraft, agriculture, medicines e.t.c.

We currently have a dangerous situation where the Chinese are making strategically sensitive equipment like aircraft parts, medical equipment and military parts. It was stupid of the Romans to expect the Goths to fight their wars for them so why is it so clever to let the Chinese take over crucial areas of western manufacturing?

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