Henry Ford

Stormy weather ahead – the WTO column

(Later also at Chinabiz and the Wage Indicator)

Brussels - I have used the car market in China always as a kind of barometer. Also because of its sheer size what happened on the car manufacturing market had a profound influence on the economy as a whole, maybe only beaten by the real estate market.

But the real estate markets have been too jumpy to really work as a solid barometer for China’s economy. A new tax, a crackdown on corruption, another tale about a bubble and the prices would jump in anticipation of what might happen. Compared to the real estate market the automotive market was a heaven of stability.

It was a kind of comforting to see all those companies throwing in massive investments into the Chinese car market, even though it would go against the common sense. While I compared the car markers with lemmings, they kept on pouring billions of investments into a market that would be only a fraction of their dreamed revenue. Did I expect them to listen to me? Of course not, it would be really scary when people would listen to me.

And many of my friends did not. They quit their jobs to join the car industry, the manufacturers, their suppliers, their ad companies and the multitude of government departments that got a piece of the action, including the feared traffic police.

Economy is all about confidence, I learned at school and saw it confirmed in China. Reality can be defied, as long as the trust is there.

So, when Volkswagen China decided to slash their production capacity to half, only a poor 900,000 cars per year, it was very sure that dramatic changes were taking place. Even when it would only be seen as a symbolic gesture – most production capacity is anyway not used in China – it is bound to have a huge effect.

When car manufacturers give up on their China dream, what is left for the poor people down the food chain that hope for a few smaller pieces of the action that would drop from their tables?

It was comparable to the loss of confidence in the second half of the 1990s, after foreign companies had been building up massive overcapacity in the first half of the 1990s.

Will the other car manufactures stick to their insane investments plans? I doubts it, after Volkswagen has been the first to acknowledge they were on a crash course.

There is some good news too in the automotive industry in China, like Delphi, the largest car part producer in the US, who will shift more production from the US to China to cut costs. But is that going to help to sell more cars? First we would need visionaries like Henry Ford, who started to pay his workers enough so they could afford to actually buy a Ford.

Now that would be a nice new dream: raising the Chinese wages to such a level, most people could actually buy a car. Apart from China and the world becoming uninhabitable, there would not really be anything against such a proposal, is there? Ford did not mind about those little details, as long as he could sell cars.

Fons Tuinstra