The 'China Price' Upon Which GM's (And Ford's(?)) Future Survival Depends Is Rapidly and Foreseeably Growing Too Expensive For GM To Manage

Implications: GM's short sighted purchasing management, and probably Ford's as well, pinned its hopes for being able to make a profit primarily on reducing its costs of labor and materials by shifting as much as possible of its parts production to the People's republic of China. Just 3 years ago, in 2005, GM's global purchasing czar, Bo Andersson, told his subordinates that he expected to source 30% of his 'spend,' more than 30 billion dollars a year in the PRC by 2007! Ford's clueless descendant of the founder of industrial mass production, William Clay Ford, Jr, went even farther afield. He told an audience of Chinese in Shanghai last year that his 'vision' for Ford was a 60% dependence on Chinese sourcing! Both of these targeted agendas were made by men literally ignorant of the economics of the global economy, but neither of them hesitated for a moment to drive the OEM American automotive supply industry bankrupt leaving both of these clueless men without a backup plan. 

Analysis: The Chinese currency has appreciated 16% against the US dollar in the the last year. This means that just on currency exchange alone fixed price contracts for Chinese goods have increased in cost by 16%. Add to that the price increases in oil, plastics,  commodity metals, and in steel, which alone is scheduled to go up another 22% by the middle of this year, and you have, just in the last year, the costs of some automotive parts, built in China, going up in dollars by as much as 50%! Did I mention, by the way, that ocean freight prices are at an all time high?

Even though it is obvious everywhere but in Detroit that the dependence on China as a long term source of cheap labor was foolish and the lack of any plans to insure against the risk of price increase and availability increase for metals and minerals was simply stupid we nonetheless now here nothing about these mistakes, and we still are treated to insipid political candidates talking about 'insourcing' or unilaterally canceling NAFTA, after which they return to Washington where they clueless vote more economic nails into the coffins of the American OEM automotive industry by mandating fuel and portrait fantasies with no regard for their true costs to the nation's economy.

If you wonder how it is that GM or Ford can suddenly terminate up to 50% of their workforces and survive you should also ask yourselves how these companies survived with their bloated workforces in the first place. GM and Ford, of course, as always, have a plan; they will simply utilize cheap foreign workers as replacements, but, of course, they will need something for these cheap foreign workers to do, and for that they will have to make high quality well designed cars that can be sold at a profit for prices Americans can afford. This puts us right back to where our OEM Automotive industry was when Japan entered the US market, and the result will be the same, except that this time it is the Japanese who fear losing market share to Chinese competition.

Detroit may not have noticed that the era of cheap Chinese goods is over, but Wall Street certainly has. It is truly indicative of how poorly managed Delphi must be that even though US industry will soon take up the 'insourcing' theme no one wants the comatose hodgepodge of GM's castoffs called Delphi. This is a testament to Wall Street's belief that GM's management was trying to pull off a fast one when it jettisoned Delphi and that the trick didn't work. Wall Street noticed that GM's Andersson's plan was to 're-source' all of Delphi's business with GM to China. The street does not believe GM when it makes an offer to keep Delphi going, because it has an obligation.
 
GM has no where to turn but Delphi for parts and assemblies it can already not afford to make in China. GM, however, brought this situation on itself, and no one in the financial community feels any obligation to help out.

Those chintzy small cars that GM produced in large quantities to allow itself to flaunt the CAFE rules and produce high margin SUVs and pickups will soon be swept aside by Chinese models, because Chinese workers in China using as many Chinese raw materials as possible, and paid in Chinese currency, will be able to make better and cheaper small cars than those made by workers paid in US dollars using increasingly expensive imported raw materials.

Cheaper Chinese cars will soon be sold in America thanks to the technology and the money China received to finance its recent and future five-year economic growth plans from Americans who financed their future with plastic cards they used to buy Chinese made cheap underwear.