China: Forcing Our Economic Policy Hand
If you’ve been keeping up with the press, you know that it’s only a matter of time before inexpensive Chinese cars become available in the U.S. market. How cheap? According to a recent Forbes article, “Chinese cars could redefine the entry-level segment of the U.S. auto market, with prices for vehicles as low as $6,600”. Citing a study from Roland Berger, the article goes onto to discuss how the “estimated low-end price range is approximately 30 percent below the lowest-cost vehicle on the market today”. Sure, they’re cheap you might say, but what about quality? According to the study, the defect rate of General Motor’s suppliers in Shanghai has dropped to 24 parts per million (PPM), a number that is actually better than GM’s North American supplier quality figures.
With cost and quality numbers like this, you can be sure that other domestic providers (and potentially even Japanese and German manufacturers with U.S. operations) will attempt to put up a fight―probably on legal and legislative grounds. What might this battle look like? Further down the automotive supply chain, there’s an example today that might shed some light on the subject. On January 26th, Calgon Carbon and NORIT Americas, two producers of activated carbon, a substance that acts as a filtering agent, filed an anti-dumping case against China. As background, activated carbon is used across a number of industries (including water filtration) but plays an important role in the automotive industry―specifically as the main product in emission canisters.
The complaint states that “the [Chinese] producers have demonstrated their ability to rapidly increase exports to the United States of extremely low-priced activated carbon that undersells domestic producers by substantial margins.” Fair enough, but what the complaint does not state is that the activated carbon has essentially been a monopoly product in the United States controlled by the complainants and a few other producers including MeadWestvaco. In the past decades, these suppliers have been able to gouge U.S. manufacturers by dictating pricing significantly above the world market price.
But recently, as global competition has entered the market, the supplier’s pricing power has eroded, in part, thanks to the threat of global competitors. We know this because of our experience talking to tier one and tier two U.S. manufacturers who arc consumers of the commodity in question. But the U.S. supply community refuses to sit still. Our sources have told us that in some cases, these U.S. suppliers have bought up global supply facilities in regions like China specifically to prevent Chinese competitors in their most profitable markets with lower priced products. Now, they’re turning to the legal and legislative angle to preserve their margins.
In addition to the philosophical free trade question, the major issue this case raises is whether we should defend the business interests of the few at the expense of the many. By preserving monopoly pricing for a key commodity, we put U.S. manufacturers at a distinct disadvantage in the world market. If a Mexican supplier is able to buy activated carbon at half the cost of their competitor north of the border, it is pretty clear who will have the cost advantage in a finished component.
Today, the category in question is activated carbon. In a few years, the question will most likely rise up the supply chain to automobiles and trucks. As a country, we must decide now whether or not we believe that defending the rights of a few to profit at the expense of the many is the right decision. If we decide in the favor of the supply community, you can bet that we’ll lose manufacturing jobs in the long run, as our finished goods rise in cost relative to other regions.