MISNOMER

A key part of the financial recovery of General Motors is attributable to the success of its various brands in China. You've been hit over the head with enough emerging-markets-new-middle-class stuff about China and India to last a lifetime, so let's skip to the good part.

While the brands – Buick, Cadillac, Chevrolet, etc. – and models are often familiar, GM cars sold in China are almost all made in China by the GM Shanghai division. In other words, the Buick Regal sold in China is made in Fushun, while the Regal sold in North America is made in Oshawa, Ontario (and the European version, rebadged as the Opel Insignia, is made in Russelsheim, Germany). The net result is that the car costs approximately the same in these different markets; the Chinese Regal goes for 150k – 250k RMB, or about $23,000 – $39,000 USD, on par with the US/Canada price.

Chinese-made vehicles are not sold in the US, as consumers are (rightly) skeptical of them. American- or European-made vehicles are not sold in China because of Chinese tariff policy (and, not insignificantly, because nonexistent Chinese safety regulations allow stripped China-only versions of the vehicles to be made at a considerable cost savings. Cue the hilarious Chinese Crash Test footage.) One exception for GM is full-sized trucks. None are made in China, but the American-made models are exported and offered to Chinese consumers. With all taxes and import duties, an American-made GMC Sierra Denali ($45-$50,000 in the US) retails in China for 850,000 RMB…or $135,000 USD.

"Free trade" really is a misleading term, as it implies that goods and services are being exchanged for other goods and services. In practice China sends us millions of shipping containers and we send them a small number of incredibly expensive luxury items. More accurately, they send us cheap shit and we send them our jobs. That doesn't seem like such a great deal.

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27 Responses to “MISNOMER”

  1. Both Sides Do It Says:

    Crooked Timber has a category for analysis which ignores the reality of international trade Ed talks about: "Globollocks"

    http://crookedtimber.org/?s=globollocks

    That it was coined by Brits and used by Americans through a transnational communications network as soon as it was created is a nice little irony.

  2. Nunya Says:

    Ed,

    Many thanks. You have finally encapsulated an argument that my few remaining Republican friends may be able to grasp.

  3. Middle Seaman Says:

    Since Reagan, capitalism has evolved into a neo-slavery system. The right of first night is now replaced by the right to unemployment and low wages for the employed. Capitalism in global and defies nations and borders. Give me a lot of profits or I'll give you death.

  4. Arslan Says:

    Free Trade, much like the "free market", is basically bullshit. Virtually every major industrial power today got where it was by doing the exact opposite of what the WTO and IMF recommend. The few exceptions(Switzerland, the Netherlands) also broke rules considered very important by those organizations(specifically related to patents and intellectual property). Let's run down the list:

    Britain: Used imperialism, unequal trade policies, war, subsidies, tariffs and the whole aresenal of dirty tricks before adopt its "free trade" policies in the late 19th century.

    The United States: High tariffs for most of its existence, didn't respect intellectual property in the beginning, subsidies(some of which continue today), refused Britain's recommendation to adopt free trade policies in the 1870's(Ulysses S. Grant replied that the US would adopt such policies in 50 to 100 years, when the US had grown as powerful as Britain).

    Germany: Tariffs, government subsidies, imperialism.

    France: Tariffs, subsidies, etc.

    South Korea: Industrialized under the dictator Park Chung Hee; had strict tariffs and restrictions on capital flows, created state-owned enterprises.

    Turkey: Industrialized beginning with a system of "five-year-plans" inspired by the USSR.

    Russia: I'm not sure but I have a sneaking suspicion that the state sector was responsible for the industrialization of Russia.

    China: Ditto.

    There is also the curious fact that countries which follow IMF advice(or threats) tend to be poor and get worse, whereas those who reject the advice do better, and often the extent to which a country does better or worse depends on how closely they follow that advice.

    For more info on this, and the historical data to back it up, I suggest finding the book Bad Samaritans by economist Ha Joon Chang.

  5. c u n d gulag Says:

    "That doesn't seem like such a great deal."

    Ed,
    It sure as hell IS!
    If you're in on the scam/grift part of the deal, and not one of the marks, dupes, stooges, losers, and rubes.

    Somehow, I don't think too many of Reagan's and both Bush's Conservative family members, friends, and cronies, had anything but a POSITIVE experience over the last 30+ years.

    Maybe a bit in 2007-2009, in what for them, was a market downturn – but most of that's been corrected, and I'm sure they've diversified/hidden/protected their assets better to cover future ones.

    This has been one of the greatest deals in history.
    Just take a look at income disparity charts, and who has all of the money in country.
    FOR THEM, IT'S BEEN A HELL OF A GREAT DEAL!!!
    Game.
    Set.
    Match(?).
    Probably. But we'll see…

  6. buckyblue Says:

    On the flip side, the cheap shit from China has kept the peasants at bay; with the reality of flat wages, the sudden influx of affordable crap at Wally World has allowed our Overlords to continue in their fiscal domination, with few of us noticing it,much less grabbing pitchforks. The $300 Big Screen, the new opiate of the masses.

  7. c u n d gulag Says:

    buckyblue,
    They also prayed for the Big Screen.

    So, it wasn't just the free-market that delivered the new opiate – it was also the old opiate, Jesus!

    THANK YOu, JESus!!! And you too, Milton Friedman!

  8. Aaron Weber Says:

    So, you're saying that Chinese workers shouldn't take part in building the cars that are driven in China?

  9. HoosierPoli Says:

    Don't you see, though? Multinationals HAVE to produce American consumer goods in China, because American wages aren't "competitive". So they need to cut costs in wages in order to be able to market their products in developed countries, like…America.

    So you see, we CAN'T have those jobs, because our labor be too expensive to meet the price demands dictated by our low wages.

  10. xynzee Says:

    @Arslan: Nice dissection of the issues.

    Effectively what you're saying Ed, is that while thanks to the government bail out and GM is now #1! again.

    The main reason they're #1 has little to do with domestic (American) sales, but the sales made in China and other points abroad. Which makes more than enough sense given the fact that the American economy is still tanked and no one can find a job that would enable them to afford a new car to begin with.

    I loved hearing how some brain cell here concluded that it's "more cost effective" to put trains onto ships to go to China for repairs than to do them in Australian train yards. I'd love to meet that f*wit and give him a good smack upside the head. Of course the editorial departments of the MSM will gladly sell ink by saying how the government is wasting money by having work done for such government largess domestically, and how tax payer money is being squandered… you know the rest.

    How's that thing for Rupert turning out? Of course the "left" leaning paper isn't much better on this BS.

  11. N Says:

    Trade should never be referred to as free (outside of an economics textbook) and it should also not be discussed without mentioning exchange rates. Exchange rates affect where companies place what, to a large extent, as do regulations, since it impacts the bottom line. US manufacturing wages have declined in large part due to the high dollar policy of the Rubin/Clinton administration. This policy acted to make US exports more expensive and imports cheaper. Many lower income people benefited in the US (cheaper goods) and in China (more jobs), but many 1%ers have benefited too since highly paid professionals are protected from these wage declines. An argument could be made in the long run as the Chinese get wealthier they will be able to buy more expensive American goods and more jobs will come to the US, but that period of adjustment takes time. A rising tide lifts all boats–assuming politicians aren't rowing.

    What is also left out of the wage argument is, there are two parts to the income statement. Companies could take (not always, but often) a hit in revenue instead of always squeezing the pulp out of the worker. I think someone raised this belatedly recently with Apple and the iPhone outsourcing scandals in China. Why not demand better working conditions from your suppliers, pay a little more, and lower your revenue margins from 400% (or whatever outrageous amount it was) to 350%?

  12. c u n d gulag Says:

    N says,
    You can't DO THAT!

    Then the Communist/Fascist forces of Socialism will have taken that 50% from the shareholders and 'Job Creators (All kneel… Let us pray for them… All rise!).
    And we'll have LESS job!

  13. c u n d gulag Says:

    "jobs" is what I meant.

    But at the rate we're going, "job" might be about right in the not too distant future…

  14. baldheadeddork Says:

    "A key part of the financial recovery of General Motors is attributable to the success of its various brands in China."

    Sorry, Ed. That's not true. Everyone thinks it is, but it's not.

    China is to GM today what the rental fleets were to GM in the 90's – a way to build and sell a lot of cars without making very much money on them. GM sells more cars in China than it does in the US. But if you dig into GM's annual report you'll discover that last year its profits from China were less than 20% of what they earned in North America.

    There are two big reasons behind this. First, everything GM does in China is in a joint venture with a Chinese company, and GM is the minority partner in all but two of these partnerships. (Their largest stake is 50%) The combined China JV's earned $3.3 billion last year. GM doesn't break down P/L by partnership but it would be impossible for their take to be more than half that. Even on the Buicks, 51% of the profit on every car goes to SAIC. (Who is also VW's largest partner.)

    The second reason is the legend of GM succeeding in China because of its US brands is a myth. The overwhelming majority of the cars GM sells in China are inexpensive utility and economy vehicles developed by their Chinese partners and GM's Korean partner Daewoo. These cars sell for a fraction of the price of a Buick in China and their profit margins are exponentially smaller.

    Here's an example of how much bullshit is in GM's China story: Buick in China has outsold the US for years but you may have heard that last year the Excelle alone outperformed all of Buick US. And it was the best-selling car in China for 2011. Success!

    But there's a problem. There are three Excelle models. Two are very close relatives to the Opel Astra and Chevy Cruze, but one of them is a rebadge of a Korean entry-level sedan designed by Daewoo and Suzuki. Literally the only part it shares with the other Excelle models is the Buick badge on the grille. And it costs several thousand dollars less than the other versions of the Excelle.

    Guess which version carried the other two to the top of the sales charts? The "real" Buick Excelle models together accounted for just 40% of Excelle sales at the end of last year. This Daewoo Buick is a closer relative to the Pep Boys accessories aisle than any car GM sells in the US, but because they slapped a Buick badge on it it means GM gets to crow about a Buick being the best-selling car in China and that the upcoming Buick Verano (nee Cruze/Astra/expensive Excelle) is already a runaway hit in China.

    I'm not trashing GM for getting into China and their actual performance has been pretty good for a company that's been in China for just over a decade.

    But their PR department and a lazy/complacent press corps have spun this into a fable. Canada has been more important to GM's financial recovery than China. If everything goes perfectly it will be another decade or three before per vehicle profit margins on the Chinese JV's can reach US levels, and even then no more than half of that will go to GM.

    GM and everyone else have to make a play for China and India for what they might be in 2050. Until then they will live or die on their sales in the first world.

  15. Major Kong Says:

    I think it was Jack Welch of GE who once said that he'd like to see the factory mounted on a barge and sailed around to whichever country had the cheapest labor.

  16. bb in GA Says:

    Is it reactionary RW stuff when I try to buy 'Made in the USA' and deal with locals (as opposed mega-corps) whenever I can?

    There are websites to help with that process. For instance I go out of my way to use Gorilla adhesives and tapes (no financial interest) because of that.

    Or is it just a 'feel good' exercise similar to wearing a pink/yellow/blue/polka dot/other ribbon for a cause?

    //bb

  17. Major Kong Says:

    @bb

    It certainly can't hurt.

    It can be difficult, however, to pin down what's "American" and what isn't.

    For example: is the Chevrolet assembled in Mexico more American than the Honda assembled in Ohio? An argument could be made for either case.

  18. mel in oregon Says:

    50 years for china to be competitive with the united states? haha! china has the best growth rate in the world. in the last 30 years the united states real per capita income has grown 100%, china's has grown 1300%. china sells more cars than the united states & japan combined. china has passed us in the fields of telecommunications & genomics. china is also the largest producer of electricity, steel & concrete in the world. china also has the best & biggest high speed rail system in the world. ours? er, we don't have one. health care? china now covers 95% of their population at a fraction of the cost of ours. we don't have 95% of our people covered. there is a lot more to tell, but the simple truth is we are wasting our resources on wars & wallstreet speculation, while third world countries surpass us in nearly every important avenue of human progess. oh well, only in america.

  19. doug Says:

    Our agricultural exports have shitloads of subsidies. Big time shitloads.
    Every country cheats, every country whines about the other countries cheating. BFD….

    baldheadeddork: thanks for that insight.

  20. Sarah Says:

    The United States: High tariffs for most of its existence, didn't respect intellectual property in the beginning, subsidies(some of which continue today), refused Britain's recommendation to adopt free trade policies in the 1870's(Ulysses S. Grant replied that the US would adopt such policies in 50 to 100 years, when the US had grown as powerful as Britain).

    Don't forget the way the US has fucked over Latin America, Hawaii, the Phillippines, Vietnam, and parts of Africa.

    http://en.wikipedia.org/wiki/United_Fruit_Company#Reputation

    http://en.wikipedia.org/wiki/Pinochet#U.S._backing_of_the_coup

    http://en.wikipedia.org/wiki/Gulf_of_Tonkin_incident

    http://en.wikipedia.org/wiki/Spanish-American_War#Pacific_Theater

    http://en.wikipedia.org/wiki/Hawaii#Annexation.E2.80.94the_Territory_of_Hawaii_.281898.E2.80.931959.29

    http://www.guardian.co.uk/world/2010/may/30/oil-spills-nigeria-niger-delta-shell

  21. Both Sides Do It Says:

    I love this fucking group of commenters.

    And bb you are the first conservative I've heard actually treat the "Made in the USA" thing as anything other than another way of saying "THESE COLORS DON'T RUN" and ask if it might be just an identity thing like pink bracelets. Kudos. Or maybe I don't listen to enough conservatives.

    I wholeheartedly agree with Major Kong, and individual purchasing decisions aren't going to result in macroeconomic shifts of structural factors, but seeking out "Made in the USA" alternatives when economically feasible makes a lot of sense and doesn't have to be an identity thing. A lot like how I pay the extra 2 bucks per fillup and refuse to get gas with Ethanol; won't change anything, but at least on the margins I'm not feeding economic trends which I hate.

  22. Glen.h Says:

    I'm sorry to be a dissenter here, as I generally agree with the overall arguments on this site, but the complaints from Americans about Chinese trade policies is really staring to grate. Frankly, why are you guys not exporting the stuff that the Chinese will actually buy? They don't want or need cheap cars from the U.S- they import high value cars from Europe, ending up biggest market for Rolls Royce, for example. They need minerals and energy- how much copper, iron or coal are you exporting?If a country like my own can run trade surpluses with China (and for that matter, Japan) for literally decades, why can't the U.S start running an export oriented trade with China?They will buy stuff they need from other countries!

  23. Tim H. Says:

    Not just the labor costs, when production is off-shored, support industries go with it. If most of a business occurs in China, those facilities get the latest machinery, and shortly, the outdated machinery in the United States becomes another reason to end production here. The bright spot is, when the ruling class gets us into a mess comparable to WW2, and we have little production capacity, the free traders may be first against the wall.

  24. Major Kong Says:

    @Glen.h

    I would have no problem exporting high-value goods to China. We do that with Boeing (although China is working to develop their aviation industry).

    If all we're going to do is export raw materials and then import finished goods – that's the economic definition of a "colony".

  25. bb in GA Says:

    @Both Sides

    Thanks for the kind words, but don’t forget who I am. Although our Venn diagrams intersect occasionally (since some libertarian-conservative and liberal positions are similar) I still manage to “Piss off the Posse’” merely by existing.

    Every once in awhile, I will intentionally do some tail twisting (it’s that reptilian troll nature that all conservatives are born with :-) ), but not usually.

    //bb

  26. Joseph Nobles Says:

    And Mitt Romney was cracking open American companies like walnuts to get rich and send the jobs to China faster.

  27. DS Says:

    Totally agree with this. But I noticed that you don't mention how it runs the other way as well. 'Buy American' provisions are impermissible under NAFTA and yet I don't hear a lot of people complaining when workers in Ontario lose their jobs because it is less expensive to move a factory to bumbfuck South Carolina or Alabama and pay people $15/hour for jobs that used to pay $30. China may have the US bent over a barrel when it comes to trade regulations but the US also uses its status within NAFTA to circumvent a whole variety of provisions as well (see: softwood lumber tariffs, which numerous NAFTA commissions has found the United States to be in violation of, and yet nothing is done about it.)