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How the Press Helped Destroy the Auto Industry
Friday, July 03 2009 @ 09:52 AM CDT
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Detroit's Collapse: the Untold Story
By EAMONN FINGLETON
For decades East Asian competition has played a controversial role in the decline of the American car industry. Both Japan and Korea have long been accused of unfair trade and closed markets. For their part Japanese and Korean officials have argued that their markets are open and that an incompetent and heedless Detroit doesn't make the sort of cars their consumers want.
In all the charges and countercharges, little of the remarkable truth of Detroit's trade problems has come out. To see how well -- or rather how badly -- you understand the background, try this quiz:
1. What was the Detroit companies' share of the Japanese market in 1930? (a) About 90 per cent. (b) About 20 per cent. (c) Less than 4 per cent.
2. How many models do the Detroit corporations currently make with the steering wheel on the right (the standard configuration for Japan)? (a) More than 40. (b) 12. (c) 3.
3. What was the combined share of all foreign makers – American, European, and Japanese – in the Korean car market in the last decade? (a) Less than 2 per cent. (b) Around 15 per cent. (c) More than 70 per cent.
The correct answer in each case is (a).
If you flunked, don't feel bad. Just cancel your newspaper subscription.
For decades American press coverage of global car industry competition has been abysmal. Reporters and commentators have almost never dug below the surface and their idea of fact checking has too often consisted merely of "accurately" recycling previous observers' errors. Worse many commentators have displayed an almost venomously elitist bias against Detroit. In short, readers of the American press have been fed a diet of falsehoods, while key facts that give the lie to the foreign trade lobby’s special pleading have been swept under the carpet.
Much of the most egregious press coverage moreover has emanated from writers and editors at some of the most “respected” media organizations, not least the Wall Street Journal, the Economist, the Washington Post, and the New York Times. Reuters and Associated Press have not been far behind and even the automobile trade press has often unforgiveably spun the story to Detroit's great disadvantage.
Part of the problem has been that, in thrall to a particularly toxic dose of laissez-faire fundamentalism, many top editors and commentators have been persuaded that any nation that protects its markets hurts only itself. Thus the message for Washington policymakers has been that irrespective of whether nations like Japan and Korea reciprocate with market opening measures of their own, the American national interest is best served by maximizing the openness of the American market.
In far too many cases commentators who take this view have also embraced an end-justifies-the-means strategy in which they have consciously suppressed or distorted important facts, the better to ensure public acquiescence in their extreme agenda. This mentality has been particularly evident in the Wall Street Journal’s editorial pages. Indeed it seems to have been pioneered by the late Robert Bartley, who as the Journal's editorial page editor in the 1970s and later as editor in chief never saw a piece of foreign car lobby propaganda he did not want to publish.
Bartley seems to have been an ideologue pure and simple. But something beyond ideology has also been at work, something more reliably effective: money. Even more than the rest of the foreign trade lobby, foreign car makers have succeeded in buying the press they want. They have long taken care of individual journalists via fat speakers' fees and other barely disguised bribes. Meanwhile they have established an institutional arm-lock on top media executives via advertising allocations.
Given their well-known ability to work together in government-led cartels, Japanese corporations in particular boast a "comparative advantage" in pressurizing media ad departments.
Of course, as press commentators have generally spun it, the Detroit story has been a simplistic morality tale of "incompetent executives," "lazy workers," and "intransigent unions." Detroit in other words has richly deserved its fate and, in the opinion of many of the more callous observers, the sooner it is put out of its misery the better.
The real story is a complex one in which the American auto industry has often been more sinned against than sinning.
One of the most important elements of the story, the rise of the Japanese car industry, has been particularly misunderstood. Many commentators seem to accept that the Japanese people are naturally endowed with some special car-making proclivities -- a comparative advantage denied to Americans (for a recent statement of this canard see an editorial page article in the Wall Street Journal in May by Matthew Slaughter, a George W. Bush-era member of the Council of Economic Advisers).
To say the least, this idea hardly squares with the fact -- almost never mentioned in all those "Detroit-as-basket-case" editorial page commentaries -- that in the 1920s and early 1930s the Detroit corporations utterly dominated the Japanese market. As the author C.S. Chang has pointed out, by 1930 all three of them had established major assembly operations in Japan and they also sold many American-made cars there. The fact is that Detroit would probably have retained its lock on the Japanese market indefinitely had not the Tokyo government in the 1950s launched a Herculean effort to "target" cars as a major growth industry. There then followed a massive ramp-up of investment as the Japanese establishment set to work with great purposefulness (and not a little guile) to break America's then seemingly unassailable comparative advantage.
For two decades the Japanese ramp-up went largely unnoticed in the United States but finally, in combination with an earlier one by West Germany, it began to cut a swathe through the American market in the 1970s. The Japanese were helped by the oil crises of that decade, of course. More controversially they indulged in predatory pricing to win market share. This crucially meant that the Detroit companies were starved of the adequate returns necessary to invest in new, more efficient production technologies.
By contrast and despite the claims of the elite press, the rise of the Japanese and more recently the Koreans, has been speeded by protectionism at home. In a closely related point (if a more difficult one to document -- we can't do justice to it in the space available here), key foreign governments have generally kept their currencies undervalued. Essentially the Americans' main competitors, particularly the Japanese and Koreans but to a lesser extent the Germans, have been subsidized by home market consumers. They have made good use of those subsidies by investing in the latest production equipment years before Detroit could afford to.
No nation has benefited more from protectionism than Japan. In recent years, however, the fact that the Japanese car market remains as protected as ever has dropped off the American press’s radar. Although Japanese officials first proclaimed the market open as far back as the 1970s, as of 2008 the combined share of all foreign makers was still just 5 per cent. This was only a fraction more than in the 1980s and the second lowest in the developed world after only Korea. Apart from BMW and Mercedes-Benz, which have been allowed token market shares on condition that they pitch their prices nice and high (so they don't spoil the game for the home team), every other foreign maker is shut out. Even Renault, which, via a stake in Nissan, ostensibly controls Japan's second largest car distribution network, has never been able to get its cars into its own showrooms. (Why hasn't Renault pressed harder for market access? As Renault executives have consistently ducked the question, CounterPunch put it to officials at the French embassy in Tokyo -- and for good measure asked also why the Peugeot Citroen group's cars are even less visible in Japan. Not entirely unexpectedly, the embassy never responded. Basically the French government is powerless to influence Japanese car trade policy but would rather not say so. And, as is well known in the Tokyo diplomatic community, any attempt to embarrass the Japanese establishment via public statements is viewed with vengeful disapproval by the Japanese establishment.
The Right-Hand Drive Canard
Whenever the subject of Japanese protectionism comes up, press commentators allege, in a classic blame-the-victim gambit, that the Detroit companies aren't trying hard enough and their products just don't meet Japanese consumers' expectations. The fact that all but two European car makers plus the entire Korean industry are also shut out is never mentioned.
Of course, as the commentators never fail to point out, the Japanese drive on the left -- and Detroit, it is alleged, makes virtually no cars with the steering wheel correctly positioned for Japan. As the author Pat Choate has pointed out, this is a classic piece of nonsense. Why? Because the Detroit Three have always operated large subsidiaries in Europe whose products are available in both left-hand-drive and right-hand-drive versions. As the European subsidiaries' models have been systematically shut out of Japan, it would hardly make sense for the Detroit Three to invest the necessary several hundred million dollars to establish production lines in their home factories to serve a Japanese "open market" that exists only in the minds of the more intellectually-challenged members of the American commentariat.
The right-hand drive argument is fallacious also in a different sense in that many Japanese buyers of foreign cars -- indeed often a majority -- actually prefer the steering wheel on the "wrong" side. (Why? Because it betokens a foreign -- and, given Japanese conditions, an expensive -- car. Basically American-configured cars have snob value, particularly in the case of larger cars. But, of course, if the cars are not allowed in, they can't be bought.) All this notwithstanding, the steering wheel argument keeps turning up like a bad penny. It is a particular favorite of right-wing commentators and indeed, as far as the Wall Street Journal's editorial page is concerned, no discussion of global car industry competition is complete without a stern dressing down for Detroit for allegedly failing to ascertain which side of the road the Japanese drive on.
Most such admonitions come from the more naïve sort of think-tank analysts or ivory tower economics professors. But the steering wheel argument has also often been invoked by people who really do know better. For many years one of its more notable exponents has been David Sanger, who formerly headed the New York Times's bureau in Tokyo before going on to become the paper's chief Washington economics correspondent, and more recently White House correspondent. He has rarely passed up an opportunity to play the steering wheel card. (He has also repeatedly ridiculed Detroit for not investing in specially built local plants to serve the Japanese market. In reality if Japanese officials were making a good faith effort to honor their trade agreements, it would be more cost effective for Detroit to serve the Japanese market from existing plants in the United States and Europe. Fact: Neither BMW nor Mercedes-Benz, the two foreign makers who have achieved a token foothold in the Japanese market, manufacture there. Someone should tell the Times's chief trade "expert" that the purpose of trade is trade.)
Perhaps the ultimate low blow has come from the Economist. In a smart-aleck contribution couched as an open letter to the then United States Trade Representative Mickey Kantor, the magazine wrote in 1995: "Dear Mickey, Ever considered the real reason why the Japanese don't buy American cars? Yes, we know about all that closed-market stuff…. The real problem is that Detroit has never catered for those strange foreign markets, such as Japan and Britain, where cars are driven on the left and steered on the right. It's not easy driving a car with the steering wheel on the 'wrong' side. Just try overtaking." The writer sneeringly suggested that, rather than unfairly picking on the Japanese, Kantor would be better employed "bashing those villainous Saudi Arabians for not buying American ski-equipment." The letter was signed, "Yours helpfully, R.H. Driver."
The special significance is that the Economist's editors were better placed than almost anyone to know how disingenuous the steering wheel argument is. By virtue of their London base, after all, they should be aware that the Detroit Three's European subsidiaries make a huge range of cars suitable for Japan yet these cars have consistently been shut out. Then there is the fact that virtually the entire European car industry corroborates the Detroit companies' allegations.
Given its eponymous expertise in the dismal science, the Economist also can be assumed to have understood that Kantor was not just fighting for better access for American cars in the Japanese market. His most important objective was different: to eliminate a huge source of hidden subsidies for the Big Three's Japanese competitors. This objective needed to be pursued irrespective of whether the Detroit companies ever aspired to sell a single car in Japan. In all probability had Kantor succeeded, the Big Three would indeed have found it profitable to invest in American production lines to serve Japan (apart from anything else blue-collar wage rates in the United States have long been lower than in Japan). But even had the Big Three never sold a car to Japan the fact that the Japanese market had been opened to _someone_ -- say the Europeans -- would have restored some badly needed balance to the world trading system.
The Economist's editors also understood that Kantor's efforts were as much concerned with components as with the vehicles that are made from such components. Until the 1980s the United States had been a major net exporter of car components -- many of them made by such erstwhile huge Big Three subsidiaries as GM's Fisher Body and Delco. The Economist's letter made no mention of components -- for the good reason that the components issue self-evidently did not fit the writer's snarky agenda. After all, irrespective of whether you drive on the right or the left, an American-made battery or carburettor will work just as well. As the Economist surely knew, Japan's components market was not only even more tightly closed than its car market but was even more extensively rigged to channel excess profits to Japanese car makers. (This is a rather technical point but basically Japan's so-called sha-ken system of periodic government vehicle inspections strongly favors components officially blessed by the company that made the car. Essentially the maker enjoys monopoly profits in the after-market parts business. The margins can be quite rich given that a U.S. government survey in the 1990s discovered that some components were priced at as much as six times what a free market would dictate.)
The contemptuous tone of the "Dear Mickey" letter was particularly piquant in view of an earlier apparent conflict of interest by one of the magazine's principal commentators on the world car industry, Nick Valery. In the late 1980s Valery imported an expensive European sports car to Japan when he moved there as the magazine's Tokyo bureau chief. Before leaving in 1992 he sold the car -- a Lotus Turbo Esprit -- for a profit that, according to one witness, he boasted to colleagues had substantially paid for an apartment on the American West Coast. In a telephone interview with CounterPunch, Valery, who is now retired and lives in Pacific Palisades on Los Angeles’ West Side, laughingly downplayed his profit and added: "I suspect I made probably $50,000." He also mentioned that he had got the idea from a British friend, the Tokyo branch chief of a foreign securities firm, who had imported a series of vintage Rolls-Royces and sold them for as much as three times what he paid. In a subsequent email exchange Valery backed away from the $50,000 figure and provided various details that seemed to suggest the transaction had actually made a loss. He failed to respond, however, to repeated e-mails requesting clarification of how the various versions of the episode could be reconciled.
In the interval between CounterPunch's interview with Valery and Valery's subsequent apparent backing away from the $50,000 figure, CounterPunch put some written questions to John Micklethwait, the magazine's current editor in chief. CounterPunch asked:
1. Whether in view of the large profit Valery had apparently made, Micklethwait believed the transaction was a bona fide arm's length one?
2. Whether Micklethwait believed that the Japanese car market was substantially open at the time of the transaction?
3. Had Valery ever written for the magazine about the American or Japanese car industries after he sold the car?
Micklethwait never replied. An informed guess is that the "Dear Mickey" letter was written either by Valery or by Valery's Japan-watching associate Bill Emmott. The latter had been Valery's predecessor in Tokyo and subsequent main editor.
Micklethwait's silence notwithstanding, there is a serious case to answer. Certainly the Economist cannot have it both ways. For decades it has held that Detroit's allegations of Japanese protectionism have been greatly exaggerated and that the Japanese market has been substantially open to anyone who "tried hard enough." It follows therefore that no one should have been able to make large arbitrage profits on personal imports. Of course, in the subsequent email exchange Valery seemed to disown the idea that he had made any profit at all. But this does not get the Economist off the hook. The point is that in an article some months before he sold the car Valery had actually written about his securities industry friend's profitable Rolls-Royce sales. If the Japanese market had really been open, it is a fair bet that no securities house chief would have had any incentive to moonlight as a used car salesman.
In reality no one of good faith who knows the Japanese or Korean car markets has ever endorsed the official line that protectionism is a thing of the past. In Korea's case, trade barriers probably keep car prices on average nearly $2,000 higher than they otherwise would be. This represents pure profit for Korean makers and the aggregate subsidy probably runs close to $2 billion a year. In the case of Japan, though the per-car effect is probably less, the aggregate subsidy probably runs more than $8 billion a year. Numbers on this scale deserve attention. Yet the practical effect of protectionism in raising prices in the Japanese and Korean markets has been utterly ignored by the Western press.
Many journalists seem blind to the practical details of other nations' car industry protection tactics. What sort of tactics? Speaking in Washington in 2007, Steve Biegun, a strategist for Ford, provided some eye-opening recent Korean examples:
* Ford was barred from airing advertising commercials except between 2 a.m. and 6 a.m.* Its showrooms' floor space was restricted by government regulation.
* Korean tax officials automatically audited anyone who bought a foreign car.
Japan has used similarly disingenuous techniques in the past and indeed the tactic of hitting buyers of foreign cars with tax audits was invented in Japan.
In recent years Japanese officials have relied largely on the manipulation of regulations on specifications to keep foreign cars out. The effect has been compounded by the extreme difficulties faced by foreigners in trying to build dealer networks. Not only are suitable sites hard to find but, contrary to all Western ideas of open markets, Japanese car makers rule their distribution networks with an iron rod and are permitted a free rein by government officials in "discouraging" their dealers from handling rival products.
If the regulations in Japan and Korea are problematic for foreign makers, the capriciousness with which these regulations are changed is even more infuriating. A favorite gambit in Korea is so-called "pop-up" tariffs, whose level is changed depending on market conditions. At times when foreign suppliers are not a factor, tariffs are slashed but the moment someone tries to break in to the market they may suddenly be doubled. The effect is to allow Korea to claim a low average tariff level for international statistical purposes while simultaneously keeping most would foreign entrants into the market firmly marginalized.
The Japanese have traditionally used a similar but even more objectionable technique: the revision of standards after a foreign exporter's goods have already left port. Thus a car exporter who has met all current Japanese regulatory requirements might find his consignment rejected at the port of entry because of a rule change announced while his goods were on the high seas. In the past this has necessitated entire consignments being shipped back to the exporting nation.
To be fair Tokyo has now renounced this technique. But the fact that such a stratagem persisted into the early years of this decade surely substantiates the Detroit Three's contention that Japan is hostile territory, where their products are distinctly unwelcome.
What The Media Miss
The key thing for our purposes here is that so little of the story has been told in the English-language media. Take Biegun's disclosures about the Korean market. These were completely ignored by the American press.
It seems that reports of the specifics of East Asian trade barriers are just not news. Yet assurances by East Asian officials that their markets are substantially open are taken at face value.
See for instance a description of Japan in 1982 by Japanese Foreign Minister Yoshio Sakurauchi as "one of the most open markets in the world." His remark was reported by both the Associated Press and United Press International. This episode had an interesting sequel in 2000 when Minoru Makihara, vice chairman of Keidanren, the semi-official voice of the Japanese business establishment, told the Tokyo foreign correspondents' club that as recently as the late 1980s the Japanese market had bePalisadsn "still closed and tightly protected." He was trying to make the point that there had been substantial liberalization in the meantime (a highly debatable point, of course) but, to anyone who had witnessed first hand how assiduously Japanese officials had presented the Japanese market as already open in the 1980s, it was a stunning gaffe. In truth it should have been front-page news in the American press. In reality not a single English-language media organization picked it up. Criticizing Detroit for not trying hard enough in East Asia is one thing -- but even when the press is ostensibly presenting Detroit in a favorable light it often manages to undermine the industry.
A particular problem is a phenomenon best known as the "Don't worry, be happy" story. The term refers to a periodic tendency for the press to look determinedly on the bright side and discount the industry's problems. The "Don't worry, be happy" message panders to a marked tendency by Washington policymakers to seize on any excuse to back away from tough action on opening foreign markets.
It has taken many guises over the years. In the 1970s and early 1980s much upbeat press commentary was based on the assumption that Japanese inroads into the American market would prove automatically self-limiting. Supposedly some sort of psychological block rendered it impossible for the Japanese from making a competitive full-size car. Some American observers even seemed to think this was related to fact that the Japanese were not the world's tallest people! Thus Americans could hope forever to keep their big car operations safe from Japanese targeting. This was convenient because margins were much fatter on large cars. This theme was widely aired up to the mid-1980s. Then in short order the Japanese launched the Acura, Lexus, and Infiniti brands and suddenly Detroit's heartland was being targeted.
In reality the idea that Japanese car makers were somehow size-challenged was absurd. Certainly the Japanese had never suffered any similar block in other fields. The largest aircraft carriers deployed in World War II, for instance, were Japanese. Japanese shipyards went on by the late 1970s to build oil tankers nearly 10 times the displacement of the Titanic.
Perhaps the ultimate excess of the "Don't worry, be happy" school came in 1994 when Paul Ingrassia and Joseph White, both Pulitzer-winning journalists at the Wall Street Journal, published Comeback: The Fall and Rise of the American Automobile Industry. Reporting that Japanese car makers were supposedly "in retreat," Ingrassia and White proclaimed an "American success story" in which Chrysler -- the same company that has ranked consistently as the weakest of the Detroit Three since the 1970s -- had emerged as "the envy of the auto industry around the world." All in all the Americans had morphed into "formidable global competitors."
The book was written in the fashionable novel-like style favored by many business journalists, a technique that, perhaps conveniently, relieves authors of the need to use their commonsense, let alone perform any serious financial or economic analysis. In reality in stringing together a few anecdotes, Ingrassia and White had overlooked the one fact that really mattered: Japan was still targeting the American automobile industry.
Even before Detroit's implosion, the Comeback thesis was toast. For one thing Japan had by 2007 passed the United States in total car output -- not bad for a nation with less than half America's population. Meanwhile Toyota passed General Motors the same year. By comparison as recently as 1989 -- at the peak of the Tokyo financial boom -- GM had boasted fully $220 of revenues for every $100 of Toyota's. For our purposes the most significant thing about Comeback was what it didn't say: it utterly failed to address the unbalanced world trading system, thus implicitly seeming to endorse claims by both the Japanese and the Koreans that they had fully opened their markets.
One of the earliest airings of the "Don't worry, be happy" message came in the Economist in the late 1970s. This was a time when American policymakers were already hitting the panic button about rising car imports. Enter the Economist magazine with a magisterial word of reassurance. The foreign car makers' share had probably peaked, the magazine opined, and would never again return to the record 18.5 per cent level reached in 1977. Detroit had got its act together and imports would soon be "rolled back into the sea."
As we now know, it was not to be. Quite the contrary, the imports just kept flooding in. Thus by late 1981, the foreigners' share had passed 20 per cent and by the 1990s it exceeded 30 per cent. And as of last year it was approaching 50 per cent.
All this is the more surprising because, as in the case of the steering wheel canard, the Economist's editors had a much better understanding of what Detroit was up against in Japanese targeting than their U.S.-based counterparts. After all in the magazine's own backyard in the U.K., such targeting had by the late 1970s already proved repeatedly lethal to some of Britain's most vaunted manufacturers. The lessons had been particularly painful in the shipbuilding and motorbike industries. As recently as the mid-1950s, Britain's global leadership in these industries had seemed impregnable. With lightning speed, the Japanese ramped up capacity and, helped by subsidized export pricing, they took a buzz-saw to British margins. By the mid 1960s the British were on the ropes and by the late 1970s those who had not already succumbed were at death's door.
Perhaps the most amazing thing about Detroit's press coverage over the years is the indecent speed with which commentators have swung from one extreme to the other -- portraying Detroit as knocking the socks off all competitors one minute and writing it off as a basket case the next. Though these views were of course irreconcilable, the key geopolitical point is that the policy implications were identical: no action by Washington was needed. At least no action was required in the traditionally thankless matter of trade diplomacy.
Rarely if ever have commentators offered a balanced, commonsense, middle-ground account of the geopolitics of Detroit's plight. Such an account would have pointed out that while Detroit had weaknesses, it also had strengths, and that the single most cost effective help government could have provided was to take a much tougher line with key trade partners.
In the end the Japanese were right in one respect: Americans have not been trying hard enough. But the Americans in question have not been Detroit's ill-starred workers and executives. Rather they have been the incurious and often conflicted Pooh-bahs of an increasingly loopy American press.
Eamonn Fingleton is the author of In the Jaws of the Dragon: America's Fate in the Coming Chinese Hegemony (Thomas Dunne Books 2008). He can be reached via his website www.unsustainable.org
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