Asia’s Auto Industry: The Concubine Economy

Asia countries gains access to state-of-the-art technology through joint ventures. This form of cooperation has been dubbed the “concubine economy.” Just as the Chinese emperors once selected their concubines, Asia Government selects foreign companies and grants them the right to produce goods locally in cooperation with a domestic partner.

If Donald Trump really wants to grab American voters’ attention on unfair trade, all he needs to do is tweet out a single question: “Why on earth is America importing tens of thousands of Buicks from China?”

Short answer: Automotive trade with Asian countries is out of whack. China, Japan and South Korea benefit enormously. Sadly, America looks like a pushover.

Check the latest numbers: In the first half of 2016, Japan and Korea shipped 1.23 million cars and trucks to U.S. shores. Over the same period, America exported less than 40,000 cars to those countries, according to data from Automotive News.

It’s a landslide.

Now here comes China. The People’s Republic will manufacture and ship tens of thousands of Buick Envisions and a small number of Cadillac CT6 hybrids to America this year.

That’s right. China is building American cars for export back to America.
Asian governments flat out do not welcome car imports. Never have. They throw up elaborate tariff and non-tariff walls that flash a message in bright neon lights: Imports Not Welcome Here.
In Korea, buyers of foreign car brands have been subject to random investigations by tax authorities. Tax collector message to the import owner: “Go ahead, make my day.”

What if foreign carmakers get really insistent about market access? Asia’s stance is simple: If you want to sell to Asian customers, you must build your cars in Asia.

China is arguably the country with the most one-sided rules. A car shipped from America to China is met at customs with a nasty 25% import duty. A Tesla Model S that runs $85,000 in America starts at $124,000 in China after import duties and special fees.

You really need to produce inside China to get price competitive.

China then requires foreign automakers to form a joint venture with a Chinese partner, a state-enterprise.  It’s the law. And there’s more: Chinese partners must hold ownership of 50% or more. That’s a regulation, too.

But that’s the rule in China. So, on every Ford or Jeep or Buick sold in China, Chinese partners like Shanghai Automotive Industry Corporation or Guangzhou Automotive (state-owned enterprises) collect at least half the revenues.

Inside China, we call it the concubine economy.

Buick illustrates of how these regulations work in China’s favor. In 2016, Buick will sell 1.2 million vehicles worldwide, of which 1 million will be in China.

GM’s joint venture factories inside China will produce one million Buicks for Chinese customers this year. Imagine: Without China’s trade barriers, America could be exporting a million Buicks to the People’s Republic.

With Buick Envision production anchored in China, though, GM finds itself essentially cornered into importing Buicks from China to serve American customers.  (GM officials say there is not sufficient demand in the US alone to warrant Envision production in America).

Japan and Korea, in fairness, have built many transplants in the U.S in recent years. So, trade imbalances are a little less extreme than they once were. But if China can export GM, Ford and Jeep cars and trucks to America with impunity, Chinese automakers won’t even feel the need to do transplants.

Let’s be honest: Asia is still clinging to protectionist policies. Since the 1960s, governments from Beijing to Seoul to Tokyo have put in place barriers to allow their “infant” car industries room to grow up.

But there’s no longer any justification for protection. Today, China is the world’s largest producer and consumer of vehicles. China sales this year will near 24 million, compared with 17 million in the U.S.

Mr. Trump is right when he says American needs to negotiate better trade deals. The Trans-Pacific Partnership (TPP) is a paper tiger. It will have no impact despite the Obama administration’s insistence otherwise.

To really get to the heart of the matter, Trump should channel President Reagan and declare: “Asia, tear down those walls.”

Article published on Forbes


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