Wednesday, January 25, 2006

North America's Impending Loss of Economic Control

The writing is on the wall.

While Americans and Canadians worry about offshoring and the resulting loss of jobs, there is another and far greater threat: the loss of control over the economy. In an earlier post I discussed China's rising prominence in the computer and electronics manufacturing sectors. American companies are also losing marketshare on other fronts. Ford has just announced a plan to cut 30,000 jobs by 2012 in order to reduce its financial hemorrhaging. In an article entitled "Ford's latest Rebuild" (subscription required), the Economist reports:
"Bill Ford, chairman and a scion of the founder’s family, is particularly concerned that Ford is losing out in its biggest and most important market, America. This week he revealed a plan imaginatively dubbed the “Way Forward” that is supposed to cut losses and win back favour from American drivers. He pledged “sacrifice at all levels” to ensure “sustainable, profitable change”. The firm will pare capacity and could lose as many as 30,000 jobs by 2012, around a quarter of its total North American workforce. Some 14 factories will be closed as Ford's car division attempts to return to profitability by 2008.

The firm’s failings are as apparent as rust on a 1970s Ford Maverick. In 2005 Ford’s vital North American carmaking operations produced a pre-tax loss of $1.6 billion; worldwide it lost $1 billion."

The problems are partly related to legacy costs the big three are saddeled with including the costs of unionized workers and rich employee benefits. Again from the same article:
"Japanese carmakers are nimbler not because they produce cars abroad: much of their output is from American factories. But the Japanese firms are not encumbered by the legacy costs of their American rivals. Nor are unions so dominant in the Japanese-run factories."

While the lower operating costs of Japanese fimrs should be a concern as it directly affects US automakers' ability to compete with them profitably, it is the loss of market share that is most worrying:
"Although overall car sales are down a little in America since a peak in 2000 the market is still buoyant. Nearly 17m cars were sold in 2005 and customers are expected to drive a similar number off the country’s forecourts this year. But America’s car giants are losing out to Japanese firms. Toyota is threatening to overtake GM as the world’s biggest car producer this year. Nissan and Honda have made impressive inroads in America. In 2005 the three Japanese firms, combined, grabbed over 28% of America’s market share. Mr Fields acknowledges that the industry’s “big three” is becoming the “big six”."

What we North Americans are in danger of, more than job losses, is the loss of control over our economy. My questions are: what happens once most of the products we purchase are feeding the coffers of foreign controlled companies? What are the root causes of this problem? What are we gong to do about it?

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