America's new environmental laws put pressure on global carmakers

“Pension funds that happen to make motorcars,” is how Jeremy Clarkson, a UK-based motoring journalist, describes the US auto industry.

This explains one of the reasons why US automakers produce cars that fewer and fewer Americans want to buy.  Their current employees and shareholders support an ever-increasing financial burden in paying the pensions of retired autoworkers.  Companies save money on innovation and design, and pay that money to their pension funds.

That, added to a global glut of manufacturing capacity, and the international network of auto-manufacturers is facing a crisis.

The motor industry is loved by governments around the world.  It is a large employer of semi-skilled and artisanal workers and creates even more jobs up and down the manufacturing supply chain.

This adoration has translated into billions of dollars in subsidies to promote local manufacturing.  From export promotion subsidies in South Africa, to state-owned champions in Malaysia, to major tax breaks in the US and Europe; supporting motor manufacturing is big business.

The glut in capacity, however, effectively pitches governments and countries against each other, rather than creating a market of competing manufacturers.  France has given $3.9 billion to their auto-makers.  The UK has offered $3.5 billion.  The US dwarfs all with their $83 billion package.

This is not game-changing, though.  It simply extends the agony of ailing companies and drives smaller manufacturers, who lack government connections, out of business.  Worse is that state- and union-owned companies have little incentive to innovate or produce cars that people might actually want to buy.

Anyone who doubts this should consider what the East German, Cold War-era, state-produced Trabant was like.  The two-cylinder, 600cc two-stroke engine, was placed in a large engine compartment with the entire fuel-tank bolted directly above it. Refuelling involved filling the tank with petrol and oil and shaking it back and forth to mix.  All this above an extremely hot engine.  The body panels were made out of cotton and plastic, adding to the flammability.

The engine was noisy and polluting, producing nine times the amount of hydrocarbon and five times the carbon monoxide of the average European car of 2007.

The only reason it existed at all was because it belonged to the East German government and consumers weren’t allowed to buy Western cars.

Consumers around the world are now in a similar bind as job-protection trumps innovation.  Until, that is US president, Barack Obama, introduced new emissions and fuel-economy standards for US vehicles.  These rules require that manufacturers achieve average fuel-efficiency targets of 12.4 kilometres per litre, up from the current 9.6 km/l, by 2016.  This is expected to add R15,000 to the cost of a new car over the next six years.  Don’t expect to make that cash up through lower petrol prices since OPEC will merely cut production as demand falls.

Since more than 16 million vehicles are sold each year in the US, these rules become global rules.

US automakers are looking at costs of $21 billion in order to upgrade their existing plants.  Other manufacturers will be dusting off their calculators to figure out whether they can afford to upgrade.  If they can’t then they will turn to their governments for loans.  If those governments can’t afford it, then some very difficult decisions will have to be made regarding the future of cherished and protected industries.

These aren’t easy decisions to make at the best of times.  The rapid political shift leftwards as a result of the credit crisis will make it even harder. 

Allowing surplus factories to shut down will cause job losses.  Governments have the choice of continuing to finance factories that produce things no-one wants in order to “save” those jobs, or allowing factories to close down and paying to reskill and support the unemployed.

The first choice robs everyone.  The second benefits consumers and allows new industries to prosper.