Sunday, 22 April 2012

How to live with Globalization

Globalization for many people is a bad word.  For those in richer countries, there are positives such as cheaper goods and a wider variety of products which everyone benefits from.  However, it is the hardship caused by those who lose their jobs due to increased competition from countries where labour is cheap.  Governments in the western world are thus caught between promoting trading with other countries which has brought so much prosperity over the past decades or to start putting up walls to trade which would help save jobs in the short term but be harmful as a lack of competition hurts domestic industries. 

One key battleground for those wanting to protect jobs is car manufacturers.  Car makers in the US and Europe typically run squealing to politicians when they feel pressure from foreign competition and politicians get up in arms when these firms think of shifting production (and jobs) overseas.  The US government even bailed out General Motors in 2008 amid the financial crisis.  But the protection afforded to car manufacturers results in the industry as a whole being plagued by excess capacity as firms are not allowed to go bankrupt, and therefore, auto firms tend to go cap in hand to the government when times get bad. 
In this background, the British car industry is an interesting example of how a manufacturing industry can thrive in an increasingly integrated world.

The UK has for the past forty years run a “car trade deficit” which refers to that the value of the auto exports are less than that of imports. But, the car trade deficit was the lowest in 36 years in 2011 and may turn into a surplus in the near future.  Car manufacturers are prospering in an open market with five out of six cars made in the UK being exports and imports making up the same proportion of cars sold to locals. 

Auto firms have prospered despite (or due to) there not being any more large UK car makers.  UK firms that make cars have all been brought by overseas rivals.  But it is these car makers who have retained their brand that have found lots of buyers overseas.  Firms such as Rolls Royce and Mini (owned by BMW), Bentley (owned by Volkswagen), and Jaguar and Land Rover (owned by Tata Motors) have seen strong sales in countries such as China and Russia.  The rise of a new generation of wealthy in these countries and others has opened up new markets for these premium-brand car makers. 

But it is not only an older generation of British firms that are doing well making cars in the UK but also foreign firms as well.  Japanese car makers Nissan, Toyota, and Honda all have large operations in the UK for the European market and are looking to expand production there.  It is the flexibility of the British work force that makes the UK an attractive place to build cars.  Car makers can thus respond to sales trends in Europe faster than if they were making cars anywhere else which helps make up for labour being more expensive than elsewhere.  And the growing level of automation used to make cars means that labour costs are being a less important factor in the manufacturing costs.  Nissan’s factory in Sunderland made 271,000 cars with 4,600 people in 1999 but almost doubled its production to 480,500 while still only needing 5,500 people.

The tale of the story is that openness and flexibility can be the best way to create an environment where manufacturers can thrive thanks to rather than despite globalization.

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