Will the U.S. Fight the German Car Invasion?

It’s going to be very interesting to see how Washington, Inc. copes with a challenge to one of its newest acquisitions. The WSJ reported today that both Volkswagen and BMW are eyeing the U.S. auto market for growth and increased market share.

Sensing opportunity in Detroit’s weakness, Volkswagen AG (VLKAY.PK) and BMW AG (FRA:BMW) of Germany are gearing up to expand market share in the U.S. in the next few years.

VW is investing in its first U.S. factory in two decades and expects to triple U.S. sales to one million vehicles by 2018. BMW is introducing a new small car and expanding its distribution network.

“The U.S. will be the growth engine of the future,” Jim O’Donnell, BMW’s U.S. chief, said in a recent interview. “This is where we will continue to focus our efforts.”

There isn’t anything really surprising on the face of this. A couple of weak dominant players are getting challenged by some well run, profitable and well capitalized competitors. Capitalism at its finest. Of course, it isn’t all that simple.

Two of the three weak competitors are now partially owned by the biggest economic power on the planet. Their workers helped elect the new leader of that country and his vision includes a starring role for those weak companies in a green revolution. A sober analysis would conclude that going up against that kind of a stacked deck is suicide. No matter how you cut it, Washington is all in on the auto business and losing isn’t an option.

At another time this would have made for an interesting case study. It probably still will, but it will be a case study in industrial policy. Given their familiarity with government intrusion in business, one would have thought that these two German companies would have more sense.

Comments

[Chris B:]

The big 3 will continue to shrink with or without government loans. Don't let anybody tell you that the purpose of those loans was to restore their competitiveness. The purpose was to avoid 1-2 million layoffs in the middle of a severe recession, to prevent the sudden insolvency of their pension plans (which would and still might require another bailout), and to allow these companies to slowly wind down their operations over the course of several years rather than quickly disintegrate within a matter of weeks.

They can't actually grow (or survive) unless they can make a profit on their products. Unless their retiree obligations disappear overnight, this cannot happen. They will continue to bleed market share for the next few years.

The real threat to the German companies' plans for growth come from consumer exhaustion and the soon-to-arrive ultra-cheap Chinese imports.

Jan 06 01:01 PM

[TB3:]

Not sure what the point of this article is. The author poses the question will Washington fight the German attempt to increase market share in the U.S. This is like asking if the Giants should be worried about the Detroit Lions in the NFL. If Washington needs to gear up to protect the U.S. manufacturers, I would think they would be far more concerned about stopping the Japanese, Koreans and probably soon the Chinese. Another yawner from SA.

Jan 06 01:01 PM

[ChickenLips:]

Until the US auto companies offer a real comprehensive warranty to instill confidence in their new green autos, I'm not buying it regardless of what my congressmen want. The future of the US auto industry depends on attracting the youth back into their dealerships. That is going to be a hard sell because we saw our parents cuss and kick their stalled unreliable American cars in the fenders in our childhood. The youth like their dependable imports, BMW and Volkswagen have a chance. Besides, my friend's reliable VW diesel Jetta gets nearly 50 mpg!

Jan 06 01:06 PM

[Ishortyou:]

With the unions impairing reforms in the US manufacturing very difficult for them to survive at the end not even the unions will survive out of this.

Jan 06 01:06 PM

[Michael66:]

Recently one of the Editors of Consumer Reports said that in his opinion the Mercedes was the worse car sold in America.

The German autos have just about dropped out of the top ten ranking of cars for quality.

I have been told that so many Mercedes are having to be towed to the shop for repairs that the dealerships have been told to completely cover each Mercedes as it is prepared to be towed to the shop. I don't know if this is something happening locally or nationwide.

Jan 06 03:10 PM

[dw57:]

i think this is pick on the big 3 article. VW sells around 200k (about what GM has been selling in one month) in the US, and BMW is a lot less. so why would they be a threat? and so far most of the importers/transplants are in shutdown mode. Toyota is doing that for 11 days, and has had its Texas truck plant shutdown for months (and the workers are still getting paid. bet you never heard that did you?),
and the only way the retirees disappear from the big 3's responsibilities, is they end up on the tax payers responsibilities.

Jan 06 03:17 PM

[dzzkfn56:]

I continue to marvel at the completely undeserved reputation VW has for something akin to reliability and/or quality....they consistently perform year in and year out well below industry average...and yet their vehicles list at a signifcant premium for their feature content and horsepower....I guess these fawning 30 something's just can't past what they think is cool. I owned two VWs in my life and they were nothing but trouble. I'll keep my American metal.


On Jan 06 01:06 PM Chicken_Lips wrote:

> Until the US auto companies offer a real comprehensive warranty to
> instill confidence in their new green autos, I'm not buying it regardless
> of what my congressmen want. The future of the US auto industry depends
> on attracting the youth back into their dealerships. That is going
> to be a hard sell because we saw our parents cuss and kick their
> stalled unreliable American cars in the fenders in our childhood.
> The youth like their dependable imports, BMW and Volkswagen have
> a chance. Besides, my friend's reliable VW diesel Jetta gets nearly
> 50 mpg!

Jan 06 03:19 PM

[User 332328:]

I think BMW's North American operation is going to end up in the same black hole that companies like TOL and ANF are in, for the same kinds of reasons. There are an awful lot of people out there driving X5s (etc.) who are in the process of realizing that they should be driving Fords instead. A $50k car is hard to square with a $100k household income once the HELOC goes away. The lease business will get the worst hit -- I think there are a LOT of current BMW (and M-B, and etc) lessees who will walk away from the luxury marques for a long time as soon as their current contracts are up.

Jan 06 04:11 PM

[safariman:]

Interesting. In the last couple of decades, there has been more privatization (de-nationalization) of industry on a worldwide basis than nationalization. Now America moves toward nationalization of domestic banks and automakers. Maybe more to come.

The reason for privatization was said to be to improve management responsiveness, accountability, and profitability. If this is true, then the recent Government moves are in the wrong direction, and should offer greater opportunities to players from overseas.

Jan 06 04:14 PM

[oilcan821:]

it's time that gm sells a car with fuel economy comparable to vw's diesels. they have the capabilities to do this, so why don't they? because they make about $30,000 more on each $50,000 truck and suv!!!! they can't seem to figure out that $600x100,000 vehicles can add up, too!!! reagan said "greed is good" and rick wagoner is definitely a reagan believer!!

Jan 06 08:13 PM

[billddrummer:]

To oilcan,

Didn't Michael Douglas say that in "Wall Street"?

But aside from that, MB may have lost its luster after absorbing, then disposing of, Chrysler. Several billion dollars were lost which could have been used to improve quality and maintain engineering prowess.

Come to think of it, wasn't that the original purpose of the initial loan money the US government allocated to the auto industry? To provide funds for new product R & D to improve fuel economy?

Let's not look at the past, when the car makers used their own money for R & D. To suggest a loan for R & D to the GM of 1955 would have been scoffed at.

But when competition gets more intense, it seems that these companies run to the government for protection. Now, I'm not saying that there isn't government assistance in other countries for its capital-intensive industries. But the idea of government 'participating' (meddling) in the capital budget plans of GM and Ford suggests that the companies themselves aren't up to the task.

As Americans, we expect self-reliance from industries as well as individuals. The state of the US auto industry has humbled the country, and by extension, its people.

And far from shying away from competition, we should be welcoming it. Competition makes everyone better. Having the US government place its thumb on the scale makes it harder for other nations to compete. But in the process, they will make the necessary adjustments to become more competitive as time goes on.

It looks less and less likely that the US industries insulated by the government will make the same progress.

I for one welcome additional entrants into the auto manufacturing marketplace. Excess capacity aside, those companies that make cars people want to buy will survive. Those companies that don't, won't.

I tend to think BMW and VW will survive. They are the most profitable auto companies in the world, and make some of the best products, with worldwide appeal.

Bring on the Germans!

Jan 06 08:45 PM

[working at ...:]

Better check your info. VW lead all automakers in recalls by percentage in 2007 and had some trouble in 2008.


On Jan 06 08:45 PM billddrummer wrote:

> To oilcan,
>
> Didn't Michael Douglas say that in "Wall Street"?
>
> But aside from that, MB may have lost its luster after absorbing,
> then disposing of, Chrysler. Several billion dollars were lost which
> could have been used to improve quality and maintain engineering
> prowess.
>
> Come to think of it, wasn't that the original purpose of the initial
> loan money the US government allocated to the auto industry? To
> provide funds for new product R & D to improve fuel economy?

>
>
> Let's not look at the past, when the car makers used their own money
> for R & D. To suggest a loan for R & D to the GM of 1955
> would have been scoffed at.
>
> But when competition gets more intense, it seems that these companies
> run to the government for protection. Now, I'm not saying that there
> isn't government assistance in other countries for its capital-intensive
> industries. But the idea of government 'participating' (meddling)
> in the capital budget plans of GM and Ford suggests that the companies
> themselves aren't up to the task.
>
> As Americans, we expect self-reliance from industries as well as
> individuals. The state of the US auto industry has humbled the country,
> and by extension, its people.
>
> And far from shying away from competition, we should be welcoming
> it. Competition makes everyone better. Having the US government
> place its thumb on the scale makes it harder for other nations to
> compete. But in the process, they will make the necessary adjustments
> to become more competitive as time goes on.
>
> It looks less and less likely that the US industries insulated by
> the government will make the same progress.
>
> I for one welcome additional entrants into the auto manufacturing
> marketplace. Excess capacity aside, those companies that make cars
> people want to buy will survive. Those companies that don't, won't.

>
>
> I tend to think BMW and VW will survive. They are the most profitable
> auto companies in the world, and make some of the best products,
> with worldwide appeal.
>
> Bring on the Germans!

Jan 07 01:41 AM

[Paul Killinger:]

It is true that there is terrific competition between automakers for sales in the U.S. and throughout the world. Fortunately for us, the Germans aren't anywhere near the leaders in this endeavor.

Jan 07 10:47 AM

[HBWOW:]

The real question is for Congress when years ago we allowed the Japanese
to bring cars (had agreed to quotas but) to undermine and under price Detroit's products. This is like the old American electronics industry (do you remember the brands) where our government allowed free trade in but our trading partners, first Japan, then South Korea and the bigger, come lately, China swamped us with products but did not allow many and much of our products to be bought by their citizens. RESULT - spiralling trade deficits for the U.S. and loss of manufacturing base and jobs. So what is the question again?

Jan 07 05:28 PM

[a. palmer jr.:]

I always wanted a Mercedes...be nice if they made one in my price range.

Jan 07 06:16 PM