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Goods are moving, let people move

Navraj Goyal - 5/2/2006

In Detroit, credit rating agencies Standard & Poor's (S&P) and Moody's reduced the debt ratings of US car maker Ford further to 'junk' status in January. Last year in June, Delphi completed the first phase of its $50 million R&D center in Shanghai -tipped to become one of the top five Delphi technical centers globally by 2009. Meanwhile at Capitol Hill, the US lawmakers debate an important immigration reform bill as about half a million protesters gather against plans to criminalise undocumented workers. At the same time, Prime Minister Villepin struggles in Paris to push for a law that would make it easy for the employers to hire and fire workers belonging to a certain age group.

So what these four events got to do with each other? Hold on. Howsoever, remote and distinct these events may appear, they all are connected with a single chain, called, globalisation. One just has to delve a little deeper for things to become clearer.

The Big Three's of Detroit, the auto capital of the world - General Motors, Ford and Chrysler (now a part of DaimlerChrysler) - had a stranglehold on the US market for decades. This allowed them to dictate market trends. The sports utility vehicles- the SUVs : basically a mini truck with the trappings of a car is one such example. These fuel guzzling passenger trucks, as they should be called, were let loose on American roads in the last decade of past century by the US auto makers with a view to escape costly emission rules which were applicable to cars and not trucks.

With the entry of foreign car markers, especially the Japanese, the things are no longer the same. Global competition has given the consumer its rightful place in a free market. To be the king. The consumer choices have multiplied.

Foreign manufacturers are gaining market share with each passing day. It is only a matter of time before Toyota takes away from GM the number one place- a position that the US giant has monoplised for decades. Toyota has already left behind Ford to become the second largest car producer in the world.

Trouble with US auto majors is that they are not selling enough cars and are finding it difficult to make profit from whatever they are able to sell.

GM and Ford are carrying huge legacy costs of pension and health-care promises made to employees in the past. Take this: whereas Ford runs $ 2.8 billion health-care bill, GM is the single biggest purchaser of pharmaceuticals in the USA, perhaps in the world. The strong labour unions extracted big concessions and at the same time restricted competition in labour market. The exclusionary visa regime and immigration policies helped them in their cause to a great extent.

You can afford to make liberal promises, run huge inefficiencies, and thrive at the same time under the shield of protections. What in a globalised world, you can afford to spend on production only that much as the consumer allows. In the new era, consumer sets the price and decides what sells and not the producer any longer.

The policy of open competition in final products on one hand and restricting competition in the means of production on the other is a recipe for self-destruction. One decreases the prices and the other increases the costs. Together they kill the domestic companies.

Removing immigration barriers is a necessary sequel to dismantling of trade barriers. Two aspects of the same coin. If labour is stopped from reaching the factories, then the production facility has to move out to make use of labour wherever it is available cheap. Outsourcing, we call it. Rapid advances in information technology has made immigration barriers meaningless in many areas of service sector. Sitting in Bangalore an IT professional can fix your computer in any part of the world, attend to your calls, prepare your accounts, make your taxes, do your research. All this for a fraction of what you would pay if you hire someone in New York for the same work.

Things are no different in the manufacturing sector. Faced with an urgency to cut costs, the auto majors GM and Ford pressurized auto component suppliers to lower prices. The auto components makers like Delphi, Visteon, Collins & Aikman were no different from their chief patrons GM and Ford as they also carried the same legacy burdens. To stay in business, they had to cut down the costs. For this, they had to make use of the low labour cost advantage available to the Chinese manufactures. The unions and immigration barriers left them with little hope in the domestic market. Faced by this, they are shifting their production facilities overseas in growing numbers.

Situation in France is no different. Years of policy making under protectionist influence has made labour market highly rigid. This has led to a situation of unemployment rates as high as 12% that has come down to 9.6% at present.

The message is simple. Loud. And clear. In a world divided by trade barriers, you can have high immigration barriers and thriving businesses at the same time though with a considerable opportunity cost. In a global world, you can't have both at the same time. If you don't let the workers in, then the factories must go out to where the workers are. Or the businesses must go bankrupt. Delphi, Collins & Aikman , Meridian Automotive Systems Inc., Tower Automotive Inc. and Amcast Industrial Corp., J.L. French have already filed for chapter 11 protection. Others like GM and Ford may soon join the list.