Friday, April 22, 2005

DCX may supply U.S. from China

Chrysler, other U.S. carmakers seek cheap overseas labor to stay competitive.

By Christine Tierney / The Detroit News

Chinese Chrysler DaimlerChrysler is in talks to build Chryslers in China for export. Would you buy a Chrysler from China? Yes No Get results and comments Error processing SSI file Comment on this story Send this story to a friend Get Home Delivery

DaimlerChrysler AG's top China strategist triggered an uproar Thursday when he disclosed the automaker may make vehicles in China for export, including a subcompact for the Chrysler Group's U.S. lineup.

In Auburn Hills, Chrysler executives acknowledged that the company might use China as an export base. But in a confusing twist, they denied there are plans to make a small car in China for the U.S. market.

The subject is politically charged, with U.S. automakers increasing purchases of low-cost components made in China but hesitant to bring Chinese-built vehicles to the United States, where they have excess factory capacity and face fierce union opposition.

General Motors Corp. puts a Chinese engine in the Chevrolet Equinox compact SUV sold in the United States. Honda Motor Co. plans to produce cars in China for export to Europe. The only public plan to bring Chinese cars to the U.S. market is entrepreneur Malcolm Bricklin's project to import cars built in China in 2007.

Now U.S. automakers face mounting pressure to become more competitive by shifting output to China, where wages run as low as $1 an hour, and other low-cost regions.

At the Shanghai auto show, DaimlerChrysler's board member in charge of its China operations, Ruediger Grube, told reporters the automaker was studying plans to build a car in China smaller than the Dodge Neon for Chrysler.

"We would like to establish here in China an export joint venture for Chrysler products," Grube said. "Today, we are not talking about Europe. We are talking about North America."

His comments appeared to surprise Chrysler officials. "We are not looking at a B-segment car that would be built in China and shipped to the United States for the Chrysler Group," said spokesman Jason Vines.

Grube's remarks also provoked a sharp reaction from the United Auto Workers union.

"DaimlerChrysler's unexpectedly candid statement about the so-called advantage of low labor costs in China reveals worlds about what is wrong with today's global economy," said UAW President Ron Gettelfinger.

"U.S. autoworkers are prepared to compete with workers anywhere in the world based on productivity, quality and innovation. But it's just plain wrong -- for workers in China as well as the United States -- to force workers to compete against each other based on who can do a job for the lowest possible wage," Gettelfinger said.

Thursday's flap, revealing the occasional disconnect between the automaker's Stuttgart, Germany, and Auburn Hills headquarters, was also awkward because of the timing.

The Bush administration, concerned about China's rising trade surplus with the United States, is taking a harder look at China's trading practices.

China's export boom partly is fueled by its labor-cost advantage, but U.S. business and government officials say China's artificially low currency gives Chinese exporters an additional -- and unfair -- edge.

After trying for nearly two years to press the government in Beijing to allow the yuan to appreciate, the Bush administration faces growing discontent in Congress, particularly from Midwestern legislators whose constituents have been hammered by the trade imbalance.

But the Bush administration has also signaled that Detroit's automakers need to become more competitive to solve their problems.

This week, GM reported a $1.1 billion first-quarter loss and Ford Motor Co. announced its profits slumped 38 percent in the first three months of the year. Their poor results were due in part to crushing U.S. health care and retirement costs.

CEO Bill Ford Jr. said Wednesday that the company was looking outside the United States for low-cost manufacturing opportunities. "We're aggressively planning to invest in growth areas and to allocate our resources where it makes the most sense in the long term," Ford said.

DaimlerChrysler's Chrysler Group is performing better than its Detroit rivals in North America, helped by strong sales of its popular Chrysler 300C sedan.

But DaimlerChrysler is also under pressure to reduce costs: the bulk of its car-making operations are in Germany and North America, where wages are high. In addition, it is downsizing its European minicar business, the Smart brand, which is losing money because its costs are high relative to its modest sales.

"The Chinese auto industry is outgrowing the demand there, and the quality of what China can produce is improving. You put those two together and you think about exports," said auto analyst David Healy at Burnham Securities.

"DaimlerChrysler has been behind other Western automakers in China, and this may be a way to catch up," Healy said.

Grube, one of DaimlerChrysler CEO Juergen Schrempp's most trusted executives, was assigned in October to accelerate the automaker's expansion in China.

DaimlerChrysler executives, including Chrysler CEO Dieter Zetsche, have said previously that they were exploring the possibility of building vehicles in China, not only for the large local market, but also eventually for export, taking advantage of low costs and wages.

"Down the road, anyone who would build there would think of exporting," Vines said.

DaimlerChrysler now builds several thousand Jeep vehicles in China and plans to assemble Mercedes C- and E-Class sedans in the fall with longtime local partner Beijing Automotive Industry Holding Co. Ltd.

But DaimlerChrysler, despite a long presence in China, has been slow to expand in the market. Its investment plans -- $1.6 billion over three to five years -- are modest compared with those of its global rivals.

Beijing Automotive's more recent venture partnership with Hyundai Motor Co. has grown much faster than its activities with DaimlerChrysler.

In 2003, relations among the three companies became strained when South Korea's Hyundai said DaimlerChrysler's plan to build Mercedes cars with Beijing Automotive breached its own exclusive agreement with the Chinese automaker.

Last year, DaimlerChrysler shed its 10 percent stake in Hyundai, after deciding to bail out of Mitsubishi Motors Corp., its ailing Japanese partner.

Left with a small presence in Asia, DaimlerChrysler sharpened its focus on China. Last year, it sold 11,500 vehicles in China, the world's third-largest vehicle market.

As DaimlerChrysler aims to expand business in China, "we are also looking at other partners," besides Beijing Automotive, Vines said.

DaimlerChrysler has a preliminary accord to produce trucks with Beiqi Foton Motor Corp. Ltd., whose biggest shareholder is Beijing Automotive. It also produces vans with Fujian Motor Industry Group.

Detroit News Staff Writer Eric Mayne and Reuters contributed to this report. You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.