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Will China Cause the Next U.S. Bankruptcy Wave?

Bettina M. Whyte
AlixPartners LLC
New York

“What?” you ask. How can another country influence U.S. companies so dramatically as to cause the next wave of bankruptcies? One only has to look at the automotive industry to get the answer. And, what we see in autos we see duplicated throughout other manufacturing and service industries.

Let us just review a few recent headlines using the auto industry as our example: “A new domestic policy: GM gears up to be a major player in what will someday be the world’s largest automotive market (sic. China).” (Automotive Industries, 12/04) “ China gives Ford nod on Nanjing engine plant.” (Automotive News, 5/30/05) “GM wants to produce heavy trucks in China.” (Automotive News 5/2/05)

And then look at some facts: Global vehicle sales growth is below 1 percent and would be negative without China. Global light vehicle capacity is shifting and is expected to grow over 9 percent in the Asia Pacific region verses a growth of only 2 percent in North America over the next three years. Indeed, Asia Pacific is expected to produce 30.6 million light vehicles in 2007 while North America will produce only 20.2 million vehicles. And, perhaps the most telling and disturbing sign of the future is the fact that the Big Three auto makers have lost 13 percent share of the U.S. market over the last 10 years to non-U.S. manufacturers, who in 2004 held a resounding 41 percent share of the U.S. market. As a result of this lost market share, North American OEMs have seen their operating margins slide from approximately 5 percent in 1995 to approximately 2 percent in 2004. This compares to operating margins of 7 percent from their Asian counterparts, up from 2.5 percent in 1996. To put it succinctly, Asian OEMs are now valued at more than five times that of GM and Ford.

What is happening is becoming obvious. While a world player for a long time, China is now a capitalistic system which has what is needed to compete with U.S. industry–low labor costs, reasonable regulation, free capacity, high quality, good technology and state subsidies combined with good cash flow to invest in rapid growth.

China has a massive industrial labor force of over 167 million people. India has a labor force of 82 million. This is a daunting statistic when compared to the U.S. labor force of only 33.5 million. And, while the average hourly cost of wages for the U.S. worker is over $36, that number is a mere $2 in China and just over $1 for Indian workers. The median revenue per employee in the auto industry in America is now $200,000; in Asia it is $250,000.

China and the rest of Asia are not burdened with the penalties that hurt U.S. corporations, such as unions, under funded pension plans, healthcare costs, retiree benefits, environmental regulations and high tax rates. According to the Detroit News (5/1/05), “GM says health expenditures are $1,525 per car produced; there is more health care than steel in a GM vehicle’s price tag.” And, as was recorded by the Wall Street Journal (4/5/05), the PBGC estimates that the pension assets of automakers and parts companies fall $45 to $50 billion short, while airlines were $31 billion under-funded. Indeed, China and other Asian countries subsidize many of their industries.

Quality was once a problem in Asia and, perhaps, remained the last issue to resolve. However, this hurdle now seems to have been met. In fact, many believe that the quality in China has now matched that found in the U.S.

At the same time, China and all of Asia is experiencing excess operating capacity in many manufacturing operations. This, coupled with low labor costs and more lenient regulations, has lead to higher exports and a movement of U.S. investment into operations in China, leaving growth in the U.S. behind. In fact, due to foreign investments in China, China now has the ability to produce every major system and component of a car.

With these types of economics, it is not hard to understand why so many Asian manufacturers and suppliers are pinching many of our U.S. industries. In fact, it is not hard to imagine the demise of entire manufacturing industries in the U.S. After all, we have already seen this in the U.S. textile and, to a lesser extent, the steel industries. The question that needs to be asked is whether or not the next bankruptcy wave will be one of chapter 11 or liquidations.

About the Author

Bettina M. Whyte is a managing director of AlixPartners LLC in New York, where she has served as an interim CEO, COO and Chief Restructuring Officer of numerous troubled companies. Ms. Whyte is the immediate past-president of ABI, sits on the board of several companies and is an adjunct professor of law at Fordham University School of Law. She has conducted seminars throughout the country for bankers, lawyers and corporate officers on the topics of reorganizations, bankruptcies, valuations and lender liability, and is a contributing editor to the ABI Journal’s Turnaround Topics column. She has also been featured in BusinessWeek, Working Woman Magazine, The Industry Standard, Boards and Directors Magazine and on NBC Nightly News, CNN, NPR and Sky Radio.

 


 

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