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No Rest for the Weary

Given that this is a monthly magazine, it is perilous to try to write something of a predictive nature vis-à-vis the auto industry today.

Given that this is a monthly magazine, it is perilous to try to write something of a predictive nature vis-à-vis the auto industry today. It may be that no sooner do I put the final period to this that it turns out that there has been an industry-shaking change that undercuts any speculation or observation that I might make. The speed at which change has been occurring of late brings to mind the early portion of the filmed version of The Right Stuff, when pilots were attempting to break the sound barrier. Some of them were fatally unsuccessful. And it even looked, for a time, that Chuck Yeager wasn't going to make it, either. But he did breakthrough to the other side. And things turned out to be smooth. Perhaps this will be the case for the domestic vehicle manufacturers-the smooth part, not the fatal one.

One of the things that this has led to is a distraction, in a sense, from other competitive threats that are on the horizon. No, this is not to add insult to injury, but to say that we must be ready to deal with all manner of challenges. This goes for OEMs as well as for suppliers. Given the domestic pressures, we risk not having the scope that we need in order to anticipate-or see, until it may be too late-what's going on outside our immediate view.

A piece in the October 2008 The McKinsey Quarterly (www.mckinseyquarterly.com) is one of the most cautionary things I've read. And as this is being written a couple days before Halloween, I would sort of wish that this was a costumed-phantasm, not potentially the real thing. The piece, by Gordon Orr, a director in McKinsey's Shanghai office, is titled, "Seven Ways China Might Surprise Us in 2009." With the Beijing Olympics behind us and the roiling industry consuming us, we've probably not been thinking too much about the powerful country to our east. But two of the seven ways ought to make us think hard.

Mr. Orr's first "realistic possibility": "China announces that by 2020, half of the cars in the country will be electric. It invests tens of billions of dollars in R&D toward achieving that goal."

This is not in the least bit far-fetched. In Oil on the Brain, published last year, author Lisa Margonelli writes of an electric vehicle developed at the Wuhan Institute and shown at the Michelin Bibendum Challenge in Shanghai, the Aspire: "With a target price of $12,000, it's an electric vehicle, so it won't add to the already ponderous smog. Onboard GPS helps identify traffic snarls, allowing our future driver to park (the doors open upward to accommodate tight spaces) and continue on to work with that onboard bicycle. The Linux-based operating system even provides an electronic jack, so that if you do get stuck in traffic, you can simply plug into the CPU and get work done. Instead of an instrument panel, the car has an LCD computer screen, because it's cheaper." Is anyone around here talking about an electric car for $12K? Or even $20K for that matter.

Mr. Orr speculates in his article that if his posited possibility comes to pass: "Such a move could make China the leader in the automotive technology of the future, with other countries struggling to keep pace. Shanghai Automotive Industry Corporation (SAIC) or newcomer BYD Auto could become the Ford Motor of the 21st century, propelled by a new technology-much as Ford capitalized on the internal-combustion engine at the start of the 20th century."

While some people might think that the development of the Chevy Volt is a distraction that GM doesn't need right now, I submit that the Volt may be the only thing that would keep the company going if something like Mr. Orr's possibility comes to pass.

And suppliers don't get a pass: "The Chinese government buys a 50-year lease on an entire geographic region of Mexico, enabling Chinese companies to build factories there to supply the North American market more easily."

Mr. Orr's explanation of what that would mean: "Chinese companies would then become the undisputed leaders in outsourced production. No longer constrained by geography, they could bring their expertise in low-cost manufacturing to Mexico (or Poland or Turkey), greatly expanding their reach and overcoming obstacles-such as maintaining supply chains across the Pacific-that still hinder their growth."

Without putting too fine a point on this: Any supplier that thinks it doesn't have the time, cash or inclination to invest in innovation and product development ought to consider another line of work. If Chinese companies were just to the south, how long do you think standing OEM contracts would stand?

Yes, things are bad right now. Horrible. But unless we all look ahead, unless efforts to improve and innovate are accelerated, not maintained, there will be an increasing number of companies looking for help. Sad, but I think true.

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