The Michelin Man In Dixie Land

Where would you expect Michelin, the French manufacturer best known for its Michelin Man mascot and its global travel guides, to build new capacity to produce automobile tires?

“The industrial heartland of France itself” might be your first guess. Perhaps “eastern Germany, or the westernizing European Union nations of Bulgaria or Romania” might be your second guess. And perhaps “an Asian nation, such as China, Indonesia, or the former French colony of Vietnam” might be your third.

Most likely, the American state of South Carolina wouldn’t even make your Top Ten list of guesses. And yet that’s where Michelin is placing its newest tire plant, a development that will transform the state into the tire manufacturing champion of the United States.

It may not be surprising that Michelin and other tire manufacturers would prefer to do business in South Carolina than in the rust belt states of Indiana or Michigan. And yet why would they want to manufacture their products in America at all?

From Snow To Kudzu

Ironically, the most recognizable tire in the United States represents a brand that is actually now owned by Michelin; it’s the gigantic Uniroyal Tire that sits at the side of Interstate 94 just outside of Detroit. The eight story tall billboard was originally used as a Ferris wheel for the 1964 New York World’s Fair, and now serves as the symbol of the Motor City. Uniroyal, however, was acquired by Michelin in 1990; it no longer operates as an independent American company.

Nevertheless, the tire industry hasn’t fully closed all of its American tire factories; instead, it has simply moved south and traded the snowy climes of Michigan for the kudzu-festooned environment of the Palmetto State. Last week, Michelin announced that it would join Bridgestone and Continental Tire by greatly expanding its manufacturing base in South Carolina.

For decades, pessimistic economists have predicted that the American manufacturing sector would continue to dwindle in the face of competition from other nations. Steve Jobs himself, in fact, once told President Barack Obama that high technology Apple manufacturing jobs that have been lost to China aren’t coming back to the United States. And yet Michelin, a European company with no historical ties to the American nation, decided to produce tires — a product far less technologically advanced than iPhones or iPads — in the United States.

That clearly raises the question: why would they decide to do so?

Simple Economics

The answer to that question is a simple function of economic competitiveness. Although many other nations maintain far lower labor costs than the United States, and although China surpassed the United States as the world’s largest automobile market two years ago, the American economy remains the largest in terms of Gross Domestic Product (GDP).

Thus, any tire company that wishes to do business on a global level must develop a strategy to produce and sell its product to American consumers. In order to do so, it must inevitably choose between a pair of options: (a) to both manufacture and sell its tires within the United States, or (b) to manufacture its tires outside of the nation and then import them into it.

Although the second option remains a feasible one, it is burdened by the weight of skyrocketing fuel expenses that drive up the cost impact of transporting finished goods across national borders. When we also consider the effect of a weakening United States dollar and a strengthening Chinese reminbi, as well as the recent willingness of the American labor force to accept lower wages and benefits in the face of high rates of unemployment and continuing economic weakness, we can understand why simple economics makes South Carolina an attractive locale for tire manufacturers.

Growing Old Before Growing Wealthy

Of course, although the United States has maintained an industrial base in tire manufacturing, we cannot assume that America will soon reclaim all of the plants and factories that have been lost to China since President Richard Nixon visited the Communist nation in 1972. Nevertheless, China’s inability to woo tire manufacturers away from the American South does give the United States hope that it will be able to compete with the Asian nation for future manufacturing plants.

The Chinese economy itself is burdened with many handicaps. Its economic growth rate is slowing, its population is aging, and its labor force is demanding wage increases and improvements in working conditions. These demands will inevitably erode its labor cost advantages.

In fact, if its economy hits a wall as Japan’s did during the final decade of the twentieth century, the Chinese government may discover that its population has grown old well before the nation has grown wealthy. Should such a scenario emerge in the future, the American manufacturing industry and its skilled labor force may remain highly capable of competing against their global rivals.

The Indian Retail Economy: Foreigners, Keep Out!

More than three years have passed since the Lehman Brothers collapse shoved the United States economy to the brink of a second Great Depression. And today, with unemployment and home foreclosure rates still high, it’s easy to understand why Americans remain glum about their economic futures.

Indeed, the conventional wisdom stipulates that the BRIC nations of Brazil, Russia, India, and China collectively represent the rising economic powers of the 21st century. India, in particular, has been praised by many economists for its combination of political democracy, economic capitalism, and English-fluent western culture.

Before Americans permit themselves to feel too threatened by the Indian economy, though, they may wish to consider a watershed decision that was announced by government officials in New Delhi last week. Apparently, India is not as prepared to embrace the principles of free-market global capitalism as its government previously led us to believe. And as a result, India’s economic competitiveness may well suffer the consequences of domestic protectionism.

A Nation Of Shop Owners

Throughout history, the structure of India’s retail economy has remained rooted in community tradition. As was the case in the pre-industrial era of the United States, the vast majority of Indian citizens purchase merchandise from the owners of tiny, privately owned kirana shops.

Some Americans still bemoan the loss of traditional self-employed shop keepers; nevertheless, they have continually flocked to successively larger and more efficient retailers. Indeed, American shoppers themselves have accelerated the modernization of the consumer economy by gravitating from urban department stores (like Wanamaker’s and Macy’s) to suburban mall-based chains (like Sears and J.C. Penney), and then on to warehouse style superstores (like Walmart and Costco).

Late last month, Indian government representatives finally announced that they would permit foreign retailers to operate majority-owned supermarkets within their national borders. In fact, they explicitly acknowledged that they hoped this decision would trigger the modernization of their retail industry. However, after just a few weeks of protest by protectionist domestic forces, the Indian government suddenly decided to reverse course last week.

Economic Impact

Why does it matter whether consumers purchase merchandise from tiny shops or gigantic super-stores? How does it affect the economy of a nation?

To be sure, many pundits bewail the loss of traditional American downtowns, with their tiny privately owned shops, to large-scale suburban developments. To such traditionalists, American society would be far more prosperous if citizens shun the automobile culture and embrace “livable” communities, residing in homes that are located within walking distance of human scale business districts.

Although towns in states such as Oregon and Vermont have indeed prospered within such urban planning environments, the modern American economy has nevertheless reaped the benefits of expanding economies of scale. Walmart, for instance, has grown to become the largest employer in the United States, selling merchandise to American consumers at prices far cheaper than any one could possibly find at smaller stores.

Why Competition Matters

It is important to note that the Indian government hasn’t simply limited the size of newly proposed domestic retail projects. It also continues to protect Indian-owned businesses by prohibiting any retail projects, of any size, that are majority owned by foreign firms.

Such a decision clearly limits the amount of competition that can occur in the retail industry, a limitation that profoundly affects the market itself. That’s because competition, by its very nature, drives innovation in product characteristics, customer service, and other functions.

Consider, for instance, whether Microsoft would have been driven to improve its Windows software if not for the competitive challenges of firms like Apple and Google. And consider whether American, Delta, and United Airlines would have been similarly driven without competition from rivals like Southwest and JetBlue.

Does any one doubt that product and service innovation would slow if such competitive forces were to suddenly disappear? In the Indian retail industry, though, such forces have never been present at all.

Protectionism, American Style

The United States, of course, is hardly a pure bastion of free market capitalism. Insurance companies, for instance, are still restricted from selling certain types of policies across state lines. And many American farmers are still paid subsidies to help protect them from market price fluctuations.

The American retail industry, though, is continually challenged by foreign store chains at both ends of the economic spectrum. The Swedish mass market “fast fashion” retailer Hennes & Mauritz (H&M), for instance, has expanded from a single American location to almost two hundred in slightly over a decade. And in the automobile sector, numerous European and Asian manufacturers compete with America’s “Big Three” in the United States.

So despite its continuing economic doldrums, the American economy still maintains competitive advantages that do not exist in other nations. Such advantages may yet succeed in generating levels of economic activity that can return the nation to prosperity.