Text 32: car crash ahead

There has been something special about cars and the making of them. Henry Ford turned the car-assembly line into an enduring symbol of industrialisation. Later, Alfred Sloan made General Motors into a model for the modern corporation: the inventor of operating divisions and marketing plans. Today the industry seems poised once again to become an example for other businesses, as car manufacturers grapple with the opportunities and challenges of globalisation. In theory, no business better illustrates the great opportunity that the opening up of world markets presents to the mature companies of the rich world. With a turnover of well over $1 trillion, and 10m employees, the car industry is still the world's largest manufacturing business. At present, many carmakers are doing well. The American Big Three (GM, Ford and Chrysler) and Japan's Toyota are rich in cash.

Nonetheless, having powered ahead for so long, the industry as a whole must now execute a death-defying turn. In the rich countries of Western Europe, Japan and North America, where the industry has until now earned most of its money, roads are becoming congested and markets saturated. Luckily for car makers, demand for cars in the developing world is set to grow, at just the right moment to make up for the shortfall in the traditional markets. But to steer in this new direction is harder than it looks. The reason is that it is not just the demand for cars that is growing in these new markets. For a while the supply of them will grow faster still, pushing down prices and profits everywhere.

Such is the rush to capture new markets in Asia and Latin America that on some estimates the industry will by 2000 have the capacity to produce about 22m more vehicles a year than the world wants. In other words, every car plant in America could close, and the world would still have too many cars. The Asia-Pacific region, already the world's biggest producer, will add the capacity to make extra 6m cars a year in the next five years. Worse still for the established companies, new entrants are joining the scramble. South Korea alone is building an industry with capacity about five times greater than the demand for cars in its domestic market. The South Koreans do not intend to confine their competition to the developing world. They will be muscling into Europe as well.

Unless you happen to be a carmaker, there is nothing to lament in all this. On the contrary, when too many cars pursue too few customers, consumers are sure to benefit. And not just consumers. One of the virtues of globalisation is that it will increase productivity and therefore prosperity in general. If they were lift to slug it out on their own, carmakers would in time compete the extra capacity away.

The more efficient firms would prosper and the weak would fall. Factories would be located in places - whether Detroit, Bavarian or Bangladesh - that have a comparative advantage in car making, and investors' capital would be allocated wherever it could earn the best return.