As the motor industry runs short of cash, with increasing demands for subsidies or loans, is the industry actually finding a natural equilibrium, asks Michael McAleer, Motoring Editor
NEVER MIND oil, it's cash that fuels the car industry. And it's the lack thereof that is strangling the industry's iconic leaders at present. The pressure being put on the US government by the big three car giants - General Motors, Ford and Chrysler - to give them access to a $25 billion (€20 billion) bailout fund is intense. The PR machines of these firms are in overdrive in their home market.
GM, which lost $4 billion (€3.1 billion) in the third quarter, warned that it could run out of the minimum cash it needs to keep its business going in the first half of 2009. If it crashes it reckons it will take with it three million jobs in the first year alone and 2.5 million thereafter. Overall, it estimates, one in 10 Americans work in the car industry. This is frontline business on the much-heralded Main St, USA.
Whatever about the politicial machinations, however, the simple truth is that the car industry is in a bind. The evidence is not just from the utterances of senior executives of big spending giants in Detroit.
On the forecourts of Ireland the consequences are evident for all to see. Several factors have contrived to create this "perfect storm". A lack of investment and innovation in production lines by several firms has reduced their ability to produce lower volumes at profit.
Poor planning means car firms failed to correctly estimate sustainable volumes in established markets. The boardroom desire for shorter model lifecycles meant less time to garner profits from each model.
The increasing demand for cleaner, smaller cars has increased development and production costs, but competitive pricing means margins are stripped to the bone. Short-term solutions such as discounting and pre-registration have disrupted the used car market.
At home, the double whammy of ill-judged changes to competition rules at EU level that forced dealers to invest millions in showrooms for little evident gain to their bottom lines, combined with introduction of a new emissions tax regime that left many buyers confused and delaying their purchases.
Finally, like every other frontline consumer product provider, the failure of banks to provide liquidity has proved the ultimate catalyst to the current problem.
Bankers are arguably top of the car industry hit-list at present. They are tightening credit lines to dealers who need to be able to finance stock levels, while at the same time declining car finance for increasing numbers of potential customers.
It's cutting off the financial oxygen to the heads of the industry in Detroit, and it's having the same detrimental impact on the lowly dealers in Ireland.
The problems of production overcapacity - or the production of out-of-favour vehicles - in the US have spread to Europe. In Britain, Honda has cut production at its Swindon plant by 24,000, while Toyota has reduced the number of shifts on its Auris line in Derby. Ford has gone to a four-day week in Dagenham and at its Transit plant in Southampton. Jaguar and Tata meanwhile, recently sold by Ford to Indian car firm Tata, have ceased Friday production at their Solihull plant. Bentley has gone on a three-day week at Crewe, while Nissan recently halted production of the Micra and Note for two weeks.
The story is the same elsewhere in Europe. In Sweden, Volvo has laid off 6,000 workers, BMW has cut production by over 20,000 vehicles in its German plants, Renault is laying off 6,000 staff while PSA Peugeot Citroën is cutting production at three of its plants.
The production cutbacks would seem prudent given the current economic climate, but there is no sign that this will solve the industry ills.
Opel has already requested support from the German government at a national level and others are likely to follow.
The current woes may be blamed on a frozen consumer economy, but some questions need to be asked about the sustainable consumer demand in established markets. Just how many cars does the western world market really demand?
In many instances, dictated to by the output of the plants, regional distribution operations have had to push excess cars onto already burgeoning forecourts. When the supply volumes weren't met, various schemes from discounting to off-loading on to the rental market have been adopted. Some have even dabbled in the old short-term method of pre-registration, where new but unsold cars are registered and then traded as no-mileage demos, with the firm taking the hit on price.
Combined with this was the increasing clamour over environmental issues, with the car industry at the forefront of much of the ire. While some elements have reacted quickly with hybrid and biofuel models, the short-term image benefits were outweighed by the introduction of big-engine high-margin models from the same brands.
Many of the "green" cars didn't stand up well to scrutiny of their environmental credentials either. It seemed like the industry accepted that things had to change, but not just yet. It was holding out to make that last profit splurge from the higher margin - but less efficient - models before turning to cleaner models. The need for profit has been exacerbated by growing consumer demand for smaller, cleaner cars, which clearly points towards electric power. The problem here is that production costs for such vehicles remain exorbitant. No doubt, like in every other industry, if the firms' put their best minds to it they could reduce costs over time and develop profitable production.
The importance placed on research and development by car firms is clear. Within the EU alone, car firms spend €20 billion a year on RD, representing one-fifth of total RD spending in the region, according to the European Automobile Manufacturers Association (ACEA). However, even with this massive spend, few of the car firms have the spare cash or time to single-handedly lead the revolution in power supply that seems to be needed now.
Ironically, it is General Motors, now in need of cash assistance, which has come closest to delivering the next generation of electric car with its Chevrolet Volt concept. It had promised to have the fuel efficient plug-in electric car on sale by 2010; at least that's what they promised prior to the latest crisis. At a time when the firm needs to be taking a lead in innovation, it's the one high-cost project that may be delayed unless Government support arrives.
It seems that for all their innovation over the past century in terms of performance, design and safety, when it comes to the environment, the industry was full of willing followers, ready to piggy-back on others' innovation, but it sorely lacks leaders.
Various firms have developed new "green" variant concepts but few had the cash to put them into production. Even if they did, the need to competitively price them against similar-sized rivals meant that in most instances profit margins were minuscule. It was easier to keep selling the bigger margin SUVs and hope that others would lead the change and the rest could simply follow.
Even when it seemed that unsustainably low profit margins in established markets like the US and Europe would finally force a complete reassessment by the car industry, those at the helm were able to avoid inevitable hard decisions, thanks to the appetite for cars in developing economies. Russian buyers came to the rescue of many European brands, as did the Chinese. Newly cash rich and with nothing to trade-in, they offered a lifeline and arguably a buffer zone within which the industry could turn itself around. Instead, many firms seemed to have opted for further procrastination.
Now even these markets have hit a few speed bumps. At the recent Moscow motor show, for all the glitz and record sales, most senior industry figures were predicting a slowdown to that market's boom. So where next for the car industry?
No doubt heads will roll in Detroit even if the bailout comes to pass. Shareholders are looking for management heads.
Yet for all the doom and gloom, this is still a hopeful tale. Demand for cars may be frozen in many markets due to wider financial concerns by consumers, but the world's love affair with motoring is far from over.
After their house and the necessities of life, most families desire a car. Even if European and US markets are reaching their natural motoring equilibriums, it still means there will be plenty of demand as people seek to maintain that level of ownership. Increasing household wealth will also bring more people into the premium end of the market, where more profit can be garnered.
Then there is the demand in developing countries, which offers great hope. According to the ACEA, there are 466 cars for every 1,000 people in the EU. In China that figure is fewer than 30 per 1,000. The potential demand is evident to all.
The importance of the car industry, even to Europe, is clear. Whatever about the much-publicised impact on the US economy if one of its giants fail, in the EU 12 million people are employed in the industry, one that brings in €381 billion in taxes to national governments.