Strange times
By: Dave Leggett - 15 June 2009 13:57
There is something strange going on in the auto industry. Despite the talk of massive overcapacity, the impact of recession and the oft-heard conclusion that the industry will consolidate into fewer, bigger carmakers, the opposite seems to be happening.
Smaller brands – Hummer, Saturn, Saab, Volvo Cars - are being sold off by bigger groups and, apparently, finding no shortage of potential buyer interest.
And the deal that would have clearly signalled that consolidation in Europe is coming – Opel and Fiat – isn't happening. Not only that, but the new CEO at PSA – a firm often identified as a potential alliance or merger suitor for Fiat – has more or less said that size isn't everything and that PSA can survive as an international business by focussing on growth markets.
Is that it then? Consolidation and rationalisation of production isn't as pressing as some have been saying?
I don't think so. But it's also a more complex situation than it appears at first sight.
For example, if GM, with all its resources, couldn't make Saab work, why should anyone else? Fair question, but an alternative business model that recognises past weaknesses and that perhaps comes with a sizeable initial dowry of assets from GM, might just be able to work.
Similarly, in looking at Magna's proposed deal to acquire Opel/Vauxhall, the position of New GM is highly significant. If a close relationship continues across the Atlantic concerns over the new European entity developing new product ease somewhat.
I can't help thinking though, that with the industry's total volume pie in Europe suddenly quite a bit smaller, the overcapacity bullet will have to be bitten somewhere, sooner or later.
A lot has to transpire before we can see the extent to which the pain is shared.
JD Power estimates that capacity utilisation at Europe's car plants currently stands at around 50% - versus 80% as recently as 2007. JD Power's baseline forecast has a return to an 80% capacity utilisation 'norm' in 2016. A rule of thumb is that car plants break even at 60-65% capacity utilisation.
There won't be much recovery to capacity utilisation from the current 50% this year or next on current market assumptions (in 2010 Europe's car market will likely decline after this year's scrappage-inspired boost). Conditions are therefore clearly ripe for further capacity rationalisation.
Manufacturers who ignore these fundamentals impose higher costs on themselves and impair their ability to be competitive – a sure recipe for potential long-term decline and eventual exit from the industry.
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Comments on this blog post
What I am afraid of is that this crisis is not deep enough so the tough lessons to be learned. While, in terms of present, everybody is speaking of how bad things are and how much things should change and adapt; in terms of future all the GMs, CEOs, “Whatever”s - especially those of the most battered companies - speak like they always did and like nothing is going to happen. “We’re gonna do this...”, “we’re planning that...”, “we have new models in the pipeline that will...” I am a journalist only since 2003, but I didn’t hear a different word since then. Ok, they have not many alternatives. A “lower note” may induce more “emotional distress" in an already very touchy market. Also, telling things as they plan them may give some ideas to competitors or set the unions on fire... But besides not saying anything significant, they are also not doing anything significant. As I see it, is little difference between the now “crisis generated” owner changes and the merge and acquisition hysteria of the ‘90s. As also with the same little effect. Aston, Bentley, MG, Saab, Volvo, Daewoo, SsangYong, Dacia, Skoda, you name them... Only a handful of them are now stronger. The others just have a bigger financial back up (provided by others) or they disappeared altogether. Your question was: “if GM, with all its resources, couldn't make Saab work, why should anyone else?” A possible answer is because someone else will care more! This industry lacks the entrepreneurs. It is filled up with top executives that are as good at GM as they would be at Ford. While they are young and still fighting to become “top dogs” they do pretty good job. Remember Ghosn and even Wagoner in their beginning! Later they slow down. They slow down more than this industry requires. Even “the last car guy” Bob Lutz, remains more of an icon than an asset for GM. An entrepreneur has everything tied up to his business. His money, his family’s money, his and his family’s future... The Quands simply cannot let down BMW and seek another (brighter) future at Porsche. Ghosn can! Wagoner also. Some big names already did it. And they are not to blame. But they are not what is needed. At least, they are not enough! And the fact that big companies split and brands are scattered al over the world is a good thing. Those brands go to someone who will, at least, care a lot for that brand. And those brands go to someone with fresh thinking and fresh ideas. Of course, this is not enough for a car company to become or remain economically viable. But diversity is the key word in all consumer related aspects. And big conglomerates proved they cannot generate enough diversity. And as far as economy of scale is concerned, I think the suppliers will take care of that. The same balljoints worked fine in FIAT, Opel, Suzuki, Saab etc. They can work the same when these companies will be not related anymore. In the end, for whom the shock absorbers from the shelf are not good enough, he might be producing a special car with a bigger price so he can ask (and pay) for “custom” parts. Therefore, in my opinion, entrepreneurs are those who will care enough and those who will generate enough diversity for this industry to revive. (For as long as the oil and ecological issues will allow it.) And now may be you understand why I am afraid that this crisis is not deep enough to shake them wake-up!
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