Blog: Tough calls
Dave Leggett | 17 November 2008
The downbeat news just keeps on coming. It seems relentless at the moment, but we are at that stage in the cycle when everyone is reassessing the demand outlook for next year and adjusting operations accordingly. Economies are on the way down, so good news will be in short supply, few looking ahead to the recovery phase at this point. The storm's still blowing in. And there's the underlying elephant in the room which is the whole credit situation and how quickly we'll have a return to credit being more available.
While the spotlight is very much on Detroit, it's perhaps worth noting that Europe isn't looking too pretty either. Renault's Patrick Pelata has said he sees a 20% decline next year. Gulp. That's perhaps a measure of how far people are taking their market forecasts down right now. It's downward revisions all round.
But, if the credit situation is gradually 'resolved' in the first half of next year the outlook might start to look a bit brighter given where interest rates are going, tax cuts on top, some degree of pent-up new vehicle demand and inflationary pressures remaining subdued (especially oil). It could even be a V-shaped recession with quite a sharp upturn. Well, it could. That's the optimistic scenario.
I know there's an alternative scenario in which consumer confidence stays on the floor and credit markets stay pretty much locked up, a deep economic slump persisting into 2010. But the credit element and banking crisis behind this recession is new territory. This recession is not quite like previous ones.
In short, it's still a very uncertain picture, the uncertainties much bigger than we might usually expect, though they are always pretty big at this stage of a down cycle.
As an automaker though, it makes sense to be prepared for the worst obviously, with a plan in place if the recovery to demand is early and sharp. Not being ready to turn the taps on when demand picks up can also be costly and result in lost share.
There's also a tricky judgement call in trimming cost. Take too much out and the patient may be permanently incapacitated. Areas like R&D might look like a luxury, but if there's no hot new product in time period t+5, that big cost saving made might be regretted. Equally, if that cost cut is really necessary for survival, there's no argument. Tough calls.
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