Important car shows usually fit into a predictable pattern. There are rows of gleaming new cars. Grey suited executives make speeches about how wonderful these new machines are. They reach new heights of unashamed hyperbole describing their company’s prospects in particular, and the industry’s generally. Models drape themselves over the new cars, in the most tasteful way possible of course. Then everyone goes home to the grim verity, writes Neil Winton.
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In Europe, reality now means an every-intensifying price war, stagnant sales, more furrowed brows about the prospect of fuel prices and the new technology which might mitigate its impact, and how manufacturers plan to restructure by slashing wages, shutting factories or moving production to eastern Europe or Asia, or a combination of all of the above.
But at this biennial Frankfurt Car Show, held in mid-September, many German based companies were looking at another scenario for their salvation. The German general election campaign was reaching a crescendo of political hype which even auto industry leaders would be too embarrassed to replicate. The opinion polls had been predicting for months that the Conservative coalition led by the Christian Democrats’ Angela Merkel would replace the red-green government of Chancellor Gerhard Schroeder.
Traditional German System
Companies like Volkswagen, Germany and Europe’s biggest, and DaimlerChrysler, were betting that the new, incoming government would finally give it the go-ahead to dump the traditional German system which had allowed union’s huge power in boardrooms to protect workers/stymie corporate action, depending on your political view.
Volkswagen couldn’t contain itself in the build-up to the election. VW CEO Bernd Pichetsrieder demanded wage cuts and threatened to move the production of a new Golf based SUV to Portugal if unions balked at his cost-cutting agenda.
VW brand chief Wolfgang Bernhard said VW was on the brink.
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By GlobalDataPeople Have To Change
“It’s (VW) a company in crisis. People understand that. They have to change,” Bernhard said after he launched a new model at the show, the Eos, which has an innovative powered steel convertible roof.
In a TV interview, Pichetsrieder said that he might have achieved a billion euros worth of cost savings so far, but there was still another billion to go. Pichetsrieder was visibly impatient with the current situation which was crimping VW’s progress.
He picked his words carefully to avoid any criticism that he favoured any particular political party, but was fooling nobody.
“In the last 18 months, we have heard another proposal everyday, from the government, the opposition, and the lander (states). We need certainty for our business to prosper,” Pichetsrieder said.
In the event, the German electorate gave a right royal raspberry to that hope.
You wanted certainty? Tough. Try this instability.
Corporate Trap Shut
Commentators were wondering how Merkel’s conservatives managed to fritter away a more than 10-point lead in the three months leading up to the election. Some were saying that VW’s shrill demands for change might have been the catalyst for the conservative’s problems. Why didn’t VW shut its corporate trap during the election denouement? Did it really have to make it so obvious that a conservative win would mean the end of the cosy system which protected workers/ruined companies by making it impossible to fire workers? Investment banker Morgan Stanley described this as “sabre rattling”.
Now German automotive companies face a bitter scenario; a period of stagnation and uncertainty. Reform is as far away as ever. If Merkel’s conservatives manage to cobble together a government, it will be powerless to change anything. Reform, if it is ever to get the green light, will need another election.
Running On Empty
And, according to investment banker Citigroup, VW is really running on empty.
“VW should be the most fertile field for auto restructuring, with capacity utilisation of 72-73 per cent in Europe, and in our view a labour force 15,000 to 20,000 too high being paid 20 per cent above engineering norms,” said Citigroup in a report published days before the election.
Hubris
After the election, Germany’s auto industry association the VDA warned that even without government-led change, companies would go right ahead and reform themselves, in a statement which sounded more like hubris.
“We will go our own way forcefully, perhaps even more forcefully,” VDA chairman Bernd Gottschalk said.
“If business conditions cannot be improved effectively from the political side, then we as the auto industry will step up our own restructuring and cost-cutting efforts once again,” Gottschalk said.
One out of every 7 jobs in Germany depends on the automotive sector, which exports €146 billion euros worth of products and generates a trade surplus of €81 billion, according to the VDA.
DaimlerChrysler, which has also said it wants to eliminate thousands of jobs in Germany, pleaded for the decks to be cleared.
“We have no time to lose. We are in a merciless competitive struggle,” said Thomas Weber, head of research and technology at DaimlerChrysler, which had hogged the limelight at the show with the introduction of its top-of-the-line new S-Class model.
Revolving Door
The European industry itself has been in the throws of a minor revolution this year as the executive revolving door has seen leadership changes at Renault, DaimlerChrysler, Fiat, Jaguar, Volvo and Toyota. VW has a new number two in Bernhard.
European sales have been stagnating, as Europe’s biggest market, Germany, saw sales stalling. But sales had jumped by 11 per cent in Germany in August, as buyers felt a change of government might boost the economy, or were buying to avoid a Merkel promise of an increase in sales tax from January 1, 2006. Any revival in European sales via a boost in Germany is now likely to die on the vine.
Rising oil prices are also unlikely to put consumers in a mood to buy cars. But a consumer clamour for fuel economy set off a rash of action by companies at the show to demonstrate their green macho.
More Hybrids
VW, its subsidiary Audi, and Porsche announced they would develop a new, fuel-efficient hybrid engine. Details weren’t revealed. Less than a week before, BMW joined General Motors and DaimlerChrysler to develop a hybrid engine.
Currently, Toyota of Japan has the inside track with hybrids. Toyota expects to sell 240,000-250,000 hybrid vehicles globally this year, nearly double the 130,000 vehicles it sold in 2004, and aims to sell at least 300,000 next year. Eventually, it hopes to sell a million hybrid vehicles a year.
In Europe though, hybrids are expensive and don’t offer much, if any, of an economy advantage over diesel. But in a politically correct world, it does demonstrate to politicians that a company is “concerned” about the environment.
Winners In America
According to Citigroup, Europe’s diesel expertise could make their cars winners in America. The bank said that at current oil prices, about half of Americans would consider switching to more fuel-efficient vehicles, and that could be diesels.
“Little wonder that OEMs are so keen to hop on Toyota’s hybrid-drive wagon. However, only time will tell whether the current hybrid hype evolves into genuine demand or proves merely a passing fad. In the meantime, we think diesel stands to be the main beneficiary of consumers growing appetite for economy – and here we find diesel biased VW, BMW and DaimlerChrysler best placed to capitalise on as yet untapped U.S. diesel demand,” said Citigroup.
VW’s latest gasoline direct injection engine technology was also on show at Frankfurt. Citigroup was impressed because it matched diesel economy at a lower price and weight and put VW in a strong position “….as Europe prepares for the almost inevitable carbon- based tax system for cars.”
Clunky, Greasy
Morgan Stanley also sees gains for Europeans if the oil price stays high, but not necessarily in America. Americans have been loathe to embrace the diesel revolution, still associating oil-burners with clunky performance and greasy stains. Coming U.S. regulation on particulates is another hurdle for diesels to jump over.
“If oil remains at elevated levels long term, this could open up the door for European OEMs to export their world-leading fuel economy competence to consumers in other regions,” Morgan Stanley said.
Companies like VW, BMW, Mercedes and Porsche have been struggling in the U.S., because of the debilitating impact on their competitive position from the dollar’s weakness. This is having spill-over effects in Europe, as they need to sell excess capacity in the home market and that means lower prices for these upmarket products in Europe.
Spur To U.S. Sales
The weaker dollar has also been a spur to U.S. sales in Europe. Cadillac unveiled a new small Cadillac based on the Saab 9-3 with a diesel engine. Chrysler launched its Caliber hatchback into the Golf sector with a diesel. Various Chrysler Jeeps will now be much more competitive.
If there wasn’t enough competition in Europe from the Japanese and the Koreans, the Chinese made their first appearance at a major car show, with debuts from the Jiangling Motors Landwind SUV, and vehicles from the Geely Group and Brilliance China Automotive.
The Chinese debuts were a bit half-hearted, but experts reckon that Chinese component suppliers were much more of a threat.
Other notable debutants at the show included the Audi Q7 SUV, the Jaguar XK sports car, the Fiat Grande Punto, the Renault Clio III, the Honda Civic, and the face-lifted Toyota Yaris.
The prospect of a radical new German government shaking the economy out of its schlerotic mode is dead. Stagnation seems the brightest prospect for the foreseeable future.
Neil Winton
