What will 2004 bring? On the evidence of a survey of leading academics, auto industry experts and investment bank analysts conducted for just-auto by Neil Winton, a mild upturn for the industry is in prospect. But there’s also a feeling that the mild upturn will only serve to mask the industry’s fundamental problems a little longer. Some are already looking ahead to the next big downturn and crunch time for some carmakers. Ford in Europe and Fiat are picked out as especially vulnerable. Longer term, big changes to the industry’s structure are anticipated.
If you believe in miracles, and nobody is going to blame you at this time of year, 2004 may be the time when car manufacturers finally face reality and set a course for the warm, sunlit uplands. In this nirvana, new cars will command high margins for a couple of years, rather than a couple of weeks after the expensive launch in the South of France and the multi-million dollar advertising campaign. “Discounts and cash back? I’m not sure what you mean, sir”.
Go deeper with GlobalData
Discover B2B Marketing That Performs
Combine business intelligence and editorial excellence to reach engaged professionals across 36 leading media platforms.
Factories will be running at full pelt 24/7, making cars that have already been ordered, rather than churning out as many Morris Canardlies as they dare in the blind hope that someone, somewhere, may pay just enough to scrape back most of the costs.
Forget the nirvana option. 2004 is going to be more or less normal, with most of the major players desperately seeking to move the metal and having to shave margins, or even forgo them, in the process. In fact next year will afford some respite; according to investment bank Goldman Sachs, car sales in Western Europe will rise about 2.5 per cent in 2004 to 14.5 million. Goldman Sachs also predicts that Euroland GDP will grow 2.6 per cent next year.
But make no mistake – the day of reckoning cannot be put off forever, leading academics, auto industry experts and investment bank analysts told Just Auto. And the day of judgement may be uncomfortably close for ailing companies like Fiat and Ford.
Pirates
“There are too many of them (big car makers), too little profitability, too little growth. Profits, such as they are, come from businesses of which they have no real control like banking, or from squeezing suppliers, squeezing after markets, restricting cross border sales. These are not rational economic profits, they are almost pirated profits,” said Graeme Maxton, chief economist at automotive consultants Autopolis.
Maxton predicts that any shakeout will lead to a fragmentation of companies rather than consolidation, as troubled outfits like Ford and DaimlerChrysler are forced to sell off acquisitions which never gelled properly. Emerging companies in China, India, and Russia may be ideally placed to take up any slack.
Nowhere to hide
Professor Garel Rhys of the Cardiff Business School said the virtual ending of tariff barriers means that there is nowhere for inefficient companies to hide anymore, and this makes restructuring inevitable, but don’t hold your breath. “We need restructuring, but this will occur very slowly, more like the death of a thousand cuts which might take up to a decade,” said Rhys.
Professor Karel Williams of the Manchester School of Business and Management also believes that some of the major players are teetering on the edge of the financial precipice. When the next big downturn comes, the likes of Ford and Fiat will be hard pressed to survive. Williams said car companies are so huge and complicated that any change of direction is very difficult.
“The big three in the U.S. for instance are responsible for huge pension funds and that greatly complicates any adjustments or retrenchment. It’s not just closing factories or shedding jobs; you can’t just dump liabilities in pension funds,” Williams said.
Big downturns not eliminated
That said, Williams makes the point that really radical solutions have not been necessary recently because markets have not performed all that badly. Downturns have been modest and short.
“The industry has been very lucky. There was a bad downturn at the end of the 80s, but don’t imagine that 15 to 20 per cent downturns have been abolished. This would supply the motor to sweep away resistance to change by the worst companies. If the U.S. declined from around 16 million (cars and light trucks a year) to 12 or 13 million, there would be massive forced adjustments,” said Williams.
A big downturn in the U.S. and Europe would force companies like Ford into massive restructuring, according to Williams. It could be the final straw for Fiat.
Look out UAW
“Ford would soon drop its consensual approach of agreement with the UAW (United Auto Workers Union). There would be a major restructuring at PAG (Ford’s Premier Automotive Group) and Ford would finally confront Jaguar, take a hard look at Land Rover, and consider factory closures in Europe,” Williams said.
The Premier Automotive Group comprises Ford’s upmarket brands of Jaguar, Land Rover, Volvo, Aston Martin and Lincoln. Early in December, Ford CEO Bill Ford reiterated his claim that PAG would account for 30 per cent profit of all Ford profits by 2005 or 2006.
Passed the point of no return
Fiat is the other major possible victim of any downturn. “I think Fiat has long passed the point of turnaround myself,” Williams said. In the midst of all this pessimism, there are some companies which are moving in the right direction, says auto analyst Hendrik Emrich at Berenberg Bank in Hamburg, citing BMW and Volkswagen.
Stack ’em high, sell ’em cheap
European manufacturers must make character cars, which can command high margins because of their desirability. They must avoid the U.S. strategic experience, where cars have become virtual commodities just selling on price, often discounted so much because of cutthroat competition that margins have disappeared.
“Look at the (BMW) Mini. It is possible to be different, to build individual, desirable cars. The personalisation of the Mini keeps prices high,” said Emrich. Volkswagen, with its variety of brands – Seat, Skoda, Audi, and VW – appealed across a wide spectrum of the sporty, emotional, workaday and conservative and with its platform strategy, offered the prospect of great economies of scale, and an increasing average price for the cars, according to Emrich.
Emrich though was less convinced about another BMW tactic – the decision to move downmarket with the upcoming 1 series, which will face competition at the upper end of the VW Golf/Ford Focus sector.
Don’t get your hands dirty
John Lawson, auto analyst at Schroder Salomon Smith Barney, reckoned that car companies could learn some lessons from computer manufacturers and cut the amount of capital employed in the search for shareholder value.
“Lowering capital spending is not an easy thing to do but the industry could use external sourcing and assembly, and for a wider proportion of the technology content of the vehicle, like the personal computer industry, which are often basically marketing organisations and systems designers. They don’t make many things and get their hands dirty but they contract that out and keep their own investment to a relatively low level,” Lawson said.
Japanese lurking
Lawson didn’t expect much progress towards restructuring the auto industry in 2004, as sales are expected to pick up. It takes a downturn to make the companies start to worry about the future. This will also give the U.S. industry some breathing space and the opportunity to raise prices.
Any recovery in Europe is likely to be swept up by the Japanese and Koreans, and won’t be providing much relief for the two most vulnerable European operators – Fiat and Ford Europe, according to Lawson.
Professor Rhys also worries about the survival chances of Fiat and Ford Europe’s prospects in 2004, but is looking long term at emerging competition in Asia to provide the next round of pressure.
Crucial for Ford and Fiat
“Ford (Europe) and Fiat are relying on new models, and they’ve got to start doing something soon, if they don’t the decline will become very dramatic indeed and the ability to make profits difficult. 2004 is a crucial year for Fiat and Ford to stop the haemorrhaging losses,” Rhys said.
In the very long term, China will leapfrog over Japan and could pick up laggards in the West. “In say 40 years, Ford could be part of a wider alliance with Toyota. GM might be owned by the Chinese – over this period there will be dramatic changes of that nature. China might claim the high ground with alternative vehicles and propulsion. They might decide to go for the non-CO2 car, and it might well be that the rest of the world has to follow suit,” said Rhys.
True entrepreneurs
“The Chinese are much more adroit, farseeing and innovative than the Japanese. It will be an order of magnitude different when they really start to compete. China won’t just innovate on others’ ideas; they want to break free even though they’ve been going to sleep for over 200 years. They are very entrepreneurial and adroit in a way that the Japanese aren’t. The Chinese have the extra gift of the true entrepreneur,” said Rhys.
Manchester Business School’s Williams brings us back down to earth with a reminder of more immediate difficulties. “I’m pessimistic for 2004, but without anticipating immediate melodramatic events. But this is an industry with problems,” said Williams.
