IMI Magazine

IMI Magazine

News Analysis

Vauxhall risks becoming a bit part in GM’s European theatre

Recent top management changes at Vauxhall suggest that the company is being downgraded from a key player in GM’s European manufacturing and marketing network to area sales office. How else is it possible to interpret the corporation’s European sales and marketing director taking on the extra role of chairman, or Vauxhall’s sales director assuming the additional responsibility of managing director? In a further blow, Vauxhall loses responsibility for running IBC Vehicles, the van manufacturing business.

These developments, however, are not unexpected. They correspond with GM’s grand plan for its European operations which last saw a profit six years ago and continue to haemorrhage cash at an unsustainable rate. The aim is for the Zurich-based European headquarters to establish centralised control over Opel, Saab and Vauxhall as part of a programme to secure the maximum possible economies of scale through joint development, purchasing, manufacturing and marketing.

It is difficult to fault the logic behind this strategy, but care is needed in its execution to ensure that existing and prospective customers are not confused and that marque loyalty is retained. Already there are worrying signs that Saab’s identity will be diluted through plans to badge, as Saabs, other models from GM’s global manufacturing network, along with the decision to assemble the next generation 9-3 at an Opel factory in Germany.

Little wonder, then, that speculation is rampant concerning Vauxhall’s future. Given European overcapacity and the urgent need to cut costs, the long term future of its sole surviving vehicle assembly facility at Ellesmere Port - on Europe’s most westerly fringes - becomes questionable. The more so as low cost assembly locations come onstream in Eastern Europe and China gears up to supply export markets.

Meanwhile GM’s history of ineptness when tinkering with brands hardly inspires confidence that the future of the Vauxhall badge is in safe hands. Before any decision is made, though, European bosses and their masters in Detroit should reflect that the marque has a strong following in the UK, holding second position overall in the new car market and number one in the fleet market. Also, just about the last thing the hard pressed Vauxhall franchised network needs is an expensive rebranding exercise involving Opel or, horror of horrors, Chevrolet.

Big Three knocked for six

It would take a few years, but if American car consumers’ buying habits continue on their present path Honda, Nissan and Toyota are set to become the ‘Big Three’, supplanting Chrysler, Ford and GM.

Sales of light vehicles (cars, MPVs, SUVs and pickups) during the opening four months of the year highlight further weakness for Ford and GM compared with impressive gains for the three Japanese companies. With help from new Models, Chrysler managed an advance in this period but is now comfortably within Toyota’s sights and, indeed, was overtaken by Toyota in April. On a global basis Toyota is comfortably ahead of Ford in terms of unit production. A similar state of affairs exists on the financial front where Ford and GM’s dismal first quarter results stand in stark contrast to their Japanese competitors. Toyota has announced record profits for the third successive year and is easily the world’s most profitable vehicle producer, while Nissan’s rehabilitation as a global contender is now complete following record results during its 2004/05 financial year.

Adding to the injury, the cocktail of losses, declining profits and monumental healthcare liabilities has resulted in Ford and GM’s debt ratings being reduced to junk status, while Toyota enjoys a triple A rating. This means that the American groups will face a far higher interest rate on the bond market than Toyota – perhaps as much as double.

It is all the more intriguing, therefore, that the legendary billionaire investor, Kirk Kerkorian, has made a tender offer for 9% of GM’s equity, and at the same time enlisted the services of former Chrysler finance chief Jerry York to advise on the deal. Many industry watchers see this as a prelude to a more Determined assault on GM, perhaps leading to a takeover offer on similar lines to the Kerkorian/York pitch for Chrysler in 1995. Is it possible that GM will be on the receiving end of a takeover bid before too long?

Hard labour

Just as most Conservatives rue winning their fourth term in 1992, which sowed the seeds of the party’s present predicament, it could be that in the fullness of time New Labour will regret having won its third term. However, this may have less to do with backbench revolts and increased bickering within government circles and more with the economic outlook.

Clearly Gordon Brown will be anxious not to upset voters to the extent that he suffers a John Major-style drubbing at the next election – assuming he becomes the next Labour leader. But events appear to be moving beyond his control as, after an extended period of buoyancy which has vested New Labour with the mantle of sound economic management, there are now inescapable signs that the tide is turning.

Anecdotal evidence abounds concerning tougher times ahead with reduced employment prospects, lower manufacturing output, falling retail sales, stagnant or falling housing market, sky high consumer debt and other nasties. Little more than a week after the election the chancellor has admitted that the government’s growth predictions may be somewhat optimistic, while the general view among commentators is that the burden of taxation will have to rise if government spending plans are to be fulfilled.

For the motor industry, the chief worry is that consumers and businesses will react by deferring purchases and maybe scaling down vehicle size.

Already the car market looks sickly and manufacturers may require a series of costly incentives to retain momentum during the rest of the year.

Commercial vehicle sales remain strong, although this could change with a vengeance if the slowdown in business confidence and consumer spending gathers pace. As for fuel prices, businesses and private motorists alike will be hoping that this year’s fuel duty increases, postponed until the beginning of September, will be abandoned altogether as was the case last year.

Double whammy for suppliers

Further confirmation of the growing crisis affecting the North American components industry was provided in mid-May when Collins & Aikman, one of the world’s largest suppliers of automotive interiors, filed for Chapter 11 bankruptcy protection. This followed earlier Chapter 11 filings from two other major suppliers, Meridian Automotive Systems and Tower Automotive.

Other groups – including the two global leaders Delphi and Visteon – are also showing signs of distress, with vehicle manufacturers’ incessant demands for ever lower unit prices now compounded by production cutbacks.

Closer to home, there’s been the appointment of administrators at Tuberex, the exhaust manufacturer, and consequences among the components community - still unquantifiable - of MG Rover’s collapse.

Recent events demonstrate vividly that, more than ever, component suppliers need to choose their customers with care and monitor relationships closely, aligning their interests with manufacturers who enjoy rising volumes and are financially sound.

One of the most predictable research findings of recent times is that European suppliers would prefer to do business with BMW and Toyota the most, and with Ford, GM and Fiat the least. As a follow-up it would be interesting to determine the extent to which the financial and marketplace success of BMW and Toyota has been assisted by positive supplier relationships, and how far the mediocre performance of Ford, GM and Fiat reflects their more cavalier approach to supplier ‘partnerships’.

Sweating the assets

Less than three years after paying Ford £350m for Kwik-Fit, CVC Capital Partners is looking to sell the fast-fit group for around £800m. This represents an increase of nearly £14m a month under CVC’s stewardship.

CVC can also take pleasure from its dalliance with Halfords, which was bought from Boots in August 2002 for around £400m and floated on the stockmarket less than two years later for £600m. Presumably CVC and its partner Permira are hoping to work similar magic with the AA, acquired from Centrica in mid-2004 for the rather full price of £1.75m.

Meanwhile the managements and, not least, shareholders of both Ford and Boots should be asking why it is left to others to capitalise on the inherent value in businesses as relevant to today’s marketplace as Kwik-Fit and Halfords.

Surely it should not be beyond the abilities of mega groups in the motor industry and other commercial sectors to provide the conditions necessary to encourage entrepreneurial flair in their subsidiaries, similar to the Hanson experience in the go-go days of the 1980s.