IMI Magazine

News: Analysis

Fuel costs derail return-to-profit forecasts
High fuel prices are resulting in rapid and radical shifts in the model mix throughout global vehicle markets. Nowhere is this more evident than in Europe and North America where SUV sales are falling like a stone, while demand for small cars is rocketing. As an illustration of the forces at work, UK demand for SUVs in May declined by 18% and by a hefty 41% in the US. In contrast, during the same month Mini was the strongest growing marque in the US with a rise of 53%, while Smart notched up an increase of 147% in the UK.  

These are potentially menacing developments for much of the global motor industry, but are especially disastrous for the US Big Three (Chrysler, Ford and GM) which are heavily dependent on high margin SUV and pickup sales. Unlike their European and Japanese competitors, all three are ill-equipped to meet the sudden demand for downsized vehicles. 

It’s hardly surprising then that the Big Three’s survival prospects are once again under the spotlight. Ford’s outlook appears especially shaky and already it has indicated a derailment of its scheduled return to profitability. Meanwhile, the consensus among investment analysts points to GM posting a worrying loss for the current year rather than the previous expectation of a modest profit. No wonder both groups’ share prices slumped towards the end of June to their lowest levels for more than 30 years.

The key question now is the extent to which recent outcomes in vehicle markets reflect a short term reaction to prevailing economic conditions and, in particular, high energy costs, or a more fundamental and permanent shift in consumer behaviour. History suggests the former, but it’s difficult to avoid the conclusion that the motor industry and its customers are entering a new era. If so, the need to accelerate the development of new technologies is paramount.

Dacia to strike a chord?
With UK car consumers already having the choice of 48 marques, covering all shapes and sizes from Smart at one extreme to the likes of Hummer and Maybach at the other, there would seem scant scope for others to achieve a meaningful market entry.

Even so, an additional four hopefuls – Dacia, Infiniti, Lancia and MG – are poised to enter or re-enter the arena within the next year. Aside from the challenge of taking on the existing suppliers, the timing of their arrival will not be helped by the prospect of a falling market as private buyers and businesses alike react to the faltering economy.

Of the four maybe Dacia – the Romanian-based Renault subsidiary – will achieve the greatest success. Infiniti and Lancia will be competing in the cut-throat luxury segment where brand perception is all important. Quite why Fiat anticipates that its Lancia subsidiary will beat the Germans where Alfa Romeo has failed remains to be answered, while Nissan’s Infiniti has a distinctly modest sales target, at least initially.

As a budget brand, though, distributed and supported by Renault’s franchised network, it could be that Dacia, with its Sandero 5-door hatchback, will strike a chord among consumers during these tough times. Scheduled to make its debut in July at London’s motor show, the company will be gauging public reaction prior to its launch during the first quarter of next year. But with stylish looks and an expected price tag of under £7,500 the omens are surely positive.

More ‘cred’ for Made in Britain
The UK’s credentials as an attractive location for car assembly have been given a strong boost following Nissan’s announcement that a new small model, scheduled for introduction in 2010, will be produced at its Sunderland plant when the current Micra is phased out. The clear inference after 22 years’ experience is that Nissan’s commitment to its UK manufacturing presence is as strong as ever. It’s not hard to see why.

For a start, Sunderland is widely viewed as Europe’s most productive vehicle assembly facility, comfortably ahead of some of the fabled continental plants. It’s even standing up well against auto plants springing up in low labour cost European countries like Slovakia. Moreover, with a projected output of more than 400,000 units during the current year, Sunderland represents a crucial supply source as Nissan pursues an ambition to expand its presence in the European marketplace.

What’s helped, of course, is the current competitiveness of UK produced goods because of sterling’s slide against the euro. It’s worth recalling that in an interview in May 1998 Norio Matsumura, at that time president of Nissan Europe, hinted that sterling’s then strength was causing the company to reconsider its UK investment.

Why Tata will need a partner
Tata’s acquisition of Jaguar/Land Rover seems to have whetted its appetite for further international expansion. In a recent letter to shareholders the Indian company reports that it is seeking to raise further funds of around £1.5bn to fulfil ambitious plans for expanding its product range and presence in the Indian and global markets by means of both takeovers and strategic alliances. Rumours suggest that the company is interested in purchasing Hummer, following GM’s indication that the marque could be sold. 

Meanwhile, Tata has lost little time in demonstrating its intention to become a good and supportive parent of the two iconic British brands. Just days after the takeover, a £700m investment programme for Jaguar/Land Rover was announced involving, among other things, the recruitment of 600 new staff. It’s anticipated that most of these newcomers will join the R&D function. 

It shows that Tata understands the need to invest heavily in new technology to enable Jaguar and Land Rover to meet consumer aspirations as well as future environmental demands.  But with R&D investment spread across a far lower level of output than German and Japanese rivals, the result will be high unit costs and a growing loss of competitiveness. Tata needs to finalise a strategic alliance as a matter of urgency, but where will it find a joint venture partner to ease the burden?

Thin end of the ‘health’ wedge
The notion – floated by the European Commission – that car advertising should incorporate tobacco-style ‘health warnings’ needs to be monitored closely. It is a small step from the legitimate provision of environmental information which enables consumers to make an informed choice (and which exists in current print advertising) to the active discouragement of personal motorised transport. After all, the sole purpose of the lurid warnings on tobacco products is to wean consumers off the habit.

It’s not hard to see some of the loonier environmentalist groups pressing eventually for a complete ban on car advertising, in similar manner to cigarettes. From today’s standpoint such a development might seem inconceivable but, in the era of health and safety excesses, the idea should not be dismissed. Maybe the process would start with an advertising ban on vehicles exceeding a certain level of carbon dioxide emissions and then spread further down the ranges.

Perhaps vehicle manufacturers should fight back with advertising campaigns which stress the positive health benefits of their products – such as the mental and physical benefits afforded by personal mobility – and also highlight the considerable strides taken towards accommodating the rising tide of environmental concerns. 

Arthur Way