IMI Magazine

News: Analysis

‘Adjusting’ for recession
It only needs a glance at the new vehicle sales graph over recent weeks to realise that the toxic effect of the financial crisis is now spreading into the wider economy with a vengeance.

American light vehicle demand plummeted by 27% during September alone, with even Japanese suppliers caught in the maelstrom. Nissan and Toyota suffered falls in excess of 30%, while GM’s comparatively modest 16% reversal was the result of boosting unprofitable sales to fleets in a bid to maintain volume.

In Europe, new car sales dipped by a less serious 8%, although this was the lowest September total for ten years and marked the fifth consecutive month of falling demand. Moreover, some markets performed extremely poorly, led by Spain where sales were 32% down. UK demand dropped by 21% with not even the arrival of the ‘58’ plate identifier generating much in the way of customer enthusiasm.

Carmakers have responded by ‘adjusting’ production. Nissan, for example, announced a two-week stoppage of Micra and Note models at Sunderland, followed by three weeks’ short-time working. The company’s Barcelona plant will cease production of Pathfinder, Navara 4x4s and the Primastar van (which is also sold as the Renault Trafic and GM Vivaro) for one week, followed by eight weeks of short-time working.

There’s a widespread resignation throughout the industry that an upturn will be delayed until 2010 at the earliest, while some independent forecasters suggest that even this is optimistic.

Aside from the loss of confidence, a big question mark hovers over the availability of credit. Stung to near destruction by the sub-prime market, financial institutions are tightening their lending criteria to ensure that only the highest rated will be able to borrow. And with vehicle repossessions forecast to reach 1.9m in America this year, allied to a rising tide of defaults in Europe, the priority of many will be to ensure they hold on to their existing car, let alone source a new one.

Who’s next with the begging bowl?
Without a rapid and sustained market recovery, the auto industry will be following banks in looking for government bail-outs.

In mid-October, rumours swirled around Wall Street that one or more of the US Big Three was on the verge of seeking Chapter 11 bankruptcy protection. At the present rate of cash burn GM is expected to require a capital injection within the next year and Ford will not be far behind.

In Europe, too, there are growing concerns that the majority of the region’s vehicle producers have insufficient resources to endure anything more than a mild recession – the more so as they confront the need to invest heavily to meet the EU’s increasingly stringent emission standards.

Already, the initial bail-out moves are in motion, led by the US where the federal government has promised at least $25bn in loans for manufacturers to develop and equip their factories to produce a new generation of fuel-efficient vehicles. In response, ACEA – Europe’s motor industry association – sought a €40bn low interest loan for its members from the EU at the beginning of October. German and French governments have confirmed that the money they have set aside for bank rescues can also be used by carmakers seeking refinancing in order to offer credit deals to customers.

The worry is that government aid could trigger a domino effect. If vehicle manufacturers receive help, why shouldn’t the component suppliers receive similar treatment in their quest for survival?

Perils of an under-funded aftermarket
It might seem logical that that the onset of recession would be positive for the automotive aftermarket. After all, squeezed personal incomes should equate to consumers deferring expenditure on new cars and instead spending money on keeping their existing ones on the road, even allowing that some will skimp on repairs and maintenance or reduce their vehicle usage.

Recent weeks, though, suggest that members of the independent aftermarket are likely to be among the principal casualties of the gathering economic downturn. With the recession hardly started, two famous names have entered into administration – Motor World, which operated retail outlets selling car parts and accessories, and LSUK, which supplied replacement car parts and provided repair services.

The sector should brace itself for more of the same over coming months. An alarmingly high proportion of the independent aftermarket – whether parts producers, importers, wholesalers, retailers or repairers – is woefully undercapitalised and dependent on accessible credit lines to keep going.

As participants throughout the production and distribution chain, together with the final end-users, experience payment difficulties, there is likely to be an increasing prospect of widespread default. If so, this would provide the perfect opportunity for the far-sighted to pick up the pieces and establish a dominant market position in a sector which should eventually enjoy attractive long-term returns.

Interior motives
It’s been apparent for some time that carmakers have considered interiors as a crucial means of gaining competitive advantage. A wide range of materials and systems – such as leather seats and air conditioning – have migrated from upmarket cars to volume ranges with the result that fixtures and fittings of current models are noticeably plusher than their predecessors.

As environmental concerns continue to sway product development, the application of new thoughts, materials and technologies will exert a growing influence on the design and specification of automotive interiors. Lotus has provided a glimpse of the future with the Eco Elise, unveiled as a concept car at the recent British Motor Show. Among other things, this featured the innovative application of renewable materials such as hemp fibres to produce seats which were upholstered in biodegradable woollen fabric, while hardwearing sisal was used to produce carpets. More recently, Nissan showed the Nuvu at Paris, featuring an interior produced from recycled materials.

In producing these concepts, the intention is to gauge consumer reaction before deciding on the next step and maybe incorporating some of the ideas into series production.

GM Chrysler mismatch
Considering the number of merger discussions with global competitors, it is surely only a matter of time before GM joins forces with another vehicle manufacturer. Proposed deals with Renault/Nissan and Ford foundered for a variety of reasons, but now there are growing signs of a developing love match with beleaguered compatriot Chrysler.

It’s easy to see why Chrysler is keen to make any match. Private equity group Cerberus must be rueing the day it rode to Chrysler’s rescue and did the patriotic thing by restoring a domestic manufacturing icon to American ownership after its unhappy affair with Mercedes-Benz.

It’s difficult to believe, though, that this would be the best option for GM which already has a surfeit of marques and too much manufacturing capacity in North America. Any merger would doubtless require a considerable financial sweetener from the government and be accompanied by widespread plant closures and job losses.

GM would do better to seek a partner with the financial and technological strength, as well as the global reach, to propel the lumbering American giant to new products and markets.