IMI Magazine

News: Analysis

Bosch closure signifies more worrying concerns

Bosch's decision to close its alternator factory near Cardiff in 2011, with the loss of 900 direct jobs along with others elsewhere in the supplier base, is extremely worrying news, not only for the UK's auto components sector, but also for the future of British manufacturing in general. It also deals a serious blow to the portrayal of Wales as an attractive location for automotive component production, a role which the Welsh Development Agency had been promoting with some success over many years.

It's hard to fault the logic behind Bosch's judgement. Output at the plant has fallen dramatically over the past year or so and is set to plummet still further this year with little prospect of medium term recovery. This would be serious enough in 'normal' times, but clearly cannot be tolerated in the context of what the company describes as "the worst economic downturn for many decades".

What is especially disturbing from the domestic standpoint is that this is the time when international manufacturing groups should be looking to expand their UK presence to take advantage of sterling's weakness. Instead, there are already rumblings of plant closures by other companies with global operations as they seize on the current downturn as the justification for wholesale restructuring, including the transfer of production to low cost East European and Asian locations.

Nor is the position likely to improve once economic recovery takes hold. The accelerating range of new technologies being applied in the motor industry implies that great swathes of current components, along with their production facilities, will become increasingly obsolete. Since so much of UK-based component operations are foreign owned, the fear is that these will bear the brunt of the coming run-down.

'Bungee' movements in distributor shares

Any equity investor with the foresight and courage to have bought shares in vehicle distribution over the past year can be forgiven for looking more than a little smug. The sector has outpaced the stockmarket's recent recovery by a considerable margin and, together with a series of favourable factors related to the retail motor trade, such as the scrappage scheme, has reignited shareholder interest.

A look at the FT's share price section in mid-January revealed that Inchcape had notched up a 400% increase from its past year's low, while the numbers for Lookers and Vertu Motors were 220% and 273% respectively. But over the same period, even these astonishing advances were trounced by Pendragon, whose shares were 16.5 times greater than its 52-week low of 1.65p.

But before everyone gets too excited, values over the past three years have nose-dived and dividends have more or less evaporated. Moreover, there are clear signs that the sector is losing some of its fizz. Pendragon, for example, was 42% lower than its 52-week high in mid-January, while Lookers was down by 31%. This points to vehicle distribution once again falling out of favour as investors take note of the gloomy predictions for the trade in the current year. There's also the realisation that some groups have achieved survival through onerous refinancing arrangements which will limit the potential for dividends.   

Buying vehicle distributor stocks is the investment equivalent of bungee jumping. As share prices begin once more to drop the hope must be, as always, that the elastic proves strong enough to bring about another upward lurch.

French resistance - but for how much longer?

No surprises over the French government's reaction to reports that Renault was planning to move assembly of its high volume Clio model from existing European locations (France, Slovenia and Spain) to a low cost Turkish operation by 2013.

Even without the spur of mid-March regional elections, successive French governments have long pursued a policy of unfettered industrial nationalism to protect jobs and thwart foreign takeovers.

Maybe, though, European politicians are at last meeting their match from the new breed of automotive industry managers - like Carlos Ghosn and Sergio Marchionne - who are pressing the case to slash production capacity in order to restore profits.

Having rescued Nissan and now tasked with performing the same job at Renault, Ghosn appears in no mood to compromise on his recovery strategy for the French company or lose his tag as 'le cost cutter'.

Fiat's Sergio Marchionne is also standing ground over the hullabaloo caused by his decision to close one of the group's Italian plants, for the simple reason that there is no creditable alternative. In today's unforgiving car market, only the lowest cost producers will survive. Which points to fewer and fewer Clio-type models rolling off West European assembly lines longer term. 

China's bubble burst will be no picnic

China's transformation from a desperately poor and uneducated peasant society to a manufacturing and consumer powerhouse, with a rapidly expanding middle class, will go down as one of the most remarkable developments in the world economy of the past 50 years.

On the automotive front, China last year toppled the US as the world's largest market for light vehicles. Sales rocketed by more than 50%, supported not just by the country's economic growth, but also through a series of incentives, including lower sales tax.

But don't expect this relentless progress to continue. To maintain growth of around 10% as exports suffer from worldwide recession, China has resorted to a 'stimulus' package approaching $600bn that makes the British government's look like small change. This State largesse has been accompanied by the encouragement of unbridled bank lending and lower taxes to stimulate private and business demand.  

When the Chinese credit bubble bursts - as all bubbles do - the short to medium term impact on vehicle demand will be nothing short of seismic. And on a wider social and political front, it could make the West's credit crunch look like a Panda Bears' Picnic. 

Relax, it's only an MoT result

On the whole, car producers seem pretty relaxed about findings (released under the Freedom of Information Act) of vehicles susceptible to MoT failures. Manufacturers featured on the 'blacklist' include Ford, Peugeot, Renault and Vauxhall. So why the nonchalance?

It has to be a collective belief that this information will have little, if any, impact 
on sales.

The SMMT is spot on with its observation that failure rates are dependent on a wide range of factors - not least mileage, owner treatment and adherence to servicing schedules. What matters to fleets and businesses are total ownership costs, in which initial discounts and routine maintenance are key elements.

Meanwhile, there's little reason to suppose that the findings will loom large in the consciousness of private buyers. After all, the leading suppliers are invariably those who come consistently close to the bottom of vehicle ownership satisfaction surveys.

ARTHUR WAY