$1bn ‘breathing space’ for FiatIt’s hardly a vote of confidence in the future of Fiat Auto that General Motors has been prepared to pay the group’s Italian parent around £1bn as well as handing back its 10% equity stake in a divorce settlement.
Painful though it must have been for GM, the probable alternative – taking full ownership of Fiat Auto under a ‘put option’ deal – was a non-starter, given the excess of vehicle assembly capacity in Europe. The clincher, though, was the appalling prospect of negotiating all manner of minefields associated with the Italian economic, political and social landscape. GM was also probably mindful of the abyss that BMW fell into when it acquired another fading national champion, Rover.
Co-operation between GM and Fiat Auto since the ‘master agreement’ came into force in 2000 was noticeable for its absence, and the only legacy is the mire in which both companies’ manufacturing networks still find themselves.For GM the imperative now is to make one final heave in Europe in a bid to align output with market demand and costs with revenue. It seems unlikely, though, that this can be achieved without further restructuring moves and perhaps additional factory closures. It is unsurprising that Saab’s position is under special scrutiny, although rumours of closure seem improbable.
Meanwhile, it is difficult to know whether Luca di Montezemolo, Fiat’s chairman, had a straight face when he claimed that “the arrangements (with GM) had become too confining for the development of Fiat Auto” and that the group now had “all the necessary freedom to develop strategic growth alternatives”.
In truth, all of the reasons which drove Fiat Auto into GM’s arms in the first place remain valid - not least an urgent need to find another partner. What GM’s bounty provides is a welcome breathing space.
Between a rock and a hard thingThe worsening state of the UK’s new car market has come depressingly early in 2005 with a profits warning from Reg Vardy, the country’s second largest vehicle distributor. Subdued trading during the third quarter of the company’s financial year means that earnings in the 12 months to end-April will be at the lower end of market expectations.
At mid-February the company’s share price was 18% below its 52-week high, having fallen in the wake of the profits announcement. Other publicly quoted vehicle distribution groups were similarly off their 52-week peaks. The exception was Inchcape which of course has extensive overseas interests.
The issue now is whether market fizz can be restored in time for the crucial March sales period. Everyone will want to know whether the 8.2% decline in January’s new car demand was a hiccup caused by the excesses of Christmas spending and subsequent New Year reckoning or, more ominously, the beginnings of a natural cyclical downturn in line with growing economic uncertainty. After several years of buoyant demand, a reversal would be a natural phenomenon and in accordance with the lessons of history.
The evidence, though, suggests that manufacturers and dealers are not prepared to wait and find out. Instead, they will attempt to manipulate the market with aggressive sales campaigns. But this carries the risk of further erosion of margins, so it looks as though the industry is in for a battering whichever way the market goes.
Smart has nothing to smile aboutLatest financial figures from DaimlerChrysler provide grim reading. The 63% decline in fourth quarter profits was substantially worse than industry analysts had been expecting and triggered a marked fall in the company’s share price. In a reversal of roles, Chrysler recorded an encouraging profits advance on the back of new model introductions, such as the big-grilled Chrysler 300 and a new range of minivans, which have found favour with North American consumers. In contrast, the Mercedes Car Group – hitherto the group’s financial powerhouse – suffered hefty erosion of its profits due largely to the strong euro, the cost of fixing quality concerns and an exceptionally poor performance from the Smart marque.
The failure of Smart to staunch its losses, let alone generate enough profits to justify past investment and future development, is particularly disappointing. As city and urban life throughout the world becomes more jam-packed, and as countries like China and India motorise and place increasing strains on energy availability, logic should dictate that models like the Smart will have increasing relevance.
High flyers come a cropperFebruary was not a good month for two high flying female executives. The departure of Carly Fiorina as boss of Hewlett Packard – unlamented, by all accounts – was accompanied by the better regarded Kathleen Ligocki hitting the buffers at Tower Automotive. Ligocki, who moved in mid-2003 from a senior position at Ford to the top job at Tower, was forced to file for Chapter 11 bankruptcy protection after a valiant effort to keep the show on the road.
Ligocki may be accused of poor judgement in moving from Ford (where she had been tipped to land a top European assignment) to Tower, but it would be wrong to lay the entire blame for this latest misfortune on her shoulders. The die for Tower’s collapse had been cast long before her arrival and resulted largely from an ill-considered spending spree on over-priced operations which were never properly integrated into Tower’s mainstream manufacturing network. Ligocki implemented cost cutting measures along with a rationalisation programme which saw the disposal of underperforming assets, but ultimately the company was overcome by its substantial debt burden.
However, this does not provide the full explanation for Ligocki’s fall from grace. In line with other automotive component and system suppliers – in North America, Europe and elsewhere – Tower has been affected by the remorseless demands from some vehicle manufacturers for constant year-on-year price reductions which, allied to steep rises in inputs like energy and steel, has led to unprofitable contracts. Other mid-sized US component groups, such as Citation and Oxford Automotive, preceded Tower into Chapter 11 due to the impossibility of maintaining viability in these conditions.
This malaise is endemic throughout the supplier sector and is affecting even the sector’s biggest members. As an example, Visteon has announced that it will not be paying a dividend for the first quarter of the current year following a loss of $1.5bn during 2004.
Before long, investors will require an assurance that the automotive components sector is capable of generating a continuing level of satisfactory profits; otherwise investment funds will dry up and vehicle producers will face a withering supplier base.
Extortion at the parts counterFindings from Warranty Direct which show a huge disparity in the prices of replacement parts for four-year-old cars should provide consumers with a compelling incentive to shop around. Franchised dealers (especially) and independent garages appear hopelessly uncompetitive compared with high street motor parts retailers. Some items are up to six times more expensive. Warranty Direct carried out a comparison of six common parts embracing starter motor, air conditioning compressor, wheel bearing, alternator, shock absorber and radiator.
There should be nothing startling in this realisation, since a glance at any servicing bill will show that the prices charged during a standard service for ordinary fast moving items like oil, spark plugs and filters are typically far higher than in a high street outlet or superstore.
Even so, in an era of growing transparency it would be odd if consumer awareness of the ‘extortionate’ prices charged at some outlets did not have a degree of influence on future purchasing patterns and, among other things, jeopardise the moves of franchised networks to build up servicing business for older vehicles.
Meanwhile, the scope for determined entrepreneurs to shake up the sector with a radical business plan, based on offering high availability and low prices to professional and amateur repairers alike, appears very strong.