IMI Magazine

IMI Magazine

News Analysis - By Arthur Way

With Reg Vardy’s days of independence apparently numbered, it is clear that even the largest vehicle distribution groups are not immune from a takeover approach. In a sector traditionally regarded with disdain by investors, the company has become something of a stockmarket darling by skilfully pursuing a policy of expansion through acquisition and boosting profitability with only the occasional hiccough.

It might seem odd then that one of the most successful players in the consolidation of the retail motor industry should find itself on the receiving end of multiple offers, the more so since Vardy was widely viewed as one of the likely ‘survivors’ around which motor retailing would cluster to match the level of concentration found in food retailing.   

After an extended period of rationalisation, though, UK car distribution remains highly fragmented, to the point where even the largest dealer group accounts for less than a paltry 4% of the market. Compared with food – where the mighty Tesco enjoys a 30% share – the motors scene is comprised of retailing pygmies. It follows that there is still plenty of scope for consolidation without attracting the attention of the competition authorities, although whether the car makers will take a similarly benign view is another matter.

Meanwhile, it remains to be seen whether Pendragon (the original suitor) emerges victorious in the hunt for Vardy and thereby sets itself on course to become the Tesco of the retailing sector. But any hopes it may have nurtured that absorbing Vardy would be a straightforward matter devoid of outside interference have disappeared following the arrival of two further approaches, both of which have outgunned Pendragon comfortably. For all the woes of the new car market, it appears that vehicle distribution still has its fans.

How bad can it get for GM and Ford?

Rick Wagoner’s gloomy announcement of hefty cutbacks to General Motors’ North American operations hardly came as a surprise but was nonetheless deeply dispiriting. How else could the planned loss of 30,000 jobs and closure of eight plants be classified, but what was the alternative when faced with falling sales, a model mix out of kilter with consumer demand, continuing financial losses and a short to medium term outlook which falls short of inspiring investor confidence?

For GM this latest move represents just another step in the seemingly inexorable decline of the world’s largest vehicle manufacturer in its domestic heartland – a saga which bears an alarming resemblance to the 40-year demise of British Leyland from 1960s pace setter to MG Rover rump. It seems fantasy now to recall that there were suggestions 30 or so years ago that GM should be dismembered on anti-trust grounds. This was when the corporation could boast of a 50% market penetration, compared with the current flaky 25% share. Meanwhile, Ford is finalising its own North American survival plans which are expected to resemble those of GM with an announcement in the New Year of plant closures and job losses in what some observers have labelled as a ‘do-or-die’ strategy to steer the company towards recovery.

To a large extent GM and Ford are the architects of their own misfortune. Both have based their market approach on customer incentives rather than embracing a culture that upholds brand integrity, and both have bet heavily on producing high margin SUVs at a time when consumer preferences are moving towards more fuel efficient vehicles. The imperative now is to trim output to match a realistic sales target and develop new models which will capture consumers’ imagination.

More difficult is the task of reining back on pay and benefits for workers who escape the jobs axe. During their country’s manufacturing heyday, US workers were able to command high wage rates and generous pension and healthcare provisions. Now other world suppliers are producing higher quality goods with workforces willing to work for a relative pittance.

Refusal to accept this change in the economic order could all too easily consign the  American motor industry to the same fate as the country’s textile sector.

Red tape broadside

The SMMT’s latest annual survey among senior industry executives provides a blistering indictment of the high and rising legislative burden imposed by the present government. Read between the lines and the unambiguous message from the leaders of the UK’s motor industry is that the present administration is speaking with forked tongue – prattling on about making the country the best place in the world to do business and a land fit for entrepreneurs, but in reality saddling the wealth creating sector with an unacceptable cost burden which has worsened during the past five years and is anticipated to become still more irksome.

Under these circumstances, everyone in industry will reserve judgement before becoming too excited over the DTI’s latest promise to cut £1bn of red tape over the next five years.

The government also comes in for heavy criticism in the SMMT survey over its failure to come to grips with transport issues – regarded as a major handicap to  competitiveness – and scepticism over the DTI’s claim that support for international business development has improved during the past year.

Overall, 96% of respondents believe that the UK’s business environment will deteriorate compared with its competitors in the Asia-Pacific region. Even allowing for the fact that opinion polls rarely produce breezy results, the SMMT findings provide fresh impetus to concerns over the future ability of the Chinese (and maybe Indian) motor industry to attack Western markets.

Browns Lane: Bill would have done the same

Following the end of Jaguar car assembly at Browns Lane in July, it was always difficult to see the logic of maintaining a presence at the location longer term. However, conscious of the need to throw a biscuit to the barking dogs complaining of Ford’s insensitivity over prising the marque away from its spiritual home, the management softened the blow by announcing the retention of a small administrative staff together with a manufacturing operation limited to wood veneering.

Undoubtedly both activities are vital to Jaguar’s future, but hardly need to be housed at a site which would prompt a property developer to part with upwards of £100m. And, although heritage is a vital ingredient for preserving and enhancing a luxury car maker’s brand values, in the cut-throat landscape of contemporary markets there can be little scope for sentiment.

Given Jaguar’s continuing heavy financial drag on Ford’s Premier Automotive Group, allied to the likely postponement of the marque’s breakeven until after 2007, it is hard to see how the move to sell Browns Lane could be fairly criticised.

The priority surely is to ensure that Jaguar has the wherewithal to remain in the luxury car marketplace, which implies a heavy investment in product development, advanced manufacturing facilities and global marketing, rather than clinging on to a redundant assembly location. It is surely a move that Sir William Lyons – the company’s founder – would have sanctioned long ago if the alternative was decay and decline.

Bleak outlook for jobs

It’s not only the weathermen who are forecasting a bleak and cheerless winter. Evidence continues to mount that employment prospects throughout the retail motor industry and its support organisations are entering a period of turbulence. This is especially noticeable among showroom staff where there is a general expectation of cutbacks. 

A lot is riding on the market’s condition during the opening weeks of the New Year, but with new car sales now in the throes of a decisive cyclical downturn and vehicle distributors facing a renewed attack on their margins and profits, the signs are not promising.

Towards the end of November, DaimlerChrysler announced reorganisation of its UK operations in a move which is expected to result in around 100 job losses, while a trawl around the websites of organisations as diverse as the SMMT and Motability indicate that there are no job vacancies at present. As noted so often in the past, recessions tend to feed on themselves.