If anyone ever wanted to buy a new car – be it a small run-around or a luxury sports brand – now is the time to flash the cash, if you have it. While car manufacturing is always going to be inextricably linked to the vagaries of heavy industry, currency fluctuation and recession-hit economies, the current credit crunch has been the most fierce recession (or depression, depending on your viewpoint) to hit the auto industry for decades, so much so that one of the world’s biggest car manufacturers has gone to the wall and succumbed to government bail outs.
On June 1, car giant General Motors filed for bankruptcy protection, marking the biggest failure of an industrial company in US history. The move into bankruptcy protection was backed by the US government, which took a 60 percent stake in the company, and the Canadian government, which took a 12.5 percent stake. GM, which had already received $20bn of emergency loans since the end of last year, said in its bankruptcy filing that its debts totalled $173bn.
Chapter 11 bankruptcy protection gives a US company time to restructure its finances while being protected from its creditors. The restructuring will drastically change GM, with some 20,000 US workers thought likely to lose their jobs as the firm streamlines its operations. GM’s main European business, Opel, and its UK brand Vauxhall, will not be affected by the bankruptcy protection move.
GM, once the largest company in the world, had been losing market share since the early 1980s with analysts saying that it had been driven to bankruptcy because of high production costs and by the collapse in credit markets and consumer spending. GM was also slow to move away from producing gas-guzzling SUVs when consumers were looking for more fuel-efficient vehicles.
When one of the world’s largest car companies fails, others are soon to follow, though none yet on the same scale. In the UK, van manufacturer LDV has applied to go into administration, and American ‘giants’ like Chrysler are looking to merge. Experts say that it will be a long time before the car industry recovers – particularly in the US, where Detroit, the hub of the country’s car industry, is described by auto trade journalists as a ‘ghost town’.
Yet on the other side of the Atlantic in Europe, manufacturers are so far managing to keep their heads above water, but if sales continue to decline at the same rate as they have been since the start of the year, it is only a matter of time before some start asking for state aid.
Cash down the drain
European car sales in May fell at the slowest rate this year as government-backed incentives helped reverse declines at leading car manufacturers such as Volkswagen and Fiat. New-car registrations slid 4.9 percent to 1.27 million, a 13th consecutive monthly drop, the Brussels-based European Automobile Manufacturers’ Association said. Sales for the first five months fell 14 percent to 5.96 million.
Declines of 39 percent in Spain and 25 percent in the UK led the European sales contraction. However, the slump was tempered by a 40 percent jump in Germany, the region’s largest market, and a 12 percent gain in France.
Experts say that some of the turnaround experienced in Germany, France and Italy is due to state funding and state-backed initiatives. For example, state-funded sales and trade-in subsidies have shifted European demand toward smaller and more fuel-efficient models. Germany is offering a €2,500 rebate for trade-ins of cars older than nine years, Europe’s most-generous offer. The Italian government is offering payments of as much as €5,000 a car, including a €1,500 bonus on trade-ins of autos at least 10 years old plus incentives for buying low-emission vehicles.
British dealers are hoping for a sales boost from the UK’s scrappage scheme launched in May offering £2,000 incentives to people who trade in a car more than 10 years old. UK government figures show that more than 60,000 orders for cars under the UK’s scrappage subsidy scheme had been placed since the initiative was announced. Under the scheme, car buyers are given a £2,000 discount on a new car if they scrap one that is at least 10 years old. It will run until March 2010, and to benefit from it, a buyer must have been the registered keeper, for at least 12 months of the car that is due to be scrapped. Half the scheme’s cash is being paid for by the government, with manufacturers contributing the rest. The government has set aside £300m to pay for the scheme, which could benefit up to 300,000 customers.
The UK car industry is hopeful that it will work, as it has done so for some German and Italian brands. For example, since similar schemes were launched in Germany and Italy, global sales by Volkswagen, one of Europe’s biggest carmakers, rose for the first time in eight months in May, the company said in June. Volkswagen sales in Europe rose 3.1 percent to 278,933 cars, with the namesake brand delivering 9.2 percent more vehicles and the Seat division increasing by 3.4 percent. Fiat, based in Turin, Italy, sold 116,243 cars in Europe, an increase of two percent, with demand climbing 2.8 percent at the Fiat brand and 1.4 percent at Lancia.
But the majority of European car manufacturers are not enjoying such good fortunes. PSA Peugeot Citroen, Europe’s second-largest carmaker, said sales fell 5.9 percent to 165,167 vehicles. Ford Motor Co’s deliveries shrank by five percent to 125,395, led by a 20 percent drop at its Volvo brand. General Motors Corp’s group sales dropped 11 percent to 118,602 cars. European deliveries by Munich-based Bayerische Motoren Werke AG, the world’s biggest maker of luxury models, fell 14 percent to 65,490 while second-ranked Daimler AG in Stuttgart posted an 8.9 percent drop to 61,714 vehicles.
Porsche saw its nine-month unit sales slump by more than a quarter after demand for its cars was hit by the worldwide recession. Global sales at the German carmaker declined 28 percent to 53,635 vehicles between August 2008 and the end of April, compared with a year earlier. On a financial basis, its sales fell 15 percent to €4.6bn, though the figures do not include those of Volkswagen, in which Porsche increased its stake to 51 percent in January, and has indicated that it wants to increase further.
Sales of its core 911 model shed 18 percent, while those of its Cayenne four-wheel drive vehicle were down 25 percent. Porsche said it had experienced falling demand across the world, but that the decline was most extensive in the US and Canada. “In the first nine months of the ongoing fiscal year, the Porsche subgroup could not avoid the downward trend that has overtaken the worldwide automobile industry,” said Porsche. Separately, Porsche is also continuing talks with the Qatar over a possible investment by the Qatar Investment Authority, the country’s state run sovereign wealth fund, in the firm. Reports have suggested that the Qatar government wishes to buy a 25 percent stake in the car manufacturer.
Plants drying up
Car giant Ford – if giant can be used to describe any auto manufacturer these days – has also had a bad time of it so far this year. It has announced that it is moving its headquarters in Asia, and that it has posted a record loss in 2008 in Australia of $274.4m – triple the loss of the preceding year. In Europe the company has had to accept state aid to keep it operational in some markets. To give the company some breathing space and to protect thousands of Spanish workers’ jobs, the European Commission gave its approval to €51.9m of Spanish state aid for Ford to restructure its Almussafes, Valencia plant. “The Commission takes the view that the project, involving eligible investments of some €490m by Ford, will significantly contribute to the development of the region’s economy without unduly distorting competition,” it said. “The investment guarantees the continuity of activity at the Almussafes plant and will maintain some 5,000 direct jobs at the plant,” it added.
The motor industry in the UK – which has been creaking under continued international competition for decades – is also in a far from healthy shape. Commercial vehicle production fell 73.5 percent, and the number of new cars made fell 43 percent in May from the same month a year earlier, according to the UK’s Society of Motor Manufacturers and Traders (SMMT). In the first five months of 2009, car production was down 54 percent compared with the same period last year.
In order to stay competitive, several firms have temporarily shut factories or cut back production to run down existing supplies after the downturn hit demand for new vehicles. Workers at Honda’s UK production plant returned to work recently after a four-month layoff and a pay cut. The company had suspended production because of slow sales. Workers have voted to cut their pay by three percent, and managers have taken a five percent cut as part of the deal. The work force at Honda’s plant in Swindon has been reduced to 3,400 after some 1,300 workers accepted the company’s offer of voluntary severances. Honda’s production target in the UK this year is 113,000 cars, barely more than half of its previous goal of 228,000 vehicles.
“Prompt action by manufacturers to realign supply with demand has been painful, but was necessary. There is now a direct link between demand in the marketplace and production volumes,” said Paul Everitt, SMMT chief executive. He added that “low business confidence” continued to blight demand for commercial vehicles – mainly vans and lorries. “Businesses across the economy are still holding back on new expenditure, and will need to see better access to finance and stronger domestic demand.”
French revolution
Yet while the majority of car manufacturers have suffered their worst sales figures for a decade, few have suffered the indignity of having their investment rating fall to near ‘junk’ levels like Renault. Standard & Poor’s Ratings Service lowered its credit ratings on the French carmaker by two notches into junk territory on expectations weak European auto demand this year will continue next year. The two-notch downgrade to BB – two steps below investment grade – comes three months after S&P put the ratings at the brink of junk.
Renault has been cutting costs and aiming to strengthen its alliance with Japanese car firm Nissan to weather the global downturn. However, S&P said further downgrades or a change in outlook would be possible if Renault burns through a ‘significant amount’ of cash or its debt grows. S&P said it views an upgrade or positive outlook revision as highly unlikely in the current environment.
S&P credit analyst Barbara Castellano said the downgrade reflects the rating firm’s expectations for very low demand next year, and concerns about government incentive programmes this year to support the sector. S&P said that while European government programmes to revive demand in the ailing auto industry could provide some companies with short-term liquidity, that they could impede the industry’s long-term growth. At the time the credit rating firm said the government funds failed to address the industry’s structural problems such as overcapacity and a fixed-cost structure.
S&P said Renault had been hurt leaving its credit quality weak, and that it expects its credit profile will worsen amid diminished demand forecasts for next year. The French government’s 15 percent ownership in the company, while contributing to the stable outlook, does not provide ‘any notches of enhancement’ to Renault’s ratings, S&P said.
But not every car producing market is suffering, it seems. Asia’s car sector – so far – seems to be performing much more steadily. Against a backdrop of slump car markets worldwide, the automotive market in China is the first to warm up. If such sales continue, China’s auto sales will breach the 10 million target.
China has thrown in billions of yuan through stimulus measures, including car purchase tax cuts, subsidies for rural buyers and a programme of old-for-new car subsidies. The country’s car market has entered into a new, high-speed growth period, which has already seen a number of manufacturers raising their production quota.
Furthermore, some Chinese car manufacturing firms are on the hunt to pick up some of the assets that other firms are having to sell off to stay afloat. China’s Sichuan Tengzhong Heavy Industrial Machinery has agreed to buy General Motor’s Hummer brand for an undisclosed amount. The disposal is part of GM’s plan to reinvent itself by concentrating on fewer brands following its bankruptcy filing. GM says it hopes the deal will save about 3,000 jobs in the US, where Hummer will remain based.
Elsewhere, Toyota’s gas-electric hybrid, Prius has surpassed the company’s expectations to achieve a record booking of 180,000 vehicles within a month of its launch in the Japanese market. The record sales exceeded the company’s target of 10,000 units per month. The sale includes the 80,000 units booked during the pre-launch of the new Prius 2010.
Toyota’s Prius overtook its rival, Honda’s Insight, to make it to the top position as the top selling vehicle. Hybrid vehicles have been taking the top spot in auto sales mainly due to the government incentives given to the auto industry in the wake of the plummeting car sales on account of the global financial crisis, a strengthening yen and the US credit crunch. The government approved a cash-back rebate for trading in cars above 13 years for greener cars, giving consumers an added incentive to buy green cars.
Thanks to the incentive, hybrids are now tax-free in Japan and a Prius buyer saves about $1,500 which has added to the demand for the vehicle. The other main advantage with hybrids cars is the savings on petrol, especially for city driving where the constant stop-and-go traffic lowers the fuel efficiency of petrol-engines.
Sales of hybrid cars, which are powered by gasoline and electricity, have peaked for the second straight month in Japan in the midst of recession indicating the increasing demand for green cars. Toyota decided to increase the production of its new Prius by around 20 per cent from around 42,000 to about 50,000 units per month, requiring enhanced production timings for which the Japanese car maker introduced overtime at its two factories at Kariya and Toyota where the car is manufactured. Toyota also raised its full year production target for the new hybrid from 300,000 to 450,000-500,000 units in Japan for 2009 while its US target is 180,000 units for the full year.
Whether the emergence of the hybrid car as a ‘true alternative’ really captures the hearts of the public remains to be seen. But what is evident – and was to every firm except GM – is that the ‘gas guzzler’ is going the way of the dinosaur, and those manufacturers that fail to adapt and adopt green technologies into their car designs are unlikely to last much longer.