Car makers head for worldwide pile-up

Sat, 22 Nov 2008 | Latest News

Ford, General Motors and Chrysler were once supreme; now with consumers rejecting gas-guzzlers and car loans drying up, the outlook is bleak for Detroit - and the rest of the world will soon feel the pain too. Tim Webb, of The Observer, reports.

For sale: four-bedroom detached bungalow, some work needed, cost: $US800. The catch? It's in Detroit, home to the once mighty Ford, General Motors and Chrysler, and not many people want to live in the Motor City now that the American car giants are laying off tens of thousands of workers.

The bungalow is not the only bargain basement property up for grabs: thousands of others are on the market for $US10,000 or less. One estate agent who has sold 50 properties says there are houses going for $US5000 while homeowners next door are struggling to pay a $US60,000 to $US70,000 mortgage on an identical property.

The Detroit property market and the US car industry are mirror images: both are in free-fall. Talk continues around the prospect that the Government might bail-out of the giant "Detroit Three''.

President-elect Barack Obama has added to the clamour, calling for a doubling of the $US25 billion in government loans recently approved by Congress to help the industry make more fuel-efficient cars.

Without dramatic government intervention, analysts predict all three companies will run out of money some time next year.

In Europe, the mood of car manufacturers is less grim. But not by much, as they fear they could be next in line: car makers are slashing production across the board to cut costs as sales slump.

In the UK, Japanese firm Honda said it would cut output by a 10th. All the other five major carmakers in the UK - Toyota, Nissan, Jaguar/Land Rover, Ford and GM - have made similar moves, putting workers on four-day weeks and getting rid of overtime and agency shift workers.

The clamour in Europe for some kind of bail-out is also growing as car makers ask why the banks should get all the help.

The European Commission has said that up to 40 billion ($NZ85 billion) of "soft loans'' could be provided to the industry.

Ostensibly, like the US plan to provide $US25 billion, this would help companies retool their factories to meet tough EU legislation being proposed to cut carbon emissions from new cars.
But if the industry was not in crisis, it is unlikely this money would be on the table and, if approved, it would be a bail-out in all but name.

It is hard to exaggerate the scale of the crisis facing the Detroit Three; in many ways, they are in a more parlous state than the banks. Since 2005, the companies have been haemorrhaging money: in the first half of this year they lost almost $US30 billion.

More than any other incumbent car makers, they have been outwitted by nimbler foreign rivals.
The trio have also been hamstrung by the ruinous cost - estimated at $US100 billion - of providing healthcare for two million current and former workers.

That was not all. Soaring fuel prices have soured Americans' love affair with big, powerful "sports utility vehicles'' and boosted sales of smaller cars - more typically made by the big three's rivals.

When the credit crunch took hold a year ago and property sales plummeted because of the shortage of credit, car loans began to dry up. The financing arm of GM recently announced lending restrictions which, dealers estimate, would prevent almost two-thirds of would-be GM buyers from finding a loan.

In response, the three companies have announced plans to close 35 plants, mostly in the area around Detroit, with the total loss of 100,000 jobs. GM and Ford are looking to expand operations in lower-cost places, such as Mexico, China and Africa. But this restructuring, huge as it is, already looks hopelessly inadequate to stem their ballooning losses.

Paul Newton, an analyst from consultancy Global Insight, says: "The question is whether the big three can cut jobs and close factories, particularly in the US, quickly enough to offset their losses.

"Their current restructuring plan is based on last year's industry forecasts.

"However, the outlook is far worse now.''

He also doubts whether the proposed merger of GM and Chrysler would do more than delay the inevitability of further plant closures and job losses.

Summing up the apprehensive mood among car makers in Europe, Carlos Ghosn, chief executive of Renault- Nissan, said recently: "We don't know if we're at the beginning of the end or the end of the beginning''.

European car makers no longer look on at the plight of the big three with the sense of detachment they had a year ago: the question now being asked in boardrooms across the Continent is: "Could it happen to us?''.

The situation is certainly tough in the UK, but the news isn't all bad.

Even if EU legislation on carbon emissions is watered down or delayed, as the industry wants, the trend towards more fuel-efficient cars will benefit the UK's Japanese car makers, who tend to make smaller, more efficient vehicles.

But the last remaining Ford and GM plants in the UK are more vulnerable.
Both companies have a lot of capacity all over Europe and may want to retrench to their German bases.
In mainland Europe, particularly France, Germany and Italy, car makers can count on government intervention to help them ride out the storm.

The crisis gripping the big three and the alarm growing among Europe's car makers will, in effect, only hasten the inevitable: the shift of production to countries where costs are lower, primarily India, China, Russia and Thailand.

Who will emerge from the biggest shake-out in the industry's 100-year history to lead the march into the new markets is not clear.

But don't bet your house - even if it's in Detroit - on any one of the big three taking the honour. - Guardian News and Media 2008