Massive costs and three-year development periods mean manufacturers are trapped in wreckage even as they wheel out new models, writes MICHAEL MCALEER
THE FUTURE of General Motors’ operations in Europe remains in question despite securing a €200 million loan guarantee from the provincial government of Aragon in Spain, home to one of its Opel plants. Opel’s European dealer group, Euroda, has also announced plans to raise €400 million to buy a minority stake in the Opel/Vauxhall operation.
Nevertheless, there remains a significant shortfall between the funds raised so far and the €3.3 billion GM claims it needs by the end of next month to keep the likes of Opel and its British sibling Vauxhall afloat. The company’s chief operating officer, Fritz Henderson, warned last week that GM Europe would run out of cash in the second quarter of the year if it did not receive funding assistance.
Given that its US operations are surviving thanks to US government bailouts, Opel cannot expect support from its US parent and must turn instead to European governments for assistance. In particular, GM Europe’s president, Carl-Peter Forster, has said he is hoping for a €2.6 billion loan guarantee from the German government. It is home to GM’s Opel car brand, where it directly employs over 25,000 workers.
In return, GM has offered a 50 per cent stake in a new holding company the car firm would set up for its European operations. That would reassure state authorities worried their financial aid would be used to bolster GM’s US operations.
However, the German authorities are reticent about offering any bailout to the car firm, claiming they have not received enough information about the future viability of GM in the US to reassure them about investing in its Opel operation. GM purchased Opel 80 years ago, just months before the Wall Street Crash of 1929, and it has become intrinsically linked with its US parent in terms of development and parts supplies. The Germans are justifiably worried it might not be able to survive on its own if GM’s US operations were to collapse.
They took little comfort from GM’s annual report, released last week, in which auditors Deloitte and Touche expressed “substantial doubts” about the car firm’s ability to continue as a going concern.
President Barack Obama’s auto task force is to report back by March 31st on whether it considers GM and Chrysler as commercially viable and deserving of more government aid. German authorities are likely to wait for its findings before making any decision on Opel.
It also depends on whether the German government, facing federal elections later this year, is willing to invest in GM’s European brands and, in turn, be part of the undoubted cuts, job losses and factory closures required to bring production volumes in line with demand.
The reality is that over-capacity is crippling the car industry. Across the globe, car firms are reeling from the ever-declining new car market. Despite attempts to boost demand – such as scrappage schemes and customer financing facilities – falls of 20-40 per cent in new car sales are commonplace, with the Irish market down 65.5 per cent so far this year.
In return, car firms are rushing to stem the tide of new cars pouring out of the plants and into increasingly overflowing storage depots and forecourts. It can be a thankless task, as car manufacturing carries with it heavy initial costs.
The average new car takes at least three years to develop from idea to production model, during which time the vast majority of the costs are incurred. Car firms will usually get little change from €1 billion for the most basic model. The hope is the firm can recoup that over the first few years of sales, after which – even with a minor facelift to keep the model fresh – they hope to make their profits.
At the outset, estimates must be made on sales volumes. On the basis of these, production lines are set up and capacities created. Getting it wrong can prove very costly. And when the market collapses because of outside economic pressures, as it has now, it can prove very difficult to adjust production.
The problem with a model greatly dependent on accurate estimates of long-term demand is clear, but it’s a problem shared with the parts suppliers. Car firms are increasingly sales, marketing and assembly operations with components arriving from suppliers just in time for production. It’s a well-honed system replicated in other industries but the auto suppliers are now facing the full force of the dramatic fall-off in car sales.
The automotive supply industry employs five million people directly across Europe. With with new car production in Europe expected to drop by as much as 40 per cent this year, some 10 per cent of the region’s 5,000 suppliers could be at risk, says Lars Holmqvist, chief executive of the European suppliers’ organisation, Clepa. According to EU estimates, the European car industry employs 2.3 million people directly, with another 10 million in related sectors. The dramatic downturn has caught out many car firms and revealed the inherent inflexibility in their business models.
The new cars on show at the Geneva auto show earlier this month were designed and developed when terms like “soft landing” were still in the economic lexicon.
The full impact of the recession on new model development will not be evident for at least two years. Whether those models will carry the logos of Opel, Saab or Chevrolet remains to be seen.
