http://www.guardian.co.uk/business/story/0,3604,1384935,00.html Put the brakes on, car firms told Global overcapacity risk revealed Mark Milner, industrial editor Friday January 7, 2005 Guardian
The world's car makers are underestimating the extent of overcapacity within the industry, according to a new report from consultancy and accountancy firm KPMG. The firm's latest survey of top automotive executives across the globe shows that three out of four believe overcapacity is now down below the 20% level seen as crucial to industry profitability as manufacturers become less concerned with earnings-sapping sales incentives. But KMPG's head of automotive research, Mike Steventon, argues that the industry is being too optimistic. He says that global overcapacity is still about 25% and would need to fall by another 4m units to hit the 20% mark. Mr Steventon believes that although some British plants are among the most efficient and productive in the world, the paucity of indigenous ownership could put them in the firing line if the industry faces a further capacity reduction. "We have real strength in the UK [automotive sector]. We have the most diverse manufacturing base in the world. We export more cars than Japan - with the Japanese manufacturers in particular seeing the UK as the best footprint to get into Europe." But the labour market flexibility, which makes Britain an attractive area for investment, coupled with the relatively low level of UK ownership among the big car makers, could leave Britain vulnerable to global cuts. Paul Thomas, the chief executive of Ford of Britain, said overcapacity was putting pressure on profitability. Speaking after the launch of the new Focus in London yesterday, Mr Thomas said: "Good product is king. Overcapacity means a lot of marketing incentives and margins are coming under pressure for everybody." An executive at another European car firm put it more bluntly: "Companies are looking to sell customers the financing. The last thing they want is someone coming in with hard cash. They want the customers who will be borrowing the money to buy the car over three or four years." Although global car makers have seen the rapid growth of the Chinese market as an opportunity, KPMG warns that overcapacity may force the makers in China - who have concentrated on the domestic market - to look elsewhere. "Manufacturers have principally established operations in China to access the domestic market. However, the potential for China to export significant volumes, given projected future overcapacity, should not be underestimated. "The key challenge for Chinese vehicle manufacturers is to improve quality and drive down costs through a more integrated supplier infrastructure in order to commercially export vehicles," Mr Steventon said. KPMG is impressed with the rise of the Asian manufacturers, with the survey showing industry executives expect Korean and Chinese car makers to continue to expand, while there is a decline in op timism about the prospects for European brands. The report concludes that globalisation now means there is "nowhere to hide" for car makers. "A bitter rival once an ocean and an unfathomable cultural divide away is now next door and ready and bibbed for lunch - if at all possible, yours."
