Financial Times December 13, 2000 A chill wind blows from Detroit US car manufacturers are responding to a decline in demand by restructuring, says Tim Burt When the leaders of the world's largest carmakers meet in Detroit next month, the mood at the annual North American automobile show is likely to be as cold as a Michigan winter. After years of unbroken volume growth in North America and western Europe, demand for new cars and light trucks has begun to soften in both markets. This week, signs of a downturn prompted General Motors to announce a sweeping restructuring. The world's number one carmaker is ditching its famous Oldsmobile brand in the US, cutting 10,000 jobs and ending car assembly at its Luton car plant in Britain. For GM the overhaul and related exceptional charges of $1.5bn-$2.5bn could wipe out most of the group's profits this year. The changes at GM could set the tone for a similarly brutal shake-up at Chrysler, due to be announced in February. Like GM, the loss-making US arm of DaimlerChrysler has been affected by widespread over-capacity, generous dealer incentives and high fixed costs. Ford has also sounded a note of caution about its US earnings, cut production schedules and warned of significant losses in Europe this year. The industry's gloom was compounded yesterday by the publication of new car registration figures for western Europe, which showed a decline for the sixth successive month. In Germany, the region's largest market and arguably the most important for Ford and GM, registrations have fallen 10.9 per cent this year. The problem dogging the industry - already handicapped by flat volume growth and falling prices - is excess capacity. In Europe, there is enough factory capacity to make about 18m cars a year. But the industry will be lucky if sales exceed 15m in 2000. In the US, the market is expected to shrink from 18m vehicles this year to 16.5m-17m in 2001. Manufacturers fear being left with thousands of unsold models and plants churning out vehicles with no buyers. Industry executives are not panicking yet but they are keen to cut back more quickly than has been the case in previous downturns. Even if the lower forecasts for next year proved correct, the industry would still achieve sales well above average for the past 10 years. And some European manufacturers are still growing, albeit at the expense of the US giants. Volkswagen of Germany is making record profits this year and achieving significant inroads into the US market. VW sales in North America rose 22.6 per cent in the first nine months of this year. BMW is also reporting strong gains following its disposal of Rover. In France, PSA Peugeot Citroen is working at full capacity and generating profits by a happy combination of stylish models and high exposure to rising diesel demand. Sales are also strong at Renault, whose Nissan alliance partner is showing signs of recovery from near-fatal losses. Faced with such lean competition, Rick Wagoner, GM chief executive, says: "We surgically have to go after fat in the system." Compared with the previous, much harder, downturn in the early 1990s, US manufacturers are better prepared. Many of them have already trimmed production in North America. They have squeezed supplier costs and brought out new models more rapidly. Strong demand in the past seven years for high-margin minivans, pick-up trucks and, above all, sports utility vehicles has enabled the US groups to build large cash reserves. GM has $13.5bn at its disposal while Ford has $18.6bn of cash to sustain it. Ford has already used some of that financial muscle to acquire new brands. Subsidiaries such as Volvo Cars and Jaguar promise higher margins than mass-market cars and reduce the company's dependency on North America for profits. GM has taken another route, forging equity alliances to cut costs in activities including purchasing and engine development. Its partnership with Fiat Auto, in which GM now has a 20 per cent stake, could generate savings of more than E500m ($440m) next year, rising to E2bn by 2005. So far, so good. Such initiatives offer lower development and manufacturing costs. But they do not tackle the fundamental problem: that there are too many carmakers in both Europe and the US and too many factories for a shrinking market. The big US carmakers can afford to take hefty restructuring action. They feel justified in targeting Europe because their subsidiaries have failed to deliver profits even at the peak of the market. With European demand falling, the manufacturers see no reason to hold back. "There has always been an overhang of capacity but it hasn't been fully addressed," says John Lindquist, senior vice-president at Boston Consulting Group in London. "Deteriorating financial results and more emphasis on creating shareholder value are forcing manufacturers to tackle structural issues that have been postponed for some time." Ford is cutting capacity in Europe, most notably by ending car assembly at its Dagenham plant near London. GM will tailor European output to demand by removing 400,000 units of capacity by 2004. In the US, labour agreements make plant closures more difficult. But even there, temporary plant closures could be extended with thousands of lay-offs. John F. Hoffecker, head of the automotive practice at AT Kearney in Detroit, says manufacturers developing eye-catching models will be best placed to maintain profits and avoid capacity cuts: "The BMW X5 [off-roader] and Accura MDX show what can be done. Dealers cannot meet demand, the carmakers cannot produce enough of them and they sell at a premium." The same cannot be said for GM's ageing Vectra model in Europe, marked out for the axe at Luton, or Oldsmobile in the US. The Vectra had been left behind by rival models from VW and Renault, while Oldsmobile was not nimble enough to challenge BMW or Honda. Failure to produce innovative models or to cut capacity could pitch GM and others into a prolonged downturn. The latest restructuring shows the company is determined to avoid that. It will be little consolation to the 10,000 workers facing job losses but GM's corrective surgery is long overdue and may involve a lot more pain. _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
