Recession comes to US?...
----- Original Message -----
From: Charles Brown <[EMAIL PROTECTED]>
To: <[EMAIL PROTECTED]>
Sent: Monday, December 18, 2000 8:12 PM
Subject: [CrashList] Snowstorm in Detroit
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.
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