| Automobile industry : Disruptive technologies are the | | | | and Ford Credit hard. Detroit’s producers are |
| need of the hour ! | | | | seeking to tap into federal bail-out funds for their |
| | | | | financial arms, alongside a $ 25 Billion low-cost credit |
| SUNIL | | | | line to retool old factories. |
| KEWALRAMANI April 28, | | | | |
| 2009 | | | | Germany’s Big 3 also face significant |
| | | | | headwinds; devise counter-strategy : |
| | | | | Volkswagen, Daimler and BMW have acquired a |
| Hearing the new, more aggressive restructuring plan | | | | reputation for offering cars with cutting-edge |
| offered by General Motors reminds one of the | | | | technology. They are however heavy gas-guzzlers |
| scenario for mankind jokingly foreseen by Woody | | | | and heavy emitters of carbon dioxide. The trio have |
| Allen. “One path leads to despair and utter | | | | now decided to launch electric cars, to desist demand |
| hopelessness. The other, to total extinction. Let us | | | | destruction due to high oil prices impacting |
| hope we have the wisdom to choose correctly.” | | | | revenues. Daimler plans to offer Mercedes-Benz |
| If – and it is a big if – the plan is accepted by | | | | S400 hybrid in 2009. However, the luxury sedan will |
| debtholders, they will be taking a disproportionate hit | | | | be out of reach but for the more affluent. |
| compared with other principals. Only shareholders will | | | | |
| fare worse – although unbelievably GM’s | | | | Europe too catches the slowdown flu : |
| shares soared 20 per cent. | | | | Sales in the European union HAVE fall 8.3 % |
| Under the plan, the union-run healthcare trust would | | | | compared with last year. Italy was down 20 %, Spain |
| exchange half the cash owed to it for shares, making | | | | by 31 % and Ireland 49 %. The Italian group Fiat is |
| it a substantial shareholder in a restructured | | | | to stop production at most of its domestic factories |
| enterprise. GM’s scheme also assumes another | | | | in late 2008 for 3 weeks with hundreds of workers |
| $11.6bn in cash from the Treasury. In addition to the | | | | laid off temporarily. Renault is already cutting 6000 |
| $15.4bn of loans received, part of this would be | | | | jobs round Europe and Peugeot is cutting |
| retired in exchange for half the carmaker’s | | | | fourth-quarter production by at least 20 per cent in |
| equity. These two steps would give unions and | | | | France. |
| Treasury about 89 per cent of the company, even | | | | |
| before private debtholders are taken into account. | | | | China’s automobile industry too hits a slippery |
| GM envisions some $27.2bn of that debt being | | | | path : |
| converted to equity, giving holders another 10 per | | | | After stunningly rapid growth in the domestic car |
| cent of the company. | | | | market—34 per cent in 2006 and 24 per cent in |
| Whatever happens, shareholders will be either wiped | | | | 2007, year-to-year passenger car sales rose an |
| out or nearly so. Even a minimal recovery depends on | | | | anemic 14 % in the six months to June 2008. |
| debt-holders taking a bigger financial hit than the | | | | Possible reasons include the almost 70 % decline in |
| union. Assuming unsecured lenders accept, the | | | | Shanghai’s stock market since its peak in 2007, |
| restructuring plan would create a much less indebted | | | | reducing car buyers’ disposable income. Tight |
| but also far smaller GM with about 40,000, or a third | | | | government monetary policy has meant fewer |
| fewer, US workers, and four core brands with a little | | | | purchases of high-end business vehicles. According |
| over half today’s number of dealerships. This | | | | to auto consultancy JD Power, China “could be |
| makes sense, as do shedding Pontiac and plans to | | | | on the brink of a significant pause in demand |
| axe Saturn and Hummer. Someone has to pay. More | | | | growth”. Only the government’s $ 600 |
| government cash may be needed to avoid Chapter | | | | Billion stimulus packaged has saved the scene in 2009, |
| 11. A bankruptcy restructuring may be messier and | | | | and somewhat restored in China’s automobile |
| less pleasant for dealers, workers and suppliers – | | | | market. With the world economic outlook still |
| but more equitable | | | | uncertain, it may be quite some time before the third |
| Detroit Three have their back against the wall | | | | largest world economy returns to more solid growth. |
| The market capitalisation of General Motors is now | | | | |
| below that of Mattel, the maker of Match-box toy | | | | Although fuel prices are subsidized in China, sometime |
| cars. Once industry leader, GM, now finds | | | | back China did hike fuel prices to reflect market |
| Toyota’s market value, at $ 145 Billion, now 25 | | | | reality but this had only a marginal impact on sales : |
| times greater than GM. | | | | for the average consumer, it added only Rmb100 ($ |
| As a poor strategy, the Detroit Three focused on | | | | 15) to monthly operating expense. This, when |
| high-margin gas-guzzling sports-utility vehicles and | | | | weighed against the Rmb150,000 average cost of |
| pick-up trucks, which have now lost charm as oil | | | | mid-sized vehicle, was not termed |
| prices have ventured, however temporarily, into | | | | demand-destructive in China. Yet, faltering world |
| unchartered territory. The Three also failed to control | | | | economic growth is beginning to hit hard as China is |
| labour costs and have not built flexible assembly lines. | | | | essentially an export-driven economy. This, coupled |
| As a desperate move, Ford has sold its flagship | | | | with uncertainty over whether oil prices will remain at |
| brands Jaguar and Land Rover to the TATAS. | | | | the levels they are at present, could cause some |
| Credit is the automobile industry’s lifeblood and | | | | buyers of sub-compacts to defer purchases and |
| today, the drying up of credit has hit carmakers’ | | | | compel consumers to look for more fuel-efficient |
| financing arms such as General Motors’ GMAC | | | | cars. |