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Indego / IndeGo Forum / Future of the Auto Industry

Future of the Auto Industry

 

Monday, 13 October 2008 09:28


The last few weeks have seen the credit crunch make a huge impact on the global auto industry.  Sales have continued to slow not only in mature markets, but also in the previously high growth markets of China and Russia.  Based on current stock prices, you can now theoretically buy GM or Ford for what would have seemed pocket money a couple years ago, and Cerberus looks to be in deep trouble with it's investments in GMAC and Chrysler.  Oleg Deripaska, the Russian oligarch, has been forced to sell his 20% stake in Magna, acquired only last year, at a loss, and the agreed acquisition of Continental AG by Schaeffler Group looks to be heading for the scrapheap before it is even consummated.  What's going to happen next?
 
In the current climate, anybody who believes that they can predict moves in some strategic context is kidding themselves.  What is happening in government and industry today is largely tactical and opportunistic, trying to keep some semblance of order in a way which we will not as taxpayers, shareholders or employees come to regret later.  There are however, some fundamental changes which I believe have taken place which will have a lasting effect over decades, rather than just the months or years ahead of this recession.

At least for a generation or so - until a new bunch of whizkids come along who think they have invented something new - we will not see credit as widely available on such generous terms.  Given that products are now more durable and reliable than they have ever been, this is not a real inconvenience for the people who would previously have bought a new car on subvented terms offered by the manufacturer, as they will simply have to buy a more affordable 2-3 year old product.  For the manufacturers however, this sends shockwaves right through the system as from top to bottom, they have used credit (directly or through property equity release and similar) as their primary means of stimulating demand.  Fewer people will therefore buy new cars, they will keep them longer, and they will no longer have the natural trigger of a loan expiry date to drive a replacement.

With some reports out of China suggesting that two thirds of small and medium businesses will go bankrupt in the near future, and Russia yet to see the worst of their fallout from the withdrawal of debt facilities and the collapse of equity markets, manufacturers will not be able to use these high growth markets to compensate for maturity or decline elsewhere.  Whilst there will certainly still be growth in the car markets in these developing economies, it is now far more likely that local players will play a dominant role, helped by government intervention where necessary.  Established manufacturers will therefore need to manage their businesses to very different strategies which will lead to slimmed down product ranges, more collaboration on new technologies, reduced manufacturing capacity and further pressure on suppliers.  Dealer networks will need to adjust to lower new car sales, by doing a better job on retaining used car sales and service work.

The froth that has driven the simultaneous profitable growth of super-premium manufacturers such as Aston Martin, Bentley, Ferrari, Lamborghini, Maserati and Rolls-Royce will evaporate.  The financial services bonuses, the feelgood factor from rising equity and property prices, the explosive growth in the emerging market economies have all gone.  Whilst some of the manufacturers still claim to have solid order books stretching years into the future, this is no more solid than a morning mist.  Although only Aston Martin is now exposed as an independent, all will feel the cold wind of recession, exacerbated by the growing focus on environmental issues, and none will be able to weather the storm without major changes.

Suppliers have generally avoided the headlines over recent months, partially because some of the largest are either in Chapter 11 or are owned by private equity or dominant shareholders.  They are feeling the pain however, and dealing with the dual challenges of 20% volume cutbacks and requests for "emergency cost reductions" from their customers, will bring many to the brink of bankruptcy, and some beyond it. 

For manufacturers, suppliers and dealer groups however, this all leads to the same point.  If their businesses are weakened to the point where they must be acquired or go under, who will be in a position to acquire them?  Their competitors, including those from the emerging markets, will be preoccupied trying to avoid the same fate.  Even if they are felling bold, they cannot turn to the markets for more equity, and even established credit lines are being cut back.  Private equity can no longer follow the highly leveraged model that they have used in the past, and many will be among the forced sellers of automotive assets, rather than acquirers.  Governments are focussed on spending their (i.e. our) billions on bailing out the banks.  That leaves equity swaps from better positioned competitors, Gulf State sovereign wealth funds and a handful of wealthy individuals who have managed to conserve their cash.  For any of these buyers, they could be getting the deals of the century - asset rich companies at a knockdown price in a buyers' market.

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