Why the carmaker in front is cutting back

August 26, 2009

Good news: global car capacity is being cut by 700,000 vehicles. Bad news: the company doing the cutting is the world’s most efficient manufacturer, Toyota.

Across the world, governments are pledging money to keep local plants open, mostly plants which have no long-term future, and which are far less efficient than the production line in Japan that Toyota is closing.

Welcome to the crazy economics of carmaking. According to CSM Worldwide, a consultancy, the world is capable of making about 94 million cars and trucks a year. In 2008, calculates OICA, an international carmaking trade body, global sales of vehicles were just over 70 million. This year may not reach 60 million, after the end of borrow-and-spend in the economies of the west.

In essence, the world is capable of making three cars for every two buyers. No wonder so few manufacturers can make money. Sergio Marchionne, responsible for the “near miraculous” revival of Fiat, believes that 5.5 million cars is the minimum output needed to make money, since it costs 500 million euros to develop a new model.

On Marchionne’s maths, today’s 11 volume carmakers will have to shrink to about six to stay viable, but events are following the political reality rather than the economic textbooks.

Opel, the loss-making European arm of General Motors, ought to close, but it won’t. The German government will support its plants, and it seems that the UK government will pour money into Vauxhall too.

Peter Mandelson, the UK business secretary, has a reasonable record of resistance to subsidy, having rejected calls for help from Tata, the owner of Jaguar and Land Rover, but political reality in Luton and Ellesmere Port may force his hand over Vauxhall.

This is because carmaking is not just about preserving the jobs in the plant. Just-in-time production methods demand that the component makers set up as physically close to the line as they can; the Japanese “transplants” set up across Europe and America impact whole regions — and their voters.

In the west, new car sales seem set to plunge, as the cash-for-clunkers schemes end in the U.S. and UK. These schemes have shifted the metal, but have brought forward many purchases which would have been made anyway. When the French withdrew their last similar scheme, new car sales plunged by 20 percent.

The combination of political interference, increasing longevity of the product and the burgeoning cost of development is a lethal one for shareholders and taxpayers alike. As Opel and Toyota are showing in their different ways, it’s not going to end any time soon.

7 comments

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just another example of how gov. interference in markets leads to huge inefficiencies.

nice article

Posted by dvictr | Report as abusive

Note it is NOT government “interference” that is the problem, but as in the Health Care debate here it is “political interference”..and a lot of special interest, as the latter two are what is wrecking USA.Vast difference between “p9olitical” and “Government” interference, as any glane a bobby money and campaign contributions and special intereet laws AKA our tax code, would prove.
kind of amusing that many in Congress that voted for “Business deductions for the huge SUV’s” now are the same ones howling about “USA simply does not build fuel effienct auto’s or other such hot air, that is classic fo “political interference”.. ommission conrtrol is government “interference”.

Posted by chuck | Report as abusive

If companies were not inefficient in the first place, they would have not swollen themselves with so much excess capacity.

Governments may be throwing good money after bad in the same way that the private sector car makers threw money into building or maintaining plants when demand was not there.

Even though someone may argue that governments have subsidized the building of new assembly plants, one should ask himself why an efficient private sector manager would stray away from efficiency; why they should build new plants (even with free money) if the demand forecasts do not allow for them.

Perhaps the same attitudes and biases that are usually attached to politicians and bureaucrats are also shared by businessmen.

Posted by crzycar | Report as abusive

The cash-for-clunkers schemes are only enticing near future buyers to trade in a little earlier so we can try to maintain the current numbers only to have them drop sharply for the near future.

I agree with crzycar about throwing good money after bad, building new plants in towns to boost their employment was simply a bandaid solution and a near sighted decision because they did not see the big picture, which was that the demand forecasts could not sustain building all these new plants, and soon enough the towns were competing for the plants to the point where they would build them for free.

Up to this point i have only restated what has already been said but this brings me to my point, we need to aknowledge that the cash-for-clunkers schemes are continuing to produce unrealistic numbers for car sales and these companies should wake up and do one of two things, either do some research and think for once and realize that they need look past the next quarter and do some financial planning or if that’s too hard then just follow what the most efficient plant is doing, they are usually the most efficient for a reason.

Posted by doomedfromstart | Report as abusive

The Japanese approached this situation pragmatically. Future spending has been pushed forward. So the reduction in both future growth and profits is predictable – especially in those markets that benefited most from the government incentive program. Not only that, but each big incentive program makes the next one less likely due to lack of resources. So demand will be adversely affected both by the lack of consumer demand and special financing support. It is reasonable from a business standpoint to steer away from markets dependent on government subsidies.

Posted by Don | Report as abusive

I wish this article had metric data to back up the claims. It is an ongoing challenge for manufacturers to balance capacity with demand to achieve effective and efficient production. I end up wary of “productivity” metrics not knowing what’s included. A manufacturer that operates in a locality where there are no constraints on environmental pollution or penalties for worker injuries and deaths could have productivity metrics that seem favorable if those societal costs are not included. Productivity measurement becomes very dicey if any of the constraints or advantages are left out of the calculation. It may not be quite as straightforward as it seems.

Posted by Rob | Report as abusive

I think that the logic behind the necessity to shrink the number of volume carmakers is quite sound. It’s also pretty obvious that political interference is holding up the needed consolidation.

However I’d say there are very different types of poltiical interference. German interference, besides being fiercely nationalisitic, doesn’t seem to have any real potential to solve the problem. Keeping the most expensive factories open at the expense of the factory in Zaragoza, where wages and costs are HALF those of their German counterparts, makes no sense. In the case of Poland we’re actually talking one THIRD. The UK factories have had some the most recent upgrades and still don’t cost as much as the German factories.

Accepting Lord Mandelson’s offer for aid, as well as aid from Spain, Belgium and the US, to my mind would be much wiser. By closing down all the German factories, which are by far the most expensive to run, the aid in this case would be sufficient to bring Opel finally back to a profit. AND STAY THERE!

What’s the point of accepting aid from Germany only if you’re going to need more aid 1 year down the track?

Could Reuters run a service on the EU’s role in the Opel affair? After all we are talking about five european countries involved, and the EU have been terribly quiet about this:
http://www.elmundo.es/elmundomotor/2009/ 08/26/empresa/1251275625.html

Posted by Sigfried | Report as abusive