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.


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