- Professor David Bailey works at Coventry University Business School. The views expressed are his own -

The UK operations of Jaguar Land Rover lost £673.4m last year after a £640 million surplus the year before, it was revealed last week in accounts filed with Companies House. Adding in actuarial and pensions adjustments, “total recognised losses” at JLR topped almost £1.2bn last year. Not that this is much of a surprise of course. This is a “once in a century” downturn as JLR boss David Smith put it, and most car makers have posted record losses – including Toyota, for the time in its history.

JLR has announced the cessation of X-type production at Halewood at the end of this year, leaving a huge question mark over the viability of the Halewood plant. On current volumes (without the X type) it is difficult to see how JLR can keep open three UK plants.

To keep Halewood operating (which at full capacity is a very efficient plant), the LRX Range Rover concept vehicle needs the green light soon for development and production. This means accessing the EIB loan of £340 million which is already on the table from Europe.

That, of course, brings us back to the loan guarantee from the British government which is still under discussion after months of haggling. Quite why it has so long to sort this out is beyond me. The latest rumour mill suggests that the government has dropped some of its more onerous conditions like appointing the chairman, and is now prepared to offer JLR a guarantee for a £175m commercial bridging loan over six months.

However, that’s way short of what Tata was looking for, both in terms of the scale of the guarantee and the term. Just six months of guarantee seems to ignore the reality of the credit crunch facing Tata, and a guarantee covering just 50% of the EIB loan is better than nothing but well short of the 75% I was expecting.

Indeed, Tata had originally asked for loan guarantees for commercial financing of around £500m and for a £340m European Investment Bank loan to help fund investments in greener vehicles (such as the LRX, which combines lightweight materials and a hybrid engine). The EIB loan has already been forthcoming from Europe.

Tata acquired JLR from Ford for $2.3 billion in a deal completed last year, and since buying JLR it has put in over £1bn into the firm. Tata support has been crucial during this double whammy of recession and credit crunch. Remember that Saab has been offloaded by GM and Ford is trying to sell off Volvo. If a private equity firm had got its hands on JLR we would have seen significant job losses (many more than the 2,200 we’ve seen under Tata) and plant closures already. The fact that we haven’t is testimony to Tata’s commitment.

Behind the results, Jaguar as a brand is doing pretty well in a tough market, and with a cracking line up of XK, XF and (new) XJ models, is well positioned for when demand does pick up. Land Rover, meanwhile, has been badly affected by the credit crunch and the shift away from 4×4 cars with the recent oil price spike. It ideally needs models like the LRX on sale right now. This makes the lengthy haggling over a loan guarantee even more of an issue as LRX development work needs to be speeded up.

Last week, it seemed that a loan guarantee was finally within reach. Hopes subsided, though, after a letter from Lord Mandelson to Tata was leaked to the press, and Mandelson made TV appearances apparently giving a ‘take it or leave it’ impression to Tata.

I’m not party to discussions, so can only guess why Mandelson’s team thought it was appropriate to leak the letter, which called for immediate “face to face” negotiations. Maybe it was intended to shift attention to Tata after some stinging criticism by the Business Select Committee of the government for its failure to arrange a loan (MPs on the Committee said they were ‘astounded’ it had not been sorted out sooner).

If so, it backfired. Last week another group of MPs, in the form of the West Midlands Select Committee, said it was “dismayed’ no money had been forthcoming for West Midlands’ producers. It called for an acceleration of applications to the government’s Automotive Assistance Package, including that by JLR.

And the leak didn’t go down very well with Tata either, unsurprisingly. The slow pace of agreeing suitable access to finance is the responsibility of the government, not Tata. JLR has maintained a diplomatic silence in public throughout the whole loan guarantee negotiations. It would be helpful if our politicians did the same.

Indeed, I hope politicians can step back for a moment and consider what’s going on. Given where the industry and JLR are right now, Halewood’s fate hangs in the balance. It really is that serious. The longer the loan negotiations drag on, the more vulnerable Halewood becomes.

This may be what Tata’s vice-chairman Ravi Kant meant recently by his comment that “plant shutdowns” could not be ruled out. OK, he could have meant temporary shutdowns, as Halewood will face in September. Yet without LRX production, I can’t see how Halewood can be kept open in the medium term.

I should stress that JLR will get through this recession. The questions are: In what shape? With how much R&D? With how many plants open? And with how many workers employed?

JLR is not asking for a bail out but rather help in accessing commercial finance at commercial rates. It’s not too much to ask the government to assist when so much is riding on the firm in terms of R&D, jobs, the supply chain, and the revenue the firm raises for the government in income tax, National Insurance and VAT.

- Professor David Bailey works at the Coventry University Business School. The opinions expressed are his own. -

General Motors announced its exit from Chapter 11 bankruptcy protection on Friday, and pretty speedy it was, too. The firm has quickly transferred its good assets to a new carmaker (”new GM”) which is majority owned by the U.S. government, and the whole bankruptcy process has taken just 40 days.

It used to be said that “whatever’s good for GM is good for the U.S. economy”. While GM is no longer the world’s biggest automaker, by some estimates it still accounted for 1 percent of the U.S. economy before going into bankruptcy. The latter has been not only hugely symbolic of the fate of the ailing U.S. car industry, but has also been of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

The “new GM” that has emerged from Chapter 11 last week is a much smaller and leaner firm which has shed tens of thousands of workers, closed factories, cut loose hundreds of dealerships (further reductions will be needed), ditched several brands, and – with union agreement – changed employment contracts so as to cut costs.

Under bankruptcy protection, GM has shed over $120 billion in liabilities. Its work force will also shrink dramatically, from around 90,000 at the start of this year to around 64,000 by the end of 2009.

“New GM” will include the firm’s best models and R&D and will have scrapped brands like Pontiac, Hummer and Saturn. By 2012, the new GM will comprise the Chevvy, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm

The U.S. government will take a 61 percent stake in the new GM, along with the Canadian government (12 percent), and the United Auto Workers’ retiree healthcare trust fund (17 percent). Creditors to the “old GM” will get just a 10 percent stake.

The Obama government has stressed that it does not aim to maintain a long term stake, and may look to sell off its shareholding as early as 2010, or as soon as the firm is ready list on the stock market.

A key goal for GM is to stabilise things by being able to make money even if U.S. car sales remain depressed at 10 million to 10.5 million vehicles a year. And it urgently has to get new technologies and cars to market quickly, staring with its electric Volt car in 2010. If it can do that successfully, it still has a chance, as long as it can repair its battered brand image.

In essence, the future of GM now depends on its ability to actually produce fuel-efficient cars that people want to buy and which match or exceed Japanese standards for quality. It still faces a massive challenge.

GM will never be the biggest manufacturer again. However, Chapter 11 was anyway about restructuring the firm, wiping clear most of the debts, cutting costs and reorientating the firm towards more environmentally friendly cars. A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

Just before GM entered Chapter 11, GM Europe was split off from its U.S. parent and placed in a trust fund. GM Europe employs around 55,000 workers across Europe, with some 25,000 based in Germany, and 5,500 at Vauxhall in the UK.

The Canadian car parts firm Magna International has emerged as the preferred bidder to acquire GM Europe, although GM has confirmed that it is still talking to other bidders. The German government has promised GM Europe substantial financial support; it has very much called the shots in Magna becoming the preferred bidder, and wants to defend jobs in Germany.

That still leaves some major question marks over Vauxhall in the UK. Concerns remain that UK workers will suffer job cuts if a Magna deal goes ahead, in part because of the financial support coming from Germany to protect jobs there, and also because it is easier to lay off workers in the UK than on the continent. Magna has said it will look for up to 9,000 redundancies in Europe.

Earlier this week GM confirmed a rival bid from Chinese firm Beijing Automotive Industries (BAIC). Whilst Magna has a head start in acquiring GM Europe and is still very much the favourite to acquire the firm, unless a deal is sealed within the next few weeks, BAIC may yet be in with a chance.

It’s not such a daft idea, especially for British workers. BAIC is thought to be looking to cut capacity in higher cost Belgium and Germany rather than in the UK, and to produce GM models in large numbers in China. The Chinese market is growing rapidly and probably offers more opportunity than the Russian market that Magna is thought to be targeting. A BAIC deal would also offer GM more upside benefit with a bigger stake in a new GM Europe.

These developments have added pressure on the UK government to intervene to support Vauxhall production. The government announced a 2.3 billion pound auto support package back in January, yet not a single penny of this money has yet to reach any car producer in the UK, although applications for support are thought to be at an advanced stage now. The government needs to speed this up and get the money flowing soon.

Professor David Bailey works at the Coventry University Business School and has written extensively on globalisation, economic restructuring and industrial policy, with particular reference to the auto industry. The opinions expressed are his own. -

Recent comments by Tom Purves, Chief Executive of the British based but German-owned luxury car firm Rolls-Royce, struck me as interesting on a number of levels this week.

Firstly, despite the downturn, the firm has apparently received some 1,500 “serious expressions of interest” in its new Ghost model to be unveiled later this year. If these were translated into sales they could effectively double RR’s annual sales.

The Ghost will be unwrapped in September and has generated much interest after a prototype has toured the globe. Despite the global downturn, it seems that firms – luxury brands included – can still innovate and develop new products for new markets.

The Ghost is key for RR in extending their product range and hence tapping into new markets, both in terms of market segments and geographical markets. The model will especially aim at a lower price category (i.e. people who might otherwise buy a Bentley Continental Flying Spur). It could also appeal to the growing numbers of rich people in emerging markets such as Russia and China. The Ghost shares elements of the platform which underpins the BMW 7 series, and enables BMW to achieve some economies of scope across brands through platform sharing.

Secondly, RR sold record numbers in 2008 (some 1200 of its Phantom model) but sales have this year been flat given the recession. Yet that in itself is no mean feat when auto markets are down considerably around the world. Apparently the luxury market is often late going into recession and late coming out.

Thirdly, Rolls-Royce is still – it seems - delivering a profit to its German parent BMW (which by the way is currently loss making, like many of the world’s auto firms). RR should be a prized asset for the parent company.

Fourthly, for RR at least the economy has bottomed out: “We are bumping along the bottom … I do not see things getting any worse.” If accurate this will be welcome news to many in the auto industry which has been hammered by the double whammy of recession and credit crunch.

What has been especially impressive about Rolls Royce is that it has worked hard to keep skilled craftsmen in place through the recession. While some agency staff were unfortunately laid off, the firm has kept its skilled workforce in place: “we know we need them with the Ghost coming, and also because we know they are highly skilled and highly qualified and it is much better for us to retain them than not” said Purves a few months ago.

When the upswing does come, RR will be in a better place because of this long-term thinking.

- Professor David Bailey works at the Coventry University Business School and has written extensively on globalisation, economic restructuring and industrial policy, with particular reference to the auto industry. The opinions expressed are his own. -

Despite a run down in heavy commercial vehicle production in the UK in recent years, light commercial vehicles are still made in Britain in quite significant numbers.

However, this could easily change over the next few years unless something is done. The seismic changes that have unfolded in the world’s auto markets now threaten to eliminate mass van production in the UK, leaving just small niche production.

Today there are three main producers in the UK: Ford at Southampton, a GM/Renault joint venture at Luton, and LDV in Birmingham. The latter stopped production back in December when the double whammy of credit crunch and recession impacted.

On current trends, Ford, GM and LDV could be gone by 2012, with mass van demand then having to be fulfilled by imports. Jobs, capacity and R&D could be lost forever.

So, the question for the UK government is whether it actually wants van production in the UK. If it does, it needs to step in with an industrial policy to support production, starting with LDV.

Ford assembles vans at its transit van plant in Swaythling (Southampton). The firm has laid off staff at Southamptom and Ford itself has stated that it only plans to continue making the Transit panel van at the plant until 2011; after that the site will make only the chassis cab version of the model.

By 2011, production will be halved to 35,000 units a year. Volumes beyond 2011 are uncertain and are likely to be limited. Meanwhile, Ford has invested heavily in Transit van production abroad, and the firm is shifting mass production of the Transit (the “backbone of Britain” according to Ford) to Turkey.

Meanwhile, GM’s problems have led to a potential sale of its European arm to the Canadian supplier Magna, with financial backing from Russia via a government-owned bank and Gaz. The German government has offered almost 5 billion euros in short term financing and loan guarantees to effectively safeguard production in Germany.

Magna has openly discussed cutting some 9000 jobs in Europe and this leaves Vauxhall vulnerable as it is easier and cheaper to lay off UK workers. Current van production at Luton is scheduled to run to 2012. After 2012, the Luton plant faces a very uncertain future as Magna wants to expand into the Russian market and Gaz has capacity there it can use.

Last but not least, LDV is now on the edge.

Having offered a critical 5 million pound bridging loan to enable the Malaysian firm Westar to complete a takeover of LDV, the government’s Department of Business Enterprise and Regulatory Reform (BERR) pulled the plug last week when it saw that Westar had not raised the external finance needed to complement its own resources.

Yet this is an odd tautological logic. Even Tata, a huge conglomerate, has struggled to raise finance on the international markets because of the global credit crunch. So it seems that the government won’t intervene because the market won’t provide the finance – yet if the market did provide the finance the government wouldn’t need to intervene in the first place.

With no Westar takeover, LDV will go into administration on Monday. This opens up the possibility of another “lift and shift” of production, jobs and R&D out to an emerging economy like India, Russia or China.

This would mean an end of van production here in Birmingham, with a possible knock on effect on some suppliers who may well decide to pull out of the UK as well.

There are a number of things the government could actually do here.

It could take an equity stake in LDV (indeed, if Obama can nationalise GM, why can’t Brown think about equity stakes in UK firms?). An equity stake with Westar or another investor would also mean that it would have a say in keeping production in the UK.

Other key stakeholders could then take stakes. LDV’s major customer, The Royal Mail, might take a stake, and secure the supply of electric vans. Birmingham City Council might do the same. Such backing could then bring in private investors.

Alternatively, the government could provide a loan guarantee to Westar for the investment. This latter option – providing a loan guarantee for Westar to access the finance - would be the least risky and speediest option given where LDV is right now.

Such interventions have been seen in other countries and there is a case to be made for intervention here. Yet BERR has repeated the point that LDV hasn’t made a profit in several years.

This ignores the rather misses the fact that over the last few years some £600m has been invested in the award winning Maxus van range which could provide an ideal platform for the proposed switch into environmentally friendly green electric vans.

This electric can market is growing rapidly, especially in the depot-to-depot market in urban areas. Overseas this has been supported by tax breaks – something the government here could do to help LDV and Modec in Coventry. The electric Maxus is already developed and ready to roll, and LDV owns the intellectual property rights to the electric version.

As battery life improves and the recharging infrastructure in urban areas develops, this market will grow. LDV could be at the forefront of the proposed ‘green new deal’.

Put simply, there is a new market unfolding here, and LDV are effectively saying to the government: “put your money where your mouth is” when you talk about a low carbon future.

In support of LDV, a number of other points need stressing.

Firstly, the more than 25 percent depreciation of sterling improves LDV’s position regarding export markets.

Secondly, the firm is self-contained, owing the intellectual property rights and production facilities for the Maxus van in diesel and electric form.

Thirdly, LDV contributed around 7 million pounds in 2008 (not exactly a great year for the firm, remember) in PAYE and National Insurance to the government coffers. You could treble that by adding in the supply chain and dealer network. Of course, some of those firms and people might get other jobs and hence still pay NI and PAYE if LDV does close, but even a conservative estimate suggests that the government picks up a useful more than 15 million pounds a year from LDV’s operations. Add in more than 50 million pounds in purchasing and more than 50 million pounds in exports and you can start to see the value of LDV to the economy and the government.

Fourthly, we know from our research on the collapse of MG Rover that quality jobs matter and that three years on workers were earning 5,600 pounds a year less in real terms than when they were at MG Rover. The Rover Task Force cost the government 150 million pounds in picking up the pieces. And in this case, the LDV plant is in one of the most deprived areas of Birmingham. Many workers will struggle to move on, especially in the current downturn.

Fifthly, the government might be concerned that Westar would shift production overseas. In that case the loan guarantee could be converted to an equity stake with a golden share that would prevent this happening.

Sixthly, LDV management state that they have restructured and have cut costs and have brought down the output level where it can break even. The government needs to scrutinise this and if costs can be covered at around 10,000 units this remains a viable firm.

It really is time for BERR and the government to think creatively, both in terms of where the market is going, and how LDV – and indeed the UK van industry - can get there. LDV can still be saved and has some great R&D and products as well as a skilled and committed workforce. It can still be saved.

- Professor David Bailey works at the Coventry University Business School and has written extensively on globalisation, economic restructuring and industrial policy, with particular reference to the auto industry. The opinions expressed are his own. -

GM declared itself bankrupt on Monday in one of the largest bankruptcies in U.S. history, in an attempt to seek protection from creditors.

The firm has stacked up over $80 billion of losses in the last four years, also swallowing some $20 billion in cash from the Obama administration. It is likely to need another $30 billion before emerging from Chapter 11 substantially slimmed down and free of debts.

A bankruptcy judge will decide who gets what assets. It’s not clear whether during Chapter 11 the firm will continue to function and assemble cars.

It used to be said that “whatever’s good for GM is good for the U.S. economy”. Whilst GM is no longer the world’s biggest carmaker, by some estimates it still accounts for 1 percent of the U.S. economy. The bankruptcy is not only hugely symbolic of the fate of the ailing U.S. car industry, but is of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

Republicans have begun to criticise the U.S. president’s handling of the GM affair, but it is difficult to see what else the U.S. president could have done.

Obama had to give GM time to come up with a credible plan, and I have always thought that the firm would need up to $50 billion of government support to get through the downturn and restructuring.

Under the proposed plan, the U.S. government would get a stake of over 70 percent in GM in return for another $30 billion of state cash, with the United Auto Workers union taking 17.5 percent initially, with the union accepting shares in GM instead of cash owed by the firm for retired employees healthcare cover.

A majority of GM’s bondholders have accepted the offer to swap their $27 billion in debt for an initial stake of 10 percent with the option of buying 15 percent more later. Their agreement to do this should help in speeding GM’s progress through Chapter 11 and avoid expensive legal battles.

Whilst a minority group of bondholders are holding out for a better deal, in reality this restructuring is the only game in town.

Hopefully, the new GM that emerges from Chapter 11 will be leaner, fitter and free of debts. It will include the firm’s best models and R&D and will scrap brands like Pontiac, Hummer and Saturn.

By 2012, the new GM will comprise the Chevrolet, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm.

“GM-Lite” will cut the number of assembly sites across North America, including Canada, to 33 within three years, from 47 at the end of last year.

Eventually, the goal is to float the new firm on the New York Stock Exchange. It will shed some 20,000 or more workers in the U.S., and has also told over a thousand dealers in the U.S. that they are at risk of losing their franchise. GM plans to lose 2,300 from its 6,000-strong network.

In a deal with the UAW which saves the firm $1 billion a year, rules on breaks, vacation and overtime have been changed, retiree benefits have been cut, and the UAW has agreed not to strike until September 2015 at the earliest.

GM will never be the biggest manufacturer again, but Chapter 11 is anyway about restructuring the firm, erasing the debts, cutting costs and reorienting the firm towards more environmentally friendly cars.

A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

The situation here in the UK is rather different. An efficient and world class car industry is struggling given the impact of recession and credit crunch, and the British government has largely been a spectator as GM Europe has been sold off.

That in turn could have a very significant impact on jobs at Vauxhall here in the UK.