Global pile-up ahead as US auto industry loses its drive

Ford, General Motors and Chrysler were once supreme; now with consumers rejecting gas-guzzlers and car loans drying up, the outlook is bleak for Detroit - and the rest of the world will soon feel the pain too. Tim Webb reports

* Tim Webb
* The Observer,
* Sunday November 2 2008
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For sale: four-bedroom detached bungalow, some work needed, cost: $800. The catch? It's in Detroit, home to the once mighty Ford, General Motors and Chrysler, and not many people want to live in the Motor City now that the American car giants are laying off tens of thousands of workers.

The bungalow is not the only bargain basement property up for grabs: thousands of others are on the market for $10,000 or less. One estate agent who has sold 50 properties - mostly foreclosures - in Detroit is trying to remain upbeat but admits: 'It is a blue-collar town like a lot of other American towns, but it has been hit harder than most.' He says there are houses are going for $5,000 while homeowners next door are struggling to pay a $60,000 to $70,000 mortgage on an identical property. 'It's obviously devastating for them.'

The Detroit property market and the US car industry are mirror images: both are in freefall. Speculation is mounting that the government is planning a bail-out of the giant 'Detroit Three'. On Thursday, Presidential candidate Barack Obama added to the clamour, calling for a doubling of the $25bn in government loans recently approved by Congress to help the industry make more fuel-efficient cars.

Washington is also said to be trying to engineer a merger of GM and Chrysler as analysts predict that the latter's new owner, private equity firm Cerberus, could pull the plug on it. Without dramatic government intervention, analysts predict all three companies will run out of money some time next year.

This side of the Atlantic, the mood of car manufacturers is less grim. But not by much, as they fear they could be next in line: car makers are slashing production across the board to cut costs as sales slump. In the UK, Japanese firm Honda last week said it would cut output by a tenth - 32,000 vehicles, rather than 22,000 as previously planned. All the other five major carmakers in the UK - Toyota, Nissan, Jaguar/Land Rover, Ford and GM - have made similar moves, putting workers on four-day weeks and getting rid of overtime and agency shift workers. No one knows how many 'temporary' production cuts will be made permanent, or when - as will surely happen - jobs are shed along with output.

The clamour in Europe for some kind of bail-out is also growing as car makers ask why the banks should get all the help. On Wednesday, the European Commission said that up to €40bn (£31bn) of 'soft loans' could be provided to the industry by the European Investment Bank. Ostensibly, like the US plan to provide $25bn, this would help companies retool their factories to meet tough EU legislation being proposed to cut carbon emissions from new cars. But if the industry wasn't in crisis, it is unlikely this money would be on the table and, if approved, it would be a bail-out in all but name.

It's hard to exaggerate the scale of the crisis facing the Detroit Three; in many ways, they are in a more parlous state than the banks. In 2000, the high-water mark for the industry, the combined stock market value of Ford and GM was more than $130bn. Today, you could pick up both for $10bn and still have change. Citigroup analysts estimate that the pair are carrying $69bn of debt between them. Since 2005, the companies have been haemorrhaging money: in the first half of this year they lost almost $30bn. Paul Newton, analyst from consultancy Global Insight, says: 'The big three are in severe trouble. The past couple of years have been a bloodbath.'

And how did they get themselves into this mess? More than any other incumbent car makers, they've been outwitted by nimbler, more efficient - and cheaper - foreign rivals. Twenty years ago, more than two-thirds of cars made in the US were manufactured by GM, Ford and Chrysler. This year, according to the Centre for Automotive Research, for the first time foreign car makers, led by Toyota, will overtake them.

The trio have also been hamstrung by the ruinous cost - estimated at $100bn - of providing healthcare for two million current and former workers. Last year, a landmark agreement with the UAW union capped these liabilities, but the damage had already been done.

That was not all. Soaring fuel prices have soured Americans' love affair with big, powerful 'sports utility vehicles' and boosted sales of smaller cars - more typically made by the big three's rivals. When the credit crunch took hold a year ago and property sales plummeted because of the shortage of credit, car loans also began to dry up. In response, the three companies have announced plans to close 35 plants, mostly in the area around Detroit, with the total loss of 100,000 jobs. GM and Ford are looking to expand operations in lower-cost places, such as Mexico, China and Africa.

But this restructuring, huge as it is, already looks hopelessly inadequate to stem their ballooning losses. With recession looming, credit, for the few people contemplating buying a new car in these straitened times, is even harder to come by. The financing arm of GM recently announced lending restrictions which, dealers estimate, would prevent almost two-thirds of would-be GM buyers from finding a loan, and Chrysler has made similar moves. Toyota plans to take advantage, according to Citigroup analysts, by offering interest-free loans on 11 models, which will only hasten the decline of the Detroit Three.

Citigroup predicts a 35 per cent sales slump overall in October compared with last year, with GM and Chrysler even worse hit as they withdraw credit. US car sales will pick up - most analysts predict a recovery in 2010 - but to what extent the big three will benefit is unclear. PWC estimated in September that they planned to cut production by about one million vehicles by 2012, but this may not be enough.

Newton says: 'The question is whether the big three can cut jobs and close factories, particularly in the US, quickly enough to offset their losses. Their current restructuring plan is based on last year's industry forecasts. However, the outlook is far worse now. It's touch and go.'

He also doubts whether the rumoured merger of GM and Chrysler would do more than delay the inevitability of further plant closures and job losses by a couple of months.

Summing up the apprehensive mood among car makers in Europe, Carlos Ghosn, chief executive of Renault-Nissan, said recently: 'We don't know if we're at the beginning of the end or the end of the beginning.'

European car makers no longer look on at the plight of the big three with the sense of detachment they had a year ago: the question now being asked in boardrooms across the continent is: 'Could it happen to us?'

The situation is certainly tough in the UK, but the news isn't all bad. We never had a 'big three' anyway and the last 'national champion' - Rover - collapsed some time ago. Last week, Ford announced plans to invest £70m in its Bridgend engine assembly plant and BMW is building a new electric Mini at Oxford. Even if EU legislation on carbon emissions is watered down or delayed, as the industry wants, the trend towards more fuel-efficient cars will benefit the UK's Japanese car makers, who tend to make smaller, more efficient vehicles.

But the last remaining Ford and GM plants in the UK are more vulnerable. There is a big question mark hanging over the future of Ford's Southampton Transit van plant and GM's plants at Luton and Liverpool. Both companies have a lot of capacity all over Europe and may want to retrench to their German bases. How the UK's Jaguar/Land-Rover, bought by Indian conglomerate Tata last year from Ford, can also halve its gas guzzlers' emissions is not clear.

In mainland Europe, particularly France, Germany and Italy, car makers can count on government intervention to help them ride out the storm. British car makers aren't so lucky. PWC estimates UK annual production will fall by around 12 per cent to 1.5 million vehicles by 2012. This is a larger fall than predicted for the UK's European counterparts - France (8.6 per cent) and Germany (where a 3.7 per increase is forecast).

The crisis gripping the big three and the alarm growing among Europe's car makers will, in effect, only hasten the inevitable: the shift of production to countries where costs are lower, primarily India, China, Russia and Thailand.

Who will emerge from the biggest shake-out in the industry's 100-year history to lead the march into the new markets is not clear. But don't bet your house - even if it's in Detroit - on any one of the big three taking the honour.