16-05-2012 10:00
+++ Earlier this month, the FIAT Group announced that it is abandoning its network deal with Tata Motors in India after 6 years and plans to sell its cars in the country through its own dealerships from now on. While Fiat said that it will continue its joint-venture manufacturing activities with Tata Motors in Asia’s third-largest auto market, some analysts are predicting that the Italian company may opt for a full-fledged divorce, which would allow it to pay court to Suzuki. "A marriage with Suzuki would be win-win for both Fiat and Suzuki”, Deepesh Rathore, New Delhi-based managing director of IHS Automotive in India, told. "The possibilities are endless". The Japanese automaker, which itself is trying to break free from a failed partnership with the Volkswagen Group, has a 42 percent market share in India. While neither Fiat nor Suzuki would comment on the alliance rumors, the Italian company's CEO Sergio Marchionne has said he is interested in a partnership in Asia. “I don’t have discussions going on with anybody in particular other than general discussions about collaborations”, said Marchionne in a call with analysts last month. “But we continue to work at this issue”. +++ All eyes are on GENERAL MOTORS, which looks increasingly likely to resort to plant closure in Europe. GM is contemplating doing something no leading carmaker has dared do in Germany since the second world war: announce it is closing a plant. This month, Karl-Friedrich Stracke, chief executive of Opel/Vauxhall, will brief 3,200 workers in the once-mighty northwestern industrial town of Bochum on plans to restructure the American company’s lossmaking European operation. Mr Stracke will have cause to be nervous as he strolls on to the factory floor, where Opel (the group’s German-based European arm) makes its Zafira. It looks increasingly likely that GM will allocate the plant no new cars after 2014, and could close it sometime thereafter. If so GM’s American-led managers, tasked with sorting out Opel, would be breaking one of continental Europe’s biggest industrial taboos, and risking a worker or consumer backlash that could damage the brand. At a similar meeting at Opel’s headquarters in Rüsselsheim near Frankfurt, Mr Stracke faced whistles and jeers. At a time when job cuts in the eurozone are politically toxic, German leaders and GM’s competitors (notably PSA, with which it formed a strategic alliance in February, and Fiat of Italy, which may also need to shut plants) are closely watching its next move. Opel’s ability to chart a new future will be a test for its management, and more broadly offers potential lessons for the region’s industry as it faces chastening new realities amid the eurozone debt crisis. “Listen, there’s a new economic reality in Europe: we can’t deny it, we can’t hide from it, we can’t hope that it’s going to get better”, Steve Girsky, Opel’s supervisory board chairman, said in March. “We’ve got to live with it, and that’s what we plan on doing”. GM has said clearly that it can no longer bankroll Opel’s losses. Daniel Akerson, the former US Marine and private equity boss who serves as GM’s chief executive, this month described the European unit as a “work in progress” and vowed to restore profitability, whatever it takes. Few who know the car industry would dispute that GM Europe, which lost $747m last year, should act decisively to cut back its industrial footprint to match the continent’s decreasing car sales, of which it is claiming a diminished share. With 6 car plants in Germany, the UK, Spain and Poland, Opel sold fewer than 1 million vehicles last year, compared with over 1.5 million a decade earlier, in 2001. Unlike Ford or Renault (which are also weathering a tough year but have big global franchises), Opel’s business is confined almost entirely to western Europe’s oversupplied car market, tipped into crisis this year as consumer confidence has withered in the face of struggling economies. Executives at GM and its rivals do not expect sales in Europe to recover for several years. In the US, analysts and shareholders say the time has passed for incremental measures at GM Europe, where the Americans have already undertaken two partial restructurings in the past decade; most recently, cutting 8,300 jobs and closing a plant in Antwerp in 2009-10. At some point US taxpayers, who put more than 50 billion dollar into rescuing GM 3 years ago, will want to be repaid. “The European situation is the number one factor weighing on investor sentiment for GM”, says Adam Jonas, a New York-based analyst at Morgan Stanley. He estimates that GM Europe puts a discount of $5 on the global carmaker’s share price. Shares in GM, which is 32 per cent US government owned, are trading well below their 2010 share price. But seen from Germany, by enacting an aggressive and decisive restructuring of Opel, GM’s managers are tampering with sacred corporate governance principles such co-determination, whereby workers have boardroom representation, and collective bargaining at what many locals still consider a “German” brand. GM has infuriated Opel’s works council (which represents employees at shop floor level) by not negotiating a deal centrally. “The strategy of Opel management seems to be to travel from factory to factory and put workers under pressure to make concessions so that at the end of the day they can secure as great a sacrifice of wages as possible and toughen employment conditions across Europe”, Wolfgang Schaefer-Klug, Opel’s head labour representative, said earlier this month. GM’s plant in Ellesmere Port, northwest England, was saved from the threat of closure when workers agreed to 4 years of wage restraint and increased flexibility on hours and vacation times. The plant will move to 3-shift production from 2015, making the next-generation Astra alongside the brand’s low-cost factory in Poland. The move to 3 shifts will only add to GM’s total overcapacity (among the highest of any European carmaker) raising further questions over Bochum’s future. As Opel’s board decides what cars to build at which plants later this decade, its parent General Motors is also grappling with another part of its strategy to fix its European business: the group’s 3-month-old alliance with PSA (Peugeot Citroën). Experts from both sides have been working in teams to see how the 2 car makers (which face similarly straitened circumstances in Europe) can pool manufacturing and cut costs. The tie-up, which the 2 companies say could save them 1 billion dollar each a year by the middle of this decade, will probably see PSA plants making some GM models and Opel facilities turning out Peugeots and Citroëns. One logical division of labour (because of Opel’s proven expertise in making larger cars) could see PSA farm out some of this work to Germany, and Opel develop more small cars in France, capitalising on PSA’s minicar expertise. PSA is, alongside Fiat, arguably the only European carmaker facing financial challenges as deep as Opel this year. Like Opel, it works in a country where car plant closures are almost taboo. Also like Opel, PSA is being secretive about its plans as it weighs the costs and benefits of closing what industry analysts expect would be at least 2 West European factories. While Opel’s managers are taking flack from unions and regional politicians where it has plants, PSA’s plans are under even more intense scrutiny after a French presidential election that swept François Hollande, a socialist, to power. Little wonder, then, that both companies are seeking to stress the merits of their partnership and restrict details of which cars will be made where; and subsequent speculation about how synergies could cost jobs. Responding to a report Opel might cut jobs in research and development, Karl-Friedrich Stracke, chief executive, last week reassured workers any development work GM gave to PSA in France would be made up for at its technical centre in Rüsselsheim. Both PSA and GM have said they will pursue any rationalisation of their oversized manufacturing operations on their own, outside the framework of the alliance. But analysts say the industrial logic of a tie-up of 2 lossmaking European carmakers points inexorably toward cuts in manufacturing. “The GM and PSA alliance only makes sense if they share production networks across Europe”, says Tim Urquhart, an analyst with IHS Global Insight. That would then make the closure of some PSA plants inevitable. Rainer Einenkel, head of the works council in Bochum, has called for “urgent” clarity over GM’s plans, but Mr Stracke will not be showing the company’s full hand on Monday, people who know its plans say. The plant’s fate may be sealed only when GM finalises a new business plan for Europe, expected next month. While Mr Stracke is Opel’s Germanic public face, Mr Akerson has since late 2011 stocked the brand’s supervisory board with many of his most senior lieutenants from Detroit. Behind the scenes, they have been trying to fashion a future product plan, brand strategy and industrial blueprint for Opel durable enough to withstand a long European downturn. Mr Girsky, GM vice-chairman, is himself a former car industry analyst who went on to advise the United Auto Workers union before GM’s bankruptcy filing in 2009, after which he joined the company’s board. Speaking in March, he joked that the group’s history in Europe is “a bunch of Americans trying to sell German cars to French people, and wondering why it never works”. Within GM, fixing Opel is seen as an important management test for both Mr Girsky and Mary Barra, GM’s product development head, who also sits on Opel’s board. Both are mentioned as likely candidates to succeed 63-year-old Mr Akerson as chief executive. The stakes are high. Opel has already played a role in undoing one GM chief executive. Fritz Henderson presided over his company’s politically rancorous, bungled attempt to sell the European unit in 2009, a move that ended up entangling the German, US and UK governments, demoralising employees and even affecting consumer sentiment and depressing the brand’s sales. If anyone has the credentials to get it right this time, it is Mr Girsky. He played a critical role in GM’s much more dramatic and deeper restructuring and bankruptcy in the US. When the US government forced GM to restructure as a condition of financing GM’s bailout, the carmaker axed four brands and cut more than 30,000 jobs between 2008 and 2010. He should ostensibly have an easier time in Europe. Opel has smaller financial losses and some promising forthcoming models in popular segments, including the Mokka and Adam. Reviewers have compared their designs and features favourably with those of industry leaders such as European market leader Volkswagen. German unions have urged GM’s Detroit brass to allow the brand to take on the competition: spread its wings and grow out of its troubles by exporting more overseas, and building Chevrolets at its plants. But Opel’s cars do not command the sticker prices or resale values of those made by, say, VW. Opel sells the industry’s cheapest German-made cars while paying German fixed costs. GM’s ability to set Opel right is further constrained by its promise to workers, made during its earlier restructuring, not to close any plants before 2014. However, GM has given no guarantees that Bochum has a future beyond that date. Within GM, executives have for months described the factory as likeliest of any at Opel to be closed. Doing so would carry risks, and not only from the threat of costly industrial action. Another is an exodus of customers: Opel’s brand was sullied during GM’s earlier restructuring. Since 2008, the marque has made news headlines in the context of trouble at its business, not its cars. Across Western Europe, Opel has lost a point and a half of market share to rivals including VW and Hyundai/Kia since 2008. Market share now stands at about 6.5 per cent, down from 8 per cent four years ago; a considerable amount in Europe’s intensely competitive, segmented car market. “Opel hasn’t been helped by the broader issues around GM in the last few years”, says Jonathon Poskitt of LMC Automotive, a consultancy. GM’s deal to keep its UK plant open only makes Bochum look more precarious. Announcing plans for the Astra, Mr Stracke’s team also said that Opel’s mother plant in Rüsselsheim had a future. This heightened anxiety in Bochum, which labour leader Mr Einenkel speculated might lose the Zafira to Rüsselsheim, serving the plant a “death blow”. He also railed against the deal reached with UK workers, describing it as a "declaration of war against the German factory". In cutting a deal in Ellesmere Port, GM could conceivably be laying the groundwork to pitch for similar sacrifices from workers at Bochum, and to hand the plant a reprieve if it receives them. But with the UK plant now preparing to make Astras around the clock, GM’s overcapacity problem will only grow. “What they are doing at Ellesmere Port only makes sense if they close another plant”, says Tim Urquhart of the IHS Automotive consultancy. GM is for now keeping its plans discreet. Amid last week’s booing and whistling, Mr Stracke announced a 10-point turnround plan for Opel, in which he spoke of opening new export markets, improving customer satisfaction, and strengthening the brand’s value; none of which is a controversial prospect for unions. But he also hinted that the axe was still hanging over the operation’s manufacturing base. “We must do our homework in Europe”, he said. +++ HONDA believes that the stronghold of diesel engines for corporate sector buyers has reached its peak and that low-emission petrols could reclaim the lion’s share of the market in the short-term future. That’s the view of Ed Hummel, Honda UK’s corporate operations manager. He said of fleets’ penchant for diesel-engined cars: “Our view is that diesel is capping now and there might be a move towards petrol. What we’re seeing is a trend towards customers reconsidering petrol and not automatically choosing diesel. Our customers are now being much more open-minded in terms of considering petrol. "When you look at what’s going on with small-capacity petrol engines, we see the market going that way and we’ve got the scale to really invest in it”. His comments come following the firm’s announcement of its Earth Dreams series of clean engines, the first of which will be a 1.6-litre diesel unit available in the Civic in December. Hummel revealed that a series of clean petrol engines, also bearing the Earth Dreams moniker, is set to follow. Although clean and economical engines are on the agenda for the company, Hummel maintains that decent performance is equally as important to keep them appealing: “Look at the 1.6 Earth Dreams diesel engine: we are going to be at 95 gram/km and 120 hp. It will be a better story to tell in terms of power than the Golf Bluemotion and the BMW 1-series, which are sub-100 gram/km but aren’t as powerful. We want efficiency but we don’t want it to come at the expense of fire in its belly and a bit of oomph”. He also hinted that Honda would be bringing higher-power versions of the 1.6-litre engine to the UK market. According to Hummel, the new CR-V 4x4 will be the next Honda to receive an Earth Dreams engine. It is due for launch in October, when it will be powered by a 2.0-litre petrol unit and the same 2.2-litre diesel from the latest Civic, while the clean, Earth Dreams version won’t arrive until October 2013. He also said that the company has aspirations for the existing Insight hybrid now that it has been tweaked to emit 96 gram/km: “We’re targeting city centre businesses with the Insight. It’s an automatic, so it’s a little different from a lot of other taxfriendly vehicles. It’s priced below the Prius and we’re hoping for a reasonable uplift in volumes. We hope to sell about 1,500 or so for the rest of the year in the true fleet market”. +++ When is an open market not really open? Ask Hyundai. The South Korean car giant spent nearly a decade trying to crack the Japanese market before pulling out in frustration in 2009. It is a saga worth noting as negotiators from 9 Pacific countries try to conclude the trans-Pacific Partnership, a free-trade agreement, in Dallas. Bear in mind that the company has had great recent success in competing with Japanese automakers. In the US and European markets it has been taking big chunks of the market away from the Japanese. Hyundai cars are of high quality, have better styling and are far less expensive than their rivals from JAPAN. Hyundai is arguably the most competitive company in today’s global car business. Japan is the world’s number3 car market, has no import tariffs or quotas and its regulatory needs are not excessive. It should be an attractive market and, if anyone could compete in the Japanese market, it should be Hyundai. So why, I recently asked some of its executives, is the company pulling out? The answer is a blend of structural issues and social or cultural factors. Japan has the capacity to make 12-13 million cars annually. However, the shrinking domestic market absorbs only about 4.5 million and exports account for another 4 to 5 million, leaving 3 to 4 million cars worth of excess capacity. This depresses prices and profitability. Then there is the dealership structure. To sell cars, a manufacturer has to find dealers who will sell its cars. In markets such as the US, dealers are independent and free to sell whatever models they wish. This makes it relatively easy for new market entrants to find dealers. In Japan, however, the dealers are owned or controlled by the makers. They sell only the cars from a particular maker and do not represent any outsiders. Of course, a newcomer such as Hyundai can try to rent or buy land and establish its own new dealers, but in a country of limited property space and sky high prices this is a slow and expensive process. In principle, the excess capacity should lead to industry restructuring that would make dealers available to newcomers. Japanese custom and policy is to resist restructuring, however. Indeed, as the strengthening yen of the past year looked as though it might finally force reduction of production capacity by raising export prices, the Japanese government intervened in currency markets to weaken the yen and relieve industrial pressure that would have favoured market entrance by Hyundai and other foreign enterprises. So, Hyundai had decided to stop wasting time and money on the Japanese market because of a great paradox: a big market that appears to be wide open is so closed that one of the world’s most competitive companies declines to enter it. Nor is Japan’s auto industry the only example. Ironically, South Korea’s is similar, with Hyundai holding a nearly-80 per cent market share and with a dealer situation similar to that of Japan. All this raises profound questions about the meaning of free trade talks. For instance, a Japanese or Korean auto negotiator can rightly claim his market is fully open, safe in the knowledge that no or very few products will ever be imported. His industry’s and government’s strategy will be to emphasise exports, to avoid reducing domestic capacity and employment, and to shift the cost-restructuring as much as possible on to the truly open markets. This, of course, will all be done in the name of free trade, but is there any sense in concluding free-trade deals when it is clear that no trade will take place, regardless of the terms of the deal? That would seem to be a perversion of free trade. This is the kind of thing the TPP negotiators should focus on in Dallas. They are all concerned about having “21st-century standards” for intellectual property protection, government procurement and the like. These, of course, have their place, but a big part of the TPP’s concept is that it should serve as a template for more inclusive pacts. After all, the US already has free-trade deals with countries that account for 85 per cent of the trade between the countries of this group. Eventually, the TPP will need to include Japan, Korea and China. But it will not be able to do that until it finds a way to solve the problem of the closed open market. +++ TOYOTA and Lexus vehicles now account for more than 75% of all hybrids on UK roads. Almost 100,000 hybrids have been sold in the UK between 2007 and the end of the first quarter of 2012, over 77,000 of which have come from the Japanese brands. Toyota also said that the market share of hybrid cars has risen from 0.7% to 1.3% in 2012. This comes as the company reports a 5-fold leap in international profits following a tough 2011 when it was recovering from supply shortages due to natural disasters in the Far East. +++ VAUXHALL's Ellesmere Port plant will build a new generation of the Astra in an "historic" deal that will see it produce at least 160,000 cars a year. About 700 jobs will be created at the plant, which employs 2,100, plus thousands more in the supply chain. Owner General Motors announced it will invest 150 million euro in the factory and spend more than 1 billion euro in the UK component sector. It was feared that Ellesmere Port could shut under a GM restructuring plan that may still see a European plant close. Vauxhall chairman Duncan Aldred said it was a "ground-breaking, historic day" for Ellesmere Port and the UK motor industry. General Motors' investment in the UK motor industry, seemingly at the expense of rival plants in mainland Europe, bursts a few myths. Are not UK unions supposed to be inflexible to new labour agreements? Don't multinationals prefer to shut plants in the UK rather than mainland Europe because it is easier? And hasn't the country given up on manufacturing? There has been a bit of hyperbole around the Ellesmere Port news, but that is probably due to relief. For so long it seemed that the plant would close and 2,100 jobs go. Lost in the latest news about Vauxhall is another nugget of optimism. The number of cars built in the UK last month was almost 10% up on a year ago, boosted by strong export demand. Clearly, the wheels haven't come off UK manufacturing just yet. Production of the new Astra will begin at the Cheshire plant in 2015 and run until at least 2020. After the investment, Ellesmere Port will have the capacity to produce up to 220,000 cars annually. Mr Aldred said Vauxhall would more than double the UK component content in the cars, spending more than 1 billion euro with contractors, which he claimed would create 3,000 jobs in the supply chain. As part of an agreement to invest in the factory, Vauxhall workers voted by 94% in favour of a new four-year pay and conditions deal that would enable the plant to work around the clock for 51 weeks of the year if necessary. Mr Aldred described the flexibility of this deal as "ground-breaking". He said: "This is great news for the Ellesmere Port plant, our employees, the local community, our suppliers, the Vauxhall brand and the UK. We have been able to develop a responsible labour agreement that secures the plant's future. "This is assisted by the Government's industrial strategy, increasing its focus on the manufacturing sector and creating ideal ground for companies to build up long-term investments". Vince Cable, the Business Secretary, told that no financial inducements were offered to GM. Mr Cable described the Astra news as "a good story" and said it underlined that the UK "is a good business environment for the motor industry". He added: "General Motors wanted an assurance that the government was behind the industry, which we are. The car industry in the UK is a great success story. This is a success for team working. We have had business, unions and government working together in a very productive partnership". The Unite union's general secretary Len McCluskey said: "From a position of uncertainty earlier this year, there is now a potential for a future at the plant until 2020 and beyond. "Importantly this move will also bring component supplier plants back into the UK, a development that strengthens our manufacturing base generally". However, he said he recognised that Ellesmere Port's good news could spell bad news for other GM operations in Europe. Vauxhall is the UK arm of Opel, GM's European unit. Since 1999, Opel has lost 11 billion dollar, almost a quarter of it during the last 2 or 3 years. Last year, Opel lost 750 million euro and today's announcement about Ellesmere Port is expected to be accompanied by separate news that a factory in mainland Europe could be shut. Analysts say that its carmaking capacity is out of step with demand. The company has been working on a restructuring plan for months. There are fears in Germany that the Opel factory in Bochum is vulnerable to closure. Bochum produces 30 cars an hour over 3 shifts a day. Ellesmere Port produces 47 cars an hour over 2 shifts a day; a company record. But Germany could yet benefit from an expected decision to move production of its Chevrolet brand from Asia to Europe. Analysts also say it is simply cheaper and easier to let workers go in the UK than elsewhere in Western Europe. But the willingness of unions and workers at the plant to agree to more flexible working arrangements played an important role in GM's decision, as had the government's engagement on the issue in recent months. In February, Mr Cable flew to the US and met GM's chief executive Dan Akerson and vice-chairman Steve Girsky. He made the case for why GM should invest in the UK for the long term. Sources suggest the meeting may have played an important role in the company\'s ultimate decision to back the UK. Although the government insists that it has not offered the company any up-front cash, there are several sources of money (including the Regional Growth Fund and the advanced manufacturing supply chain initiative) that the company may be able to access. +++
