Car firms set to scrap

Published on Saturday 5 December 2009 13:33

WHILE the world's carmakers struggle through long-overdue rationalisation, the fate of plants in Sweden and Sicily may well determine how consolidation plays out in Europe.

On the Italian island, workers have been striking in protest at the proposed closure of the Termini Imerese plant by Fiat after 2011. Meanwhile, the race is on to save Saab's assembly operation in Trollhattan, north of Gothenburg, which will be closed by owner GM if a suitable buyer isn't found this month.

Governments in both countries are touting the prospect of significant financial support to keep these facilities open, averse to the possibility of massive job losses – 3,400 in Trollhattan, and 1,400 at Termini Imerese – at a time when the global economy remains weak and unemployment already high.

It's a scenario being re-enacted around the world, with manufacturers becoming increasingly indebted to national governments that will naturally want a return on taxpayers' funds.

The irony is, this political intervention props up the overcapacity at the heart of the car industry's structural weakness.

"There is a massive conflict in what the auto industry wants to do and what national governments see as being in their best interests," says Tim Urquhart, senior analyst with IHS Global Insight. "There is a huge Catch-22 there."

Sergio Marchionne, chief executive of Fiat, has been critical of the European industry's failure to cut excess capacity. He says Termini Imerese must close because it is the most expensive of Fiat's five Italian plants. Government ministers, however, have described the idea as "crazy", and there is talk they may extend Italy's scrappage programme beyond 31 December in exchange for keeping the Sicilian factory open.

While Marchionne's resolve may yet be tested, it seems all but certain GM will be shot of the 60-year-old Saab brand by next year.

Last week's surprise departure of chief executive Fritz Henderson after just eight months marks a likely shift in stance at GM. On Friday, GM chairman and interim chief executive Ed Whitacre announced a shake-up of senior leadership. Changes included shifting vice-chairman Bob Lutz to a senior advisory role and appointing Nick Reilly, head of GM Europe, to oversee the restructuring of Opel.

The company is expected to become more aggressive in pursuing turnaround under Whitacre, the former AT&T chief who will oversee GM's day-to-day operations while the search for a new CEO goes on.

The Detroit carmaker, currently 60 per cent owned by the US government, is hoping to pay off $8.1bn of loans to US and Canadian authorities before rejoining the stock market next year. To do this, it is shedding under-performing brands such as Saab, Hummer, Pontiac and Saturn, and is also seeking to trim its European workforce at Vauxhall and Opel by a reported 9,000 jobs.

In the UK, this will result in the loss of 350 of the roughly 1,500 workers at Vauxhall's Vivaro van plant in Luton. Fears for the 4,000 jobs at Vauxhall's other main UK factory at Ellesmere Port on Merseyside were eased last month with the announcement of plans to increase production.

Saab's fate might have been different had GM not abandoned plans last month to sell its European operations to a consortium led by Canada's Magna. As things now stand, Sweden's government has said it is willing to give loan guarantees to any potential owners of Saab to secure Trollhattan.

Henderson had favoured the sale of Vauxhall and Opel, but was outvoted by the Whitacre-led board of directors. Described as a boss who "takes no prisoners", Whitacre said last week that although momentum had been building at GM during Henderson's tenure, "all involved agree that changes needed to be made".

Urquhart at IHS says this shows that "slash and burn has won the day at GM". He expects the company to adopt a more aggressive approach with governments and unions over cutting capacity. Though this could help pave the way for other car makers in Europe, it will undoubtedly be a daunting task.

"I personally think it might turn out to be a mistake, because the (European] Union countries have shown the ability to bite back," Urquhart says.

None-the-less, pressure for consolidation remains. Peugeot, Europe's second-largest carmaker, confirmed last week that it is in talks to strengthen its partnership with Mitsubishi of Japan. The French company could take an equity stake in Mitsubishi, thus reversing the loss-making Japanese firm's attempts to survive on its own.

Some European carmakers are taking limited steps to shift production to lower-cost locations. Daimler said last week that it would move some of the manufacturing of its top-selling Mercedes-Benz C-Class from its core German factory to the US. The work will go to its Tuscaloosa plant in Alabama.

Likewise, rival BMW said in November that it would build a second factory in China to more than double local production in that country, which is now its fourth-largest market. BMW is also increasing output at its US facility in South Carolina.

The moves are part of a trend to manufacture cars in the markets where demand is high. Though France, Italy and Spain all reported hefty surges in November auto sales last week, much of this was fuelled by government-sponsored scrappage incentives, due to close in the next few months.

Volkswagen, Peugeot, GM, Toyota and others have warned that the expiry of these schemes will severely hamper their European operations. Urquhart at IHS is predicting a 5 per cent decline in sales for 2010 as a result of these programmes winding down. Though this could give carmakers added leverage when it comes to closing under-performing factories, Urquhart says it will take two or three years "at the very least" before supply is rebalanced against demand.

"It is a very, very slow process," he says. "The car industry is like an oil tanker – it is a very difficult to turn it into another direction despite there being a pressing need for the industry to reform itself."