Car Industry Swerves To Avoid Hazards Ahead

On the surface, the global car industry seems to be surrounded by crises. Job cuts this week from Jaguar Land Rover and Ford followed redundancies and plant closures announced by General Motors late last year.

These, and the challenges faced by the sector, have raised fears of “car-mageddon”.

Chinese sales have slowed, sapping earnings in the world’s most profitable market. The trade war between the US and China risks playing havoc with the global manufacturing strategies of big companies.

Tougher rules around CO2 emissions are forcing carmakers to spend heavily on electric technology just as diesel vehicles, the industry’s favourite way of lowering carbon pollution, have fallen out of favour.

Even Britain’s impending departure from the EU, although small globally, is causing a great deal of concern for any groups with exposure to the market. Add to this plateauing sales in the US and Europe, a warning that the boom times in this cyclical world may be fading, and the mood across the industry is bleak.

“These serious challenges are not coming in singles or pairs but in hordes,” said JLR chief executive Ralf Speth. “As a young niche player we feel these impacts sooner and to a greater degree.”

But despite the gathering clouds, many of the sector’s key indicators are far from gloomy. On Friday Volkswagen Group reported record car sales for last year, despite being unable to sell many of its cars in Europe for several weeks following the introduction of a new European emissions testing regime in September.

The group, the world’s largest carmaker, expected global car demand to grow slightly in 2019, but forecasts stagnation for China, its largest and most profitable market.

In the US and Europe, sales remain robust, while the trend among consumers to ditch smaller saloon cars for high-riding sports utility vehicles bodes well for the industry’s profitability. In fact, for an industry that normally only resorts to job cuts and closures in times of crisis, shedding roles at the top of the cycle when sales are strong is highly unusual.

“Something new is going on here,” said Max Warburton, an analyst at Bernstein. “Companies normally only restructure in the depths of crisis when there’s no alternative.”

He suggested it indicated a greater focus on short-term profits at the businesses, which is no bad thing in an industry that has seen shares decline over the past year as investors write off the sector’s chances of taking on cash-rich technology rivals in areas such as ride-sharing.

The cuts made by JLR, Ford and GM can also be explained by internal problems at each business. JLR, Britain’s largest manufacturer, launched a £2.5bn savings plan last year to stem losses amid an onslaught of problems, including falling diesel sales and Chinese problems exacerbated by years of overspending at the company when it was on the ascent.

Ford on Thursday announced sweeping cuts across Europe, with “thousands” of roles going in its own attempts to bring the region back into the black by cutting unprofitable models. Globally, it is looking to save $14bn from operations in China, Latin America and Europe.

When General Motors in November pledged to close seven sites, including four US facilities, it aimed the axe at facilities that principally produced saloon cars that are increasingly out of favour with car buyers.

Both Ford and Fiat Chrysler have already moved out of passenger cars in the US to focus on SUVs and pick-up trucks — GM was a laggard in this respect. Yet GM’s profits have improved because of the actions. On Friday it upgraded expectations for 2018, and said 2019 profits would climb further still because of the cost savings.

Earnings “will benefit from the restructuring to the tune of $2bn-$2.5bn in 2019,” said GM chief financial officer Dhivya Suryadevara.

Mr Warburton at Bernstein suggested the three series of cuts were “aggressive housekeeping” by businesses that failed to change sooner.

The slew of cuts comes as the industry prepares to gather in Detroit for the city’s annual motor show, which historically is a chance to present the designs and models that will dominate the automotive calendar in the coming year.

This year’s affair will be subdued, and not only because a number of manufacturers are not attending after deciding to spend their events budgets elsewhere, not least at the technology-heavy Consumer Electronics Show in Las Vegas.

Despite an array of new products, the focus is expected to be on the outlook for the sector and how US carmakers will respond to the trade war and falling Chinese sales.

The industry still faces a wide range of dangers that will make the coming downturn difficult.

Car sales have risen strongly in key markets, notably the US and Europe, for several years since the financial crash.

Chart showing global car unit sales in 2018 by leading carmakers and regional breakdown

In the US, the past two years have seen the market buoyed by natural disasters that led to the need for many thousands of cars to be replaced.

Europe’s sales remain strong, but huge uncertainty stems from Brexit, and a disorderly exit this year would send shockwaves around the continent that could knock consumer and business confidence.

China’s market, whose two-decade growth run has boosted the industry’s profit levels, has turned, with only government intervention likely to stem a fall. Data on Monday is expected to show the first annual reverse in China’s car sales since the 1990s.

Even if all three markets hang on to their near-peak levels for another year or so, the industry is soon likely to experience falling sales as the rising cycle can only go on for so long.

At the same time as fighting off falling sales, carmakers will need to invest in new and expensive electric technology to meet CO2 emissions rules in Europe and sales mandates in China.

When they do sell electric cars in greater numbers, they will make less money on them because of costly battery technology that consumers appear unwilling to pay for.

US-based manufacturers are also facing increased challenges. Ford and GM are both facing $1bn of extra costs on their metals after tariffs on imported steel and aluminium led to domestic providers raising their prices.

New rules replacing the Nafta agreement between the US, Mexico and Canada require greater use of parts made in North America, as well as a higher proportion of workers to be paid $16 an hour or above.

And companies that set up their US operations as export bases, such as BMW in Spartanburg or Volvo in Charleston, are facing the prospect of having to re-purpose their facilities to serve the local market instead to counter Donald Trump’s proposed tax levies on imported vehicles.

Structurally, the industry is also entering a drawn-out period where cars without hybrid or electric features will dwindle, leading to a shift from internal combustion technology to battery power, and the need for a refreshed workforce with a different skillset.

Add in the possible job losses from robotics and automation, and companies may be forced to make deeper cuts in the coming years. Analysts at Credit Suisse estimate the industry needs about 18 per cent fewer workers than currently employed.

For most analysts, therefore, the coming downturn is not a question of “if” but “when”.

“There is a perfect storm coming,” said Philippe Houchois at Jefferies. “Fortunately, it is coming slowly enough that management teams are responding sooner.”

GM takes on Tesla to light up electric race

General Motors has vowed to take on Tesla by re-casting its luxury Cadillac brand as an electric nameplate.

GM already produces the Chevrolet Bolt, the first long-distance affordable family car to run only on batteries. On Friday GM said the premium marque would be the company’s “lead electric vehicle brand and will introduce the first model from the company’s all-new battery electric vehicle architecture”.

The company said its electric components were being designed to work across an array of models, allowing the same technology to be used in large vehicles and smaller cars.

A similar system is being developed by Volkswagen, which wants its electric architecture to become the standard underlying technology used by the industry.

Tesla has long dominated sales of premium electric vehicles, but the US brand faces fresh challenges, not only from the upcoming electric Cadillac, but also from European premium nameplates.

Jaguar’s I-Pace was the first all-electric SUV from a European brand, while the Audi E-tron, the Mercedes EQC and the BMW iX3 will all play in the same part of the market.

Dozens of new models are expected to come to market in the next two years — providing consumers with real choice for the first time, and companies such as Tesla with real competition.

Peter Campbell

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