The Coming Car Industry Crunch? PDF Print E-mail
Andy Rowell, 6th October 2008

Another day and another bank is in crisis. Last week the British bank, the Bradford and Bingley, was effectively nationalized by the UK government to stop it collapsing.The Chancellor of the Exchequer, Alistair Darling, said he was taking “decisive action” with Bradford and Bingley to avoid the collapse of the bank, which would have “destabilised the whole industry”.

The same day the Belgium government announced the part nationalisation of Fortis, the Belgian-Dutch banking and insurance group. In effect, the European banking system is in turmoil.

Last week-end, Germany's second largest property lender, Hypo Real Estate, received a €50bn rescue package after an earlier bail-out failed. The German, Austrian, Irish, Danish and Greek governments have now said they will guarantee all savings.

Meanwhile over in the US, the consensus seems to be that the $700 billion rescue deal is nothing more than a stop-gap measure to try and stop the world’s biggest economy from a crippling recession. Many commentators believe that the bail-out will not work in the long-run, but it was the lesser of two evils. The other option – doing nothing – was just not an option.

Most analysts believe that the tumultuous events of the last month that has seen such global colossus brands such as Merril Lynch and Lehman Brothers just collapse have re-written the rules of free-market capitalism.

The crisis has had a dramatic affect on the value of the brands of some of the biggest financial names according to the latest survey of global brands. Financial services giants Merrill Lynch and Morgan Stanley have all - not surprisingly - seen the value of their brands slip significantly.

But it is not just the banks that are in crisis. Some of the world’s most famous car companies could be in trouble too. Other brands that fell significantly on the 2008 “Global Brands” survey include Ford, the car giant, which is also feeling the heat of the credit crunch. Within the past year, Ford and General Motors have posted their worst quarterly losses ever. Ford’s August US sales drop more than 26 percent compared to the same period a year ago. General Motors hardly faired better, with sales down 20 percent in August, and that was its best month of the year to-date.

All the American car makers have been hit by the credit crunch. The home of the car industry is in Detroit where such is the economic turmoil that recently a house sold for just one dollar. Unemployment in the whole state of Michigan is 9 per cent, three per cent higher than the US average. Some see the industry entering terminal decline.

If sales of normal cars have declined, sales of luxury cars have plummeted even further. Fords’s sales of expensive sports utility vehicles plunged 53 percent in August, whilst its trucks and vans declined by nearly 40 per cent.

The only top-end luxury models to register growth in the US was Toyota's Lexus, which is a “hybrid” car that is seen as being “greener” than a normal car because it is both electrical and petrol-driven.

The trend to smaller and greener vehicles has been on the cards for years and the American car-makers should have seen it coming. Toyota, the Japanese maker of Prius, did act and stole a march on its American rivals. But instead of taking action themselves, the American car industry has been highly successful in preventing political action on fuel efficiency. Many of the companies such as Chrysler, Ford, and General Motors were even at the forefront of efforts to deny climate change.

Just as the banks decided to ignore the starting signs of financial turmoil in the American sub-prime market, the American car manufacturers chose to ignore rising energy costs and concerns about climate change and carried on building bigger cars for more profit.

The result is that the Americans have been building cars that no one wants. Back in May this year the New York Times noted that “soaring gas prices have turned the steady migration by Americans to smaller cars into a stampede.” The paper quoted Ford’s chief sales analyst saying the trend is “most dramatic segment shift I have witnessed in the market in my 31 years here.”

Now there are rumours that the big car manufactures are going to have to be bailed out with fiscal incentives to build smaller, more fuel efficient cars. Robert Reich is a Professor of Public Policy at the University of California at Berkeley. An experienced politician, he has served in three administrations, most recently as Secretary of Labor under President Bill Clinton.

According to Reich, a deal could be imminent with the car manufacturers: “When no one was looking, American automakers are on the way to getting their own sweetheart deal from Congress -- billions, ostensibly to convert to more fuel-efficient cars. On a much smaller scale, this bailout is almost as outrageous as Wall Street's” he argues.

Reich continues: “Detroit has known for years that it would eventually have to create fuel-efficient cars, but it kept producing SUVs and trucks because that was where the profits were. Japanese automakers in the US did the right thing, took the risk, made the investments in fuel-efficient technologies. But they're not getting bailed out.”

But they are not the only car manufacturers who could be caught playing yesterday’s game. The German manufacturers whose global brands: BMW, Mercedez-Benz and Porsche are known for luxury, speed and power, could also be in trouble with consumers desire for cleaner, smaller cars.

As the influential journal, the Economist noted last year: “the suspicion is growing that Germany's carmakers are caught the wrong side of two huge coming shifts in demand—towards fuel-efficient “sensible motoring”, especially in the developed world; and towards “cheap and cheerful” cars, especially in Asia.”  

For the past few years, there has been a huge political fight in Brussels to try and get the European car industry – and especially the Germans – to be more fuel efficient. On the one side are progressive MEPs, and members of the European Commission coupled with environmental groups and scientists who are trying to make the EU’s car industry more sustainable in their fight against climate change.

On the other side stand the huge, powerful car lobby, typified by Germans where one in three people own a top-end car and one in seven manufacturing jobs are in the industry. The political and economic muscle of the industry is legendary. The German industry relies on friends in high places. Germany’s ex-Chancellor Gerhard Schröder was on the supervisory board member of VW. EU Enterprise commissioner Gunter Verheugen is an old political ally of Schröder’s and the car lobby. German Chancellor Angela Merkel has consistently backed the car industry, and repeatedly attacked the Commission’s proposals to improve fuel efficiency.

It is an industry that is used to getting its own way. It is an industry that continues to believe “big is best”. BMW along with Mercedes, continues to build cars that are bigger than the ones they replace and have ever more powerful engines. Mercedes is offering high-performance versions of every vehicle it makes too.

The financial and political muscle of the industry is such that it expects politicians to cave in to its demands. But last week there was a really unexpected turn of events at the European Parliament. In an unexpected move, the EU’s influential Environment committee voted by a sweeping majority to force car manufacturers to reduce their carbon dioxide emissions of new vehicles by 2012 and to impose strict fines on those that fail to do so. It had been widely expected that the committee would allow the industry at least three more years – until 2015 - to comply.

“The lobby from the car industry lost,” said Chris Davies, MEP, who is the spokesperson for the Liberal Democrats’ at the Parliament. “MEPs today stood up for tougher measures to combat global warming and sent a strong message to corporate lobbyists to back off. A good day for democracy.”

The deal has yet to be agreed by the Commission, the whole European parliament and EU governments and so you can expect an intense lobbying effort by the Germans to water down the proposals. The car industry may yet get their way.

But slowly and surely people are waking up to the power of corporate lobbyists. As trusted banks go bust, and people see their house prices plummet and savings disappear they are beginning to understand how we got into this mess. They are beginning to understand that governments often caved into the interests of big business over the interests of the consumer.

What is annoying most people I talk to is that the banking industry knew they were in trouble and did nothing about it. Last Week, for example, The Times accused the British bank Bradford and Bingley of making “every mistake in the book”.  The American and European car industries too have made many, many mistakes, believing they could carry on building bigger, faster cars forever. But the credit crunch and climate change have changed the rules. It is time they accepted the game has changed, or they too may be heading for financial ruin too.