Euro-zone disaster? Prospects for OEMs

Just as fears associated with the global economic and financial crisis were subsiding and the worst of the banking sector bad news had been absorbed, so the crisis has mutated into one of public debt. Nowhere is this more apparent than in the Euro-zone countries, where it is now becoming clear that the scale of …

Just as fears associated with the global economic and financial crisis were subsiding and the worst of the banking sector bad news had been absorbed, so the crisis has mutated into one of public debt. Nowhere is this more apparent than in the Euro-zone countries, where it is now becoming clear that the scale of austerity to be faced in coming years is much larger than previously thought.

Thus far it is the more fringe economies including Greece and Portugal that have been the focus of financial market concern, but of course the trouble with the Euro-zone is that the much more significant economies of Germany, Italy and France are all intimately connected with each other, and with their troubled neighbours.

For the automotive industry the developments are a huge concern, as the major OEMs stumble blindly out of the darkness of economic recession into what was supposed to the bright light of recovery – only to discover the long-term impact of the emergency fiscal stimulus and rescue on new car sales could be profoundly challenging. Many advanced industrial countries are highly dependent upon the state as a proportion of GDP, as an employer, and as a consumer of products and services. Retrenchment in state spending, salary reductions and redundancies, restrictions on funding national debt, and increased direct and indirect taxes in the Euro-zone countries and beyond could prove a far more potent threat to survival than the tumultuous but short-lived global financial crisis.

this time around there will be no more money to fund another rescue of the automotive industry should markets collapse once more

What is worse, this time around there will be no more money to fund another rescue of the automotive industry should markets collapse once more. The scrappage incentive schemes have run their course, and national governments lack the reserves to fund OEM cash-flow.

It is hardly surprising that share prices are tumbling across the Euro-zone countries right now, as social upheaval begins to accompany the new era of economic stringency. The relative value of the Euro is falling with them.

But, this is a problem that is unlikely to be confined to the Euro-zone, and even the previously resilient emergent economies such as China, India and Brazil will feel the impact if key export markets fade. With the economic uncertainty there is also political uncertainty over the future of the Euro project and the wider aim of European integration. These are hardly the conditions to have consumers rushing back into the market to buy new cars.

The new realism that OEMs have embraced in the last couple of years will hold them in good stead to prepare for these difficult times: but casualties must be expected

For now, at least for some OEMs, there is the comfort of the recent modest recovery in European markets and the contribution from those hotbeds of growth outside the traditional economies. Yet in real terms, the medium-term outlook is worse now than it was even during the depths of the global financial crisis.

The automotive industry is going to have to focus on aligning capacity with demand, reducing stock to the minimum, squeezing out even more cost, and increasing flexibility to unprecedented levels. The new realism that OEMs have embraced in the last couple of years will hold them in good stead to prepare for these difficult times: but casualties must be expected.

Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com’s sister website AWPresenter.com. He can be contacted on wellspe@cardiff.ac.uk.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

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