The Automotive Industry in an Era of Eco-Austerity: Creating an Industry As If the Planet Mattered

The Automotive Industry in an Era of Eco-Austerity

This book is dedicated to Thaisa. Muito obrigado meu amor.

The Automotive Industry in an Era of Eco-Austerity Creating an Industry as if the Planet Mattered

Peter E. Wells Cardiff University, UK

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Peter E. Wells 2010 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009941410

ISBN 978 1 84844 967 1 (cased)

02

Printed and bound by MPG Books Group, UK

Contents List of abbreviations Preface: the era of eco-austerity Acknowledgements 1 2 3 4 5 6 7

vi viii x

The automotive industry in crisis: economic and environmental failure Diversity and the industrial ecology metaphor Contemporary global diversity and cultures of automobility Emergent diversity in the global automotive industry: the policy agenda Alternative business models as the basis of a new industrial ecology of the automobile Enablers and limiters of change Conclusions

Bibliography Index

1 39 58 78 99 130 163 171 193

v

Abbreviations ACEA AEB AMP ASA ATS bbl BRIC CAFE CARS CAW CNG EBIT ELV EPA ERG EU EV FAPRI GMAC GMD HCNG HCV HFCs IEA JAMA KAMA LCV LPG M&A mbd MDI MFR mpg mtpa MY

European Automobile Manufacturers’ Association Association of European Businesses Automotive Mission Plan (India) Advertising Standards Agency (UK) Automotive Transformation Scheme (Australia) Billion barrels Brazil, Russia, India and China Corporate Average Fuel Economy (US) Car Allowance Rebate System (US) Canadian Auto Workers Compressed natural gas Earnings before interest and taxes End of Life Vehicle Environmental Protection Agency (US) Electric Recharge Grids European Union Electric vehicle Food and Agriculture Policy Research Institute (US) GM Acceptance Corporation Gordon Murray Design Hydrogen compressed natural gas Heavy commercial vehicle Hydrofluorocarbons International Energy Agency Japan Automobile Manufacturers’ Association Korea Automobile Manufacturers’ Association Light commercial vehicle Liquid petroleum gas Merger and acquisition Million barrels per day Motor Development International Micro Factory Retailing Miles per gallon Million tons per annum Model Year (US) vi

Abbreviations

NAP NGO NGV NHTSA OECD OEM OICA OIE PBP ppm PSS RAC RNPO SMMT SNM TPS UAW UNECE V2G VSP WHO

vii

National Automotive Policy (Malaysia) Nongovernmental organization Natural gas vehicle National Highway Traffic Safety Administration (US) Organization for Economic Cooperation and Development Original equipment manufacturer Organisation Internationale des Constructeurs d’Automobiles Office of Industrial Economics (Thailand) Project Better Place Parts per million Product service system Royal Automobile Club (UK) Renault Nissan Purchasing Organization Society of Motor Manufactures and Trades (UK) Strategic Niche Management Toyota Production System United Auto Workers United Nations Economic Commission for Europe Vehicle-To-Grid Voiture sans permit (France) World Health Organization

Preface: the era of eco-austerity Like a winter dawn creeping chill and grey over the land, the realization is growing that we are entering a new era. While the people of the world have endured previous periods of economic hardship, the new era is different. There is a real and justified fear as communities seek to comprehend the new language of crisis with its sub-prime borrowers, toxic assets, negative equity and quantitative easing, and somehow to trace cause and effect from the urban poor of America to the glittering bonus payments of the City of London. Factories and offices are closing their doors. It feels like the whole world economy has frozen solid with fear: investment has ground to a halt, sales have crumbled into bare minimalism, nobody is recruiting and nobody is selling a house. There is a collective holding of the breath while we wait for things to get back to normal. Only they will not go back to normal, if normal is what we have experienced in the last 20 years or so. This really is a new era. For a start, it will take many years to recover the losses of the last 12 months that have been witness to wealth destruction on an unprecedented scale. More fundamentally, we cannot allow a repetition of the fevered bubble of speculation upon which our economic lives floated – because in the end all bubbles burst. At the same time, the environmental challenges have not gone away. In fact, with every passing of a new scientific report or research project the evidence continues to accumulate: not only are things worse than we thought, they are also getting worse even more quickly than we thought. It is not just climate change. It is an entire package of disasters that threatens our very social existence that scientists are seriously discussing now. Be it water shortages or the decline in petroleum production, encroaching deserts or the loss of forests, species extinction or the collapse of fish stocks – everywhere the pressure of humanity on the planet is reaching critical levels. Until recently, we believed that we could face these challenges and had the economic power to overcome them, because we could afford to be green. Well, we don’t have the money any more, but we cannot afford not to be green. For us, this becomes a critical juncture in human history. A burgeoning global population is going to face a devastating economic slowdown at a time when the resource base is stretched to its limits. viii

Preface

ix

The era of eco-austerity sounds grim, and well it might be if we are not careful and imaginative. There is a very real danger that, under these circumstances, our future is one of an unremitting scramble for the dwindling resources of the planet. It is all too easy for a ‘green totalitarianism’ to emerge promising stronger government for a greener planet. An alternative scenario might be one of social implosion and global population collapse as we virtually return to the Stone Age. The truth is that none of us forecasters and analysts and visionaries really knows what the future will bring, because the rules have changed such that the old certainties have crumbled to dust around us. Governments are currently focused on trying to salvage what they can from the wreckage of the economy, and particularly the financial system. Large sums of money are being poured into vulnerable sectors like banking and the automotive industry in an attempt to return to the ‘growth’ that was a key factor behind the problems in the first place. This reaction is inevitable, but ultimately may be pointless or counter-productive – just pouring good money after bad. The era of eco-austerity is opening with a firestorm of creative destruction, which in turn creates the conditions for a radical transformation of our lives. The financial crisis has exposed the chronic lack of sustainability in our previous lifestyles, when we lived like there was no tomorrow – but tomorrow then arrived. Crises have always been the basis for opportunity, and now this is the case more than ever. The new era of eco-austerity may actually be one to be embraced and celebrated rather than confronted and overcome because now is the time for a radical change in our culture, in our social structures, in our political processes, in our lifestyles, in the very meaning of ‘wealth’ and ‘success’ and ‘growth’. Over the next few months and years, the shape of the new era will start to become evident. On the other hand, it is extremely challenging to translate this rhetoric into substantive action, particularly in an industry as problematic as the automotive industry and an activity as problematic as motorized personal mobility. This book is a modest attempt to provide an account of how we arrived at this point, and what the solutions might be. In so doing, the book has recourse to some key themes including diversity, flexibility, volatility, turbulence, localism, technological innovation, social and business innovation, and cultural change. Ultimately this is not about the search for the best single technology for a sustainable car – it is much more wide ranging than that. This book is about the search for and transition to multiple and diverse solutions to the provision of sustainable personal mobility.

Acknowledgements The research for this book was made possible through funding by the UK Economics and Social Research Council of the Centre for Business Relationships, Accountability, Sustainability and Society (BRASS) at Cardiff University. I would like to acknowledge the support of Gareth Davies at AutomotiveWorld, Paul Nieuwenhuis and my fellow academics, PhD students and staff at BRASS, and the many members of the automotive industry, government and voluntary groups who have over the years provided information and funding. Every effort has been made to trace all the copyright holders but if any have been inadvertently overlooked the publishers will be pleased to make the necessary arrangements at the first opportunity.

x

1. 1.1

The automotive industry in crisis: economic and environmental failure WHEN IS A CRISIS?

In the realm of economics and business, a crisis is rarely a single event or a happening of short duration. When a company becomes bankrupt, or when an entire industrial sector collapses, there may be one or more pivotal moments, but crisis is generally a process or a sequence of events. So it is with the crisis that engulfed the global automotive industry in 2008 and 2009. While it might be said that the industry was the victim of circumstances beyond its control, as industry leaders have been wont to claim, this explanation neglects two important factors. First, the automotive industry was itself part of the ‘circumstances’ in so many ways; and secondly, while the financial upheavals unfolding from late 2007 onward might have been the proximate cause of market collapse and hence corporate crisis for vehicle manufacturers and suppliers, the underlying causes lie buried deep within the long-standing business practices of the industry. This book is not intended to be one of the growing numbers that seek to analyse the convulsions that rippled through the global economy from 2007 onward. There are already several insightful accounts (Shiller, 2008) and doubtless more will arrive. It should be recognized, however, that in so far as the global financial crisis had its roots in massive trade imbalances, and in consumers, governments and companies spending beyond their means, then the automotive industry was undeniably part of the problem. New car sales around the world were, up to 2007, booming as never before on the strength of freely available credit and a continuing surge in investment into new production capacity. Vehicle manufacturers were making cars like there was no tomorrow, and they were right! The idea that the leading vehicle manufacturers and the automotive industry as a whole are somehow blameless, passive and undeserving victims of external events is one of the key myths to be challenged in this book. Such an analysis inevitably leads to the conclusion that the crisis is temporary, has nothing to do with structural problems in the industry, and 1

2

The automotive industry in an era of eco-austerity

can be resolved by government financial support until business as usual is possible and markets return to normality. On the contrary the crisis for the automotive industry derives from the inability of the industry to confront the twin threat of economic and environmental pressures. These two forces for change are not distinct but in fact are intimately connected one with the other, although some leading figures concerned with the issue of climate change have not embraced this perspective (Stern, 2009). For example, the burgeoning consumption of scarce raw materials by the automotive industry was one of the factors behind the surge in commodity prices that occurred just prior to the mid-2008 collapse. In a different but similar vein, the relentless consumption of petroleum by cars in use has been a key factor behind the growth in CO2 emissions to the atmosphere, and consequent global climate change, while simultaneously being a major feature in global trade imbalances. In this regard the automotive industry is one of the first in the world to truly face the reality that it is not sustainable. Being unsustainable is necessarily a temporary condition, but the automotive industry like many others appeared to be managed by those that believed that the day of reckoning could be postponed into the indefinite future.

1.2

THE ECONOMIC DIMENSION

According to the Organisation Internationale des Constructeurs d’Automobiles (OICA), in 2005 if automotive manufacturing was treated like a country, it would be the sixth largest in the world with an equivalent turnover of €2 trillion (OICA, 2009). From the turn of the millennium vehicle production expanded significantly, and in the decade from 1995 to 2005 the industry expanded by some 30 per cent. Already the rather grand claims made by the industry appear to ring rather hollow, for example that ‘automobiles represent freedom and economic growth’ (OCIA, 2009). The estimated nine million direct jobs and 50 million indirect (supplier) jobs created by the industry worldwide are now dependent upon government hand-outs. The estimated US$400 billion contributed annually to government revenues worldwide also looks less attractive now as governments and society pick up the costs of closure and rationalization. Table 1.1 shows car and commercial vehicle production by country in 2000, while Table 1.2 shows car production by country for 2000, 2007 and 2008. It is recognized that data in this and other tables may not agree with other sources, chiefly due to differences in definitions and the difficulties of double-counting kit assembly. However, the data are broadly internally

The automotive industry in crisis

Table 1.1 Country

Total Source:

Car and commercial vehicle production by country, 2000 Cars

Argentina Australia Austria Belgium Brazil Canada China Czech Rep. Egypt Finland France Germany Hungary India Indonesia Iran Italy Japan Malaysia Mexico Netherlands Poland Portugal Romania Russia Serbia Slovakia Slovenia South Africa South Korea Spain Sweden Taiwan Thailand Turkey UK Ukraine USA Uzbekistan Others

3

Commercial vehicles

Total

Total change (%) 1999–2000

238 921 323 649 115 979 912 233 1 351 998 1 550 500 604 677 428 224 39 616 38 468 2 879 810 5 131 918 134 029 517 957 257 058 274 985 1 422 284 8 359 434 280 283 1 279 089 215 085 481 689 178 509 64 181 969 235 11 091 181 333 122 949 230 577 2 602 008 2 366 359 259 959 263 013 97 129 297 476 1 641 452 18 124 5 542 217 32 273 127 445

100 711 23 473 25 047 121 061 329 519 1 411 136 1 464 392 27 268 20 149 458 468 551 394 697 3 369 283 403 35 652 3000 316 031 1 781 362 2 547 656 438 52 234 23 283 68 215 13 984 236 346 1 649 450 0 126 787 512 990 666 515 41 384 109 600 314 592 133 471 172 442 13 131 7 257 640 0 63 204

339 632 347 122 141 026 1 033 294 1 681 517 2 961 636 2 069 069 455 492 59 765 38 926 3 348 361 5 526 615 137 398 801 360 292 710 277 985 1 738 315 10 140 796 282 830 1 935 527 267 319 504 972 246 724 78 165 1 205 581 12 740 181 783 122 949 357 364 3 114 998 3 032 874 301 343 372 613 411 721 430 947 1 813 894 31 255 12 799 857 32 273 190 649

11.4 14.6 1.2 1.6 24.5 −3.2 13.1 21.1 −21.4 13.2 5.3 −2.8 7.2 −2.1 228.9 132.8 2.2 2.5 11.3 24.9 −13.0 −12.2 −2.2 −26.9 3.1 141.8 43.3 4.1 12.6 9.6 6.3 20.2 5.6 27.6 44.7 −8.1 63.0 −1.7 −27.4 59.3

41 215 653

17 158 509

58 374 162

3.8

Derived from OICA.

4

The automotive industry in an era of eco-austerity

Table 1.2 Country Argentina Australia Austria Belgium Brazil Canada China Czech Rep. Egypt Finland France Germany Hungary India Indonesia Iran Italy Japan Malaysia Mexico Netherlands Poland Portugal Romania Russia Serbia Slovakia Slovenia South Africa South Korea Spain Sweden Taiwan Thailand Turkey UK Ukraine USA Uzbekistan Others Total Note: Source:

Car production by country, 2000, 2007 and 2008 Cars 2000

Cars 2007

238 921 323 649 115 979 912 233 1 351 998 1 550 500 604 677 428 224 39 616 38 468 2 879 810 5 131 918 134 029 517 957 257 058 274 985 1 422 284 8 359 434 280 283 1 279 089 215 085 481 689 178 509 64 181 969 235 11 091 181 333 122 949 230 577 2 602 008 2 366 359 259 959 263 013 97 129 297 476 1 641 452 18 124 5 542 217 32 273 127 445

350 735 283 348 199 969 789 674 2 388 402 1 342 133 6 381 116 925 778 67 149 24 000 2 550 869 5 709 139 287 982 1 707 839 309 208 882 000 910 860 9 944 637 347 971 1 209 097 61 912 695 000 134 047 234 103 1 288 652 8 236 571 071 174 209 276 018 3 723 482 2 195 780 316 850 212 685 315 444 634 883 1 534 567 380 061 3 924 268 170 000 429 430

46.8 −12.5 72.4 −13.4 76.7 −13.4 955.3 116.2 69.5 −37.6 −11.4 11.2 114.9 229.7 20.3 220.7 −36.0 19.0 24.1 −5.5 −71.2 44.3 −24.9 264.8 33.0 −25.7 214.9 41.7 19.7 43.1 −7.2 21.9 −19.1 224.8 113.4 −6.5 1997.0 −29.2 426.8 237.0

399 577 285 590 125 436 680 131 2 561 496 1 195 436 6 737 745 933 312 72 485 18 000 2 145 935 5 526 882 342 359 1 829 677 431 423 940 870 659 221 9 916 149 419 963 1 241 288 59 223 840 000 132 242 231 056 1 469 429 9 818 575 776 180 233 321 124 3 450 478 1 943 049 252 287 138 709 401 309 621 567 1 446 619 400 799 3 776 358 195 038 332 917

13.9 0.8 −37.3 −13.9 7.2 −10.9 5.6 0.8 7.9 −25.0 −15.9 −3.2 18.9 7.1 39.5 6.7 −27.6 −0.3 20.7 2.7 −4.3 20.9 −1.3 −1.3 14.0 19.2 0.8 3.5 16.3 −7.3 −11.5 −20.4 −34.8 27.2 97.9 −5.7 5.5 −3.8 14.7 −22.5

41 215 653

53 049 391

28.7

52 637 206

−0.8

USA excludes light trucks. Derived from OICA.

% change (2000–2007)

Cars 2008

% change (2007–2008)

The automotive industry in crisis

5

consistent and it is assumed that in net global terms any differences will be marginal. From Table 1.2 it can be seen that the automotive industry as a whole entered the new millennium with a robust growth rate overall in terms of cars and commercial vehicles produced. Although it is the markets of the so-called BRIC countries (Brazil, Russia, India and China) that often get the attention, Table 1.1 shows that the strongest growth in percentage terms at that time was in a variety of countries such as Ukraine, Turkey, Brazil, Indonesia and Serbia. Table 1.2 gives a clearer overview of the relative boom conditions since the millennium up to the global financial crisis of 2008. As can be seen, production output showed extraordinary growth in some countries including the BRIC countries. It is notable also that car production in the United States had fallen by 29 per cent by the end of 2007 and by a further 4 per cent in 2008 (though this figure excludes the ‘light truck’ category of vehicles that are often used as passenger cars in that market). Production also fell in other traditional locations during this time period, including Canada, Belgium, France, Italy, the UK and the Netherlands. Of the main traditional production locations, only Japan and Germany managed to show a growth in output in the period 2000 to 2007, indicative of a strong export performance rather than greater demand in the domestic market. In contrast, production in China soared to 6.3 million cars in 2007. Thus the overall growth of 28.7 per cent shown in car production for the period 2000 to 2007 masks some very strong variations at a national level as the ‘tectonic plates’ of the industry shifted. Indeed this geographic restructuring in terms of production is but one aspect of an underlying theme in this book – that of turbulence. Data for 2008 show major reductions in output from 2007 in countries such as Italy, France, Spain and Sweden even though at a global level output was virtually unchanged. In Table 1.3 the top 50 vehicle producing companies in 2007 are listed. Again the data are essentially pre-crisis in that they reflect the position prior to the major global financial events of 2008. The subsidiary brands owned by the various groups are not shown (e.g. the data for VW does not show the figures for Skoda, Audi, SEAT and the other brands held by the group). Neither do the data account for the complexity of the interlinkages and cross-shareholdings between various companies. Finally, the data do not show the many smaller companies active in niche markets such as Lotus. Still the data do show, for all the expectation of consolidation in the automotive industry in the search for ever-greater economies of scale, that the industry on the eve of the crisis remained significantly fragmented on a world scale. Overlaid on these national data are the investments and outputs of

6

The automotive industry in an era of eco-austerity

Table 1.3

Global vehicle production by company, 2007

Rank Group 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

GM Toyota Volkswagen Ford Honda PSA Nissan Fiat Renault Hyundai Suzuki Chrysler Daimler BMW Mitsubishi Kia Mazda Daihatsu AVTOVAZ FAW Tata Fuji Chana Automobile Isuzu Beijing Automotive Dongfeng Chery Others SAIC Brilliance GAZ Volvo Harbin Hafei Geely Anhui Jianghuai Mahindra Paccar Great Wall Jiangxi Changhe

Cars

LCV

HCV

Heavy Bus

Total

6 259 520 7 211 474 5 964 004 3 565 626 3 868 546 3 024 863 2 650 813 1 990 715 2 276 044 2 292 075 2 284 139 754 855 1 335 226 1 541 503 1 100 528 1 286 299 1 165 660 711 595 735 897 690 712 243 251 512 606 543 787

3 055 575 1 108 333 256 777 2 586 284 43 268 432 522 641 734 536 578 392 996 67 003 312 177 1 779 269 257 350 0 304 273 81 040 117 779 130 968 0 0 170 230 72 422 0

33 042 129 107 39 600 95 596 0 0 131 429 127 542 0 159 237 0 4 500 438 954 0 7 174 0 3 291 13 608 0 0 157 781 0 0

1 681 85 776 7510 0 0 0 7422 24 616 0 99 410 0 0 65 447 0 0 1991 0 0 0 0 16 896 0 0

9 349 818 8 534 690 6 267 891 6 247 506 3 911 814 3 457 385 3 431 398 2 679 451 2 669 040 2 617 725 2 596 316 2 538 624 2 096 977 1 541 503 1 411 975 1 369 330 1 286 730 856 171 735 897 690 712 588 158 585 028 543 787

0 454 272

49 810 0

478 535 0

3668 0

532 013 454 272

437 035 427 882 189 057 313 002 293 588 39 138 0 231 488 216 774 209 880

0 0 69 935 0 0 179 596 14 825 0 0 0

0 0 85 036 0 0 30 105 210 446 0 0 0

0 0 24 700 0 0 0 10 753 0 0 0

437 035 427 882 368 728 313 002 293 588 248 839 236 024 231 488 216 774 209 880

104 441 0 122 605 112 083

64 115 0 0 0

0 126 960 0 0

0 0 0 0

168 556 126 960 122 605 112 083

The automotive industry in crisis

Table 1.3

7

(continued)

Rank Group

Cars

40 41 42 43

107 170 0 100 376 100 202

0 4 586 0 0

0 97 323 0 0

0 4 984 0 0

107 170 106 893 100 376 100 202

0 0 84 138 0 31 869 68 160 65 790

0 0 0 0 40 293 0 0

92 485 70 839 0 71 017 0 0 0

5 956 15 919 0 7 314 0 0

98 441 86 758 84 138 78 331 72 162 68 160 65 790

56 301 121

12 775 910

2 685 200

416 245

72 178 476

44 45 46 47 48 49 50 Total Note: Source:

Porsche Hino BYD China National MAN Navistar Fujian Scania UAZ Shannxi Shangdong Kaima

LCV

HCV

Heavy Bus

Total

LCV = light commercial vehicle; HCV = heavy commercial vehicle. Derived from OICA.

multiple vehicle manufacturers engaged in a process of inter-market penetration facilitated and augmented by the creation of new manufacturing capacity – often with destabilizing results for the recipient economies (Changhoon and Clark, 2007). Table 1.4 shows similar data but for 2008, where the impact of reduced production can be seen as well as the shifting ‘league status’ of the companies – notably of course the ascent of Toyota to become the largest vehicle manufacturer in the world.

1.3

THE PROCESS OF DECLINE

At the outset it is to be admitted that corporate strategy at all levels is diverse and contextual, while the glib phraseology of ‘globalization’ does little to capture the reality of the industry over the last ten years or so (Freyssenet et al., 2003). The idea that there can be one best way (Womak et al., 1990) has been largely discredited. Despite this, the underlying business model that forms the basis of the Toyota Production System (TPS), or Fordism, or Sloanism, or Hondaism is technologically and structurally similar in all cases. Of course differences between these approaches are important, and can be the difference between profitable survival and

8

The automotive industry in an era of eco-austerity

Table 1.4

Global vehicle production by company, 2008

Rank Group 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Toyota GM Volkswagen Ford Honda Nissan PSA Hyundai Suzuki Fiat Renault Daimler AG Chrysler BMW Kia Mazda Mitsubishi AVTOVAZ Tata FAW Fuji Isuzu Chana Automobile Dongfeng Beijing Automotive Chery SAIC Volvo Brilliance Harbin Hafei Geely Anhui Jianghuai BYD GAZ Mahindra Proton Great Wall Paccar Chongqing Lifan

Cars

LCV

HCV

Heavy bus

7 768 633 6 015 257 6 110 115 3 346 561 3 878 940 2 788 632 2 840 884 2 435 471 2 306 435 1 849 200 2 048 422 1 380 091 529 458 1 439 918 1 310 821 1 241 218 1 175 431 801 563 489 742 637 720 552 096

1 102 502 2 229 833 271 273 1 991 724 33 760 463 984 484 523 85 133 317 132 516 164 368 929 330 507 1 356 610

251 768 24 842 46 186 68 715

114 877 12 871 9 840

134 033

8 416

151 759

104 774

135 658

23 303

395 123 7 000

68 578

83 159 105 754 128 233

1 344 2 302 5 567

160 966

128 169

19 388

64 401 47 101

488 488

3 221

Total

531 149

9 237 780 8 282 803 6 437 414 5 407 000 3 912 700 3 395 065 3 325 407 2 777 137 2 623 567 2 524 325 2 417 351 2 174 299 1 893 068 1 439 918 1 395 324 1 349 274 1 309 231 801 563 798 265 637 720 616 497 538 810 531 149

489 266 446 680

489 266 446 680

350 560 282 003

350 560 282 003 248 991 241 553 226 754 220 955 207 711

17 964

218 542

140 985 62 201 493

24 025

241 553 226 754 220 955 207 711 192 971 22 043 100 615 156 813 129 651

125 084 122 783

12 485

192 971 187 053 162 816 157 306 129 651 125 084 122 783

The automotive industry in crisis

Table 1.4

(continued)

Rank Group

Cars

40 41

107 422

42 43 44 45 46 47 48 49 50 Total Note: Source:

9

MAN Jiangxi Changhe China National Porsche LUAZ Navistar Scania Shannxi Auto UAZ Ashok Leyland Kuozui

LCV 100 566

HCV

Heavy bus

7 487

108 053 107 422

106 377 96 721 88 316

106 377

2 232 76 302 72 067

13 962 7 807

41 228 1 019

50 539

19 927

63 827

1 792

2 272

55 130 574

10 741 629

2 292 188

75 220 30 953

Total

96 721 90 548 90 264 79 874 75 220 72 181 71 485 67 891

419 449

68 583 840

LCV = light commercial vehicle; HCV = heavy commercial vehicle. Derived from OICA.

financial collapse in the course of competition between companies within the same industry sector. Yet the industry tends towards an institutional isomorphism on the fundamental parameters of product design (all steel vehicles using internal combustion engines), process design (steel stamping and welding, body painting, trim and final assembly), and marketing approach (distributed network of franchised dealers, revenue streams generated by the sale of cars, multiple product brand ranges) premised on economies of scale and standardization (see Nieuwenhuis and Wells, 2007 and Batchelor, 1994 for an historical account of the emergence of this system). Industry observers have for some time been arguing that a new business model is needed (Nieuwenhuis and Wells, 1997; Maxton and Wormold, 2004). Figure 1.1 illustrates the spiral of events that make the reversal of corporate decline so difficult (Wells, 2009c). The immediate cause of problems is of course a decline in sales, as has happened on an industry-wide basis since mid-2008. Inevitably, such a general crisis more profoundly affects the weaker companies – though the business studies literature tends to neglect the lessons to be learnt from failure (Chesbrough and Rosenbloom, 2002; Denrell, 2003). In the past this spiral of decline can be traced back to more individual events – the Ford Firestone case is a good

10

The automotive industry in an era of eco-austerity UNIT SALES FALL REVENUES FALL/ UNIT COSTS RISE

MARKET VALUE DECLINES

DEALERS LOSE CONFIDENCE

SUPPLIERS LOSE CONFIDENCE

INVESTOR RETREAT

DEALERS TAKE OTHER FRANCHISES STAFF MORALE FALLS TIME TO MARKET INCREASES INCREASED RISK OF TAKEOVER CUSTOMER SERVICE DECLINES PRODUCTS BECOME TOO OLD KEY COMPETENCIES LOST UNIT SALES FALL

PROFITABILITY DECLINES

Figure 1.1

The crisis spiral

illustration (O’Rourke, 2001; Moll, 2003; Noggle and Palmer, 2005), as is the problem Mitsubishi had with cover-ups over neglected vehicle recalls in Japan (Ito, 2006). Moreover, while much of the concern has been with crisis and resolution over a relatively short time period, it is also possible for ‘crisis’ to unfold inexorably over the years. Indeed, some aspects of the negative feedback process described here can take many years for the full effects to be felt by the company. For example, when a crisis hits a company key design staff may decide to leave and find employment elsewhere. This does not matter for the immediate product portfolio, or even for models largely developed but not in the market, but in a few years’ time when full replacements are due the quality of the new designs may not be up to the desired level. As the crisis deepens so the negative effects are found throughout the organization, and the negative feedback loops start to develop. For the vehicle manufacturers the following are important: ● ● ●

customers; financial community; franchised dealer networks;

The automotive industry in crisis ● ●

11

suppliers; internal resources and competences.

Customers Customers are of course vital in this process, be they corporate or private retail. If customers lose confidence in a brand, then it is bound to suffer. Damage to a brand can be difficult and expensive to repair; alternatively, building a brand image and reputation takes many years. There is a secondary impact on used car values that is also important. If the brand is seen to be weakened, residual values on used cars will fall, with some customers getting into the automotive equivalent of ‘negative equity’ whereby the actual value of a three-year-old car is significantly below the book value upon which a finance package has been arranged. In fact with the overall market crisis several vehicle manufacturers had to reduce the asset value of the cars that they had sold under finance packages, wiping many millions of Euros off their balance sheets (Mercedes lost €449 million in the third quarter of 2008 alone due to this problem according to Reiter, 2008). Financial Community A weaker share price that reflects the troubles a company is experiencing simultaneously makes a company vulnerable to external takeover, and less able to generate the resources to mount a defence. In order to shore up the balance sheet, a company may need to sell assets but at the same time the debt rating may be reduced, thereby making capital more expensive. True, speculations over takeovers of a weak company, hostile or otherwise, can act to drive up share price again but this does not in itself help with debt rating. For example, in 2008 one of the debt rating agencies, Standard and Poor, cut the then DaimlerChrysler Financial Services Americas limited liability company rating from CCC+ to CCC− (Isaiah, 2008b). Many of the global vehicle manufacturers suffered from a shortage of finance in the post-crisis environment from mid-2008. Governments had to step in to provide ‘soft loans’ and loan guarantees (Lampinen, 2009) because so many new car purchases are made via various finance schemes rather than outright purchase by customers. In the first half of 2009 the EU European Investment Bank provided €7 billion (US$9 billion) for vehicle manufacturers (Proctor, 2009a). For GM Acceptance Corporation (GMAC) in North America, new vehicle consumer financing contracts during the first quarter of 2009 fell significantly to US$3.4 billion from US$13.1 billion in the first quarter of 2008. At the end of 2008 new contracts had collapsed, and it was only with an investment from the US Treasury’s Troubled

12

The automotive industry in an era of eco-austerity

Asset Relief Program in late 2008 that GMAC expanded its new North American retail car financing activities (AutomotiveWorld, 2009a). Again it is significant that these processes may play out over differential time periods. Some, such as adjustments to share price, can happen quickly – indeed such adjustments are the short-term consequences of financial markets assessing the future implications of recent developments. On the other hand, selling off assets in order to generate funds and reverse the crisis spiral may take some time, and equally the more ‘distressed’ the position of the company the more likely it is that the full asset value cannot be realized because potential buyers know the seller is increasingly desperate to generate whatever revenues are possible. The automotive industry faces daunting investment costs into the future, in four main categories: the rationalization costs of closing unwanted capacity in saturated markets; the investment costs in opening up new capacity in growth markets; the development costs for new models; and the R&D costs of bringing to market alternative technologies to achieve environmental targets. With low or negative profitability, the required investment resources must come from outside. A key question is, therefore, can the automotive industry afford its own future? Franchised Dealer Networks The franchised dealer network is a key element in the mainstream business model for vehicle manufacturers, for without it the spatially extensive market could not be reached. These dealerships are independent, and employed precisely because of their sensitivity to changing market conditions. Over an extended period of time, the number of dealers in the mature markets has fallen. In the UK, for example, in the 30 years to 2007 the total number of franchised dealers decreased from 11 201 (1976) to 5273 (2007), almost a 50 per cent reduction (Sewells, 2008). As sales per outlet fall, so the confidence of the dealers falls. They might react by seeking to take another brand into the franchise or business; once a single-franchise operation becomes a multi-franchise outlet some sales that would previously have gone to the initial brand will go instead to the new brand, thereby reducing sales overall to the brand under crisis. This situation is made worse if entire brands are dropped (see the section on rationalization and cost reduction below), or if the vehicle manufacturer decides to reduce the number of dealers, thereby creating ‘gaps’ in network coverage. In the USA, GM informed around 1100 franchised dealers that it would not renew their contracts in October 2010 as part of its previously announced intention to reduce the total number of dealers by 42 per cent, from 6246 in 2008 to 3605 by the end of 2010 (AutomotiveWorld, 2009b). A similar

The automotive industry in crisis

13

42 per cent cut was later announced for Canada. When Chrysler went into bankruptcy in 2009 it too announced dealer reductions (789 in the USA as of May 2009), but also halted so-called wholesale financing to dealers (which enables them to hold stock at 0 per cent finance cost for a limited period), thereby reducing their operational flexibility. It is interesting to note that the GM Europe dealer network actually tried to buy a 10 per cent share in the vehicle manufacturer in May 2009, having raised some €500 million, when the proposed sale to Magna was being discussed. The claim is that having fewer dealerships will give higher sales volumes per dealer, and hence greater financial viability. With declines, however, franchised dealers may become reluctant to invest at former levels such that, for example, the physical fabric of the retail outlets declines, as does the skills level of the workforce due to lapses in training coverage. Once again, therefore, customer service levels will fall and so will sales, thereby accelerating the impetus to decline. Not surprisingly dealers may find it difficult to trust vehicle manufacturers. In mid-2008 GM issued a statement that there were no plans to remove any brands from its range other than Hummer (Murphy, 2008a), yet barely six months later Saab, Saturn and Pontiac were added to the list. Suppliers The large changes introduced with lean production included a series of new policies to manage the supply base. The number of direct suppliers was cut by a factor of ten while a degree of control was passed to the leading suppliers in terms of product development. The vehicle manufacturers became strongly interventionist, sending development teams to enhance the quality and productivity of their suppliers. Lean sourcing was not in itself enough, however. In addition the vehicle manufacturers have sought to capitalize on low production costs associated with emergent production locations, and so in reality the ‘shared destiny’ concept has not survived critical events and, if anything, leading suppliers are now seeking to exert market power to retain price levels. Table 1.5 provides a summary. Vehicle manufacturers are increasingly reliant on suppliers, but in a crisis vehicle manufacturers become vulnerable both to strategic choices by the supplier and indeed to that supplier simply going out of business. If suppliers start to reduce their investments to a particular vehicle manufacturer in product development then it is likely that the pace of new model development will slow and/or there will be some aspects of the new model that are not up to current standards. In either case the vehicle manufacturer is left competing in the market with products that are less than ideal, being either too old or insufficiently competent, or both. In

14

The automotive industry in an era of eco-austerity

Table 1.5

Transitions in vehicle manufacturers’ sourcing strategies Traditional

Lean

Extended enterprise

Neotraditional

Number of 2 000–3 000 suppliers per model or plant Geographic Local scope of supply base R&D capacity Work to of suppliers drawing

200–300

20–30

200–300

Regional

Regional

Global

Design to fit

Innovative solutions

Innovative, sometimes challenging to vehicle manufacturers

Contracts to suppliers

Short term; awarded on quoted cost basis

Model term; awarded on cost, quality, delivery basis

Renewed cost emphasis

Management of supply base

Remote; piece price focus

Structure of supply side

Fragmented; national focus High; captive suppliers for main subassemblies

Interventionist; quality, price, delivery focus; supplier performance optimization Tiered hierarchy; regional focus Reduced; captive suppliers seek external business

Model or platform term; awarded on ‘shared destiny’ basis Outsourced; value mapping; chain optimization; strategic focus Supply chain; regional focus Selective integration in strategic technologies; reduced integration elsewhere

Low-level integration emerging even in ‘core’ technologies

Vertical integration in the OEMs

Source:

Automated; reliance on external accreditation; material cost focus Supply chain; global focus

Wells, 2008a.

turn this will undermine sales and so take the decline spiral around a further iteration. Prior to 2007 there had already been multiple high-profile business failures in the automotive components industry, including Meridian, Tower

The automotive industry in crisis

Table 1.6

15

Some illustrative major supplier bankruptcies to late 2009

Supplier

Activity

Location

Event

JL French

Castings

US

Lear

Seating; world’s 11th largest supplier

US and Canada

Visteon

Multiple areas (ex-Ford captive supplier) Wheels

US

Declared bankrupt for second time in July 2009; 98% of business with GM, Ford and Chrysler Declared bankrupt in July 2009; total assets of about US$1.27bn and total liabilities of about US$4.54bn Declared bankrupt May 2009

Laser welded blanks Multiple areas

US

HayesLemmerz Noble International Visteon Plastal Holding

Edscha

Plastic automotive components Hinges and roof systems

Key Plastics

Plastic components

Contech

Aluminium and steel cast components Roof linings

Stankiewicz GmbH Delphi

Dana

Source:

Multiple areas (ex-GM captive supplier) Drivetrain components

US

UK Sweden

Germany (owned by US Carlyle Group) US

US

Germany US

US

Declared bankrupt May 2009 Declared bankrupt April 2009 April 2009 sought high court protection Declared bankrupt March 2009 along with German subsidiary Declared bankrupt in February 2009 Declared bankrupt in December 2008 with debts of more than US$100m Declared bankrupt in February 2009 Declared bankrupt in December 2008 Declared bankrupt in 2005; yet to emerge from this Filed for protection under Chapter 11 in 2006; eventually emerged February 2008

Compiled from http://www.automotiveworld.com news reports, 2006–9.

16

The automotive industry in an era of eco-austerity

Automotive, Cooper-Standard Holding, Collins and Aikman, Arvin Meritor, Dura Automotive Systems and Federal-Mogul. In fact Table 1.6 captures only part of the scale of losses, closures and restructuring underway in the period from 2007 in the automotive components industry. In early 2009 some reports were talking of up to 500 US suppliers being ‘at risk’ as the crisis unfolded. Internal Resources and Competences One area that is particularly difficult to measure in terms of the impact of the spiral of decline is that of internal resources and competences. Many vehicle manufacturers operate so-called labour banks whereby during busy periods workers provide over and above the contracted hours per week on the understanding that during slack periods the company will continue to pay them. This simple form of production smoothing is effective up to a point, but inadequate to withstand the structural forces unleashed in the economic crisis from mid-2008. All things being equal, there must be a strong incentive for those with the most marketable or portable skills to seek employment elsewhere, and for the company to start to struggle to recruit the best talent. Inevitably in turn this means that the ability of the business to compete into the future is more or less compromised.

1.4

THE FAILURE OF TRADITIONAL STRATEGY

Traditional strategies include mergers, acquisitions and consolidation, multibrand platforms, rationalization and cost reduction, expansion into new markets and extending the brand reach. It is worth noting that these strategies have not failed for every vehicle manufacturer. VW Group, for example, has been largely regarded as successful with its use of common platforms or vehicle architectures across several different brands and models. Equally it could be argued that the Renault-Nissan partial merger has been a success on most terms, even if many jobs were lost in Japan as part of the rescue process. Over time, however, two key issues have come to be important. First, the automotive industry as a whole has become a lot more complex, as have the operations of the major vehicle manufacturers. They have all, generally, expanded production facilities and brands and models, they have opened up into new markets, and entered into multiple supply arrangements alongside joint ventures or co-product agreements with other vehicle manufacturers. Hence the process of identifying the possible synergies in a merger, and of finding the areas where duplication can be removed, is more difficult. In

The automotive industry in crisis

17

addition such processes inevitably involve governments, trades unions and others with a vested interest in the outcomes and this can militate against the raw logic of business. Secondly, arising from the complexity, it takes longer to achieve change such that the benefits might not accrue fast enough. Mergers, Acquisitions and Consolidation Many of the traditional solutions in the form of rationalization, cost reduction and industrial consolidation have failed to yield the anticipated benefits; the most obvious case being the catastrophically executed merger between Daimler and Chrysler (Han and Kleiner, 2003; Weber and Camera, 2003). In 1998 Daimler paid US$36 billion for Chrysler, while in 2007 it sold the majority of the business (80.1 per cent) to Cerberus Capital for just US$7.4 billion, having endured major losses in the previous two years. Dieter Zetsche, Chief Executive of DaimlerChrysler at the time, reportedly said that ‘We obviously over-estimated the potential synergies’ (quoted in Gerlach, 2007). The failed merger was part of a wider strategy adopted by Daimler under the then Chairman Jürgen Schrempp in the mid1990s termed the ‘Welt AG’ plan under which the company would seek a dominating role in the key market regions of the world through a series of mergers and alliances including Chrysler, Mitsubishi and Hyundai. Paradoxically, the strong leadership of Schrempp could have been the cause of the merger failure (Stadler and Hinterhuber, 2005) as he took the company into a series of relationships that the rest of the management found difficult to make operational. While the major financial institutions and corporate lawyers, along with the senior management teams involved, tend to be well rewarded in the short term by mergers and acquisitions (M&As), in the longer term the corporate benefit is much more doubtful. In the case of the automotive industry there are sound reasons for taking the view that benefits would in any case take years to materialize. For example, the typical car model requires something like 36 to 48 months to bring to market if started from a ‘clean sheet’. It is then in production for say eight to ten years (with some mid-life facelifts possibly), and will be supported in the aftermarket for a further ten years with the supply of spare parts. Investments in plant and tooling, as well as supplier contracts, are generally put in place as the model is developed and put into production. Indeed reversal of consolidation, merger and acquisition strategies has proven expensive for GM buying out the ‘put’ option held by Fiat and selling Saab to Koenigsegg in mid-2009; BMW selling off MG Rover (Brady and Lorenz, 2001; Donnelly et al., 2003); Ford selling Land Rover and Jaguar to Tata after years of losses, unhappy ownership of the Norwegian electric vehicle brand TH!NK, and so on. Table 1.7 illustrates

18

The automotive industry in an era of eco-austerity

Table 1.7

Major restructuring changes in the global automotive industry, 2007 to 2009

GM GM GM

Bankrupt Sale of Saab Sale of GM Europe (Opel, Vauxhall) Sale of Hummer

GM GM Ford Ford Ford Porsche Chrysler

Chrysler LDV Source:

Sale of Saturn Sale of Jaguar/Land Rover Sale of Aston Martin Sale of Volvo Cars Attempted acquisition of VW Sold to Cererbus Financial Holdings by Daimler (retained 20%) Bankrupt Bankrupt

Bailed out by US government Purchased by Koenigsegg Initially agreed purchase by Magna and others; bids reopened later Purchase proposed by Chinese company Purchased by Penske Purchased by Tata Purchased by Prodrive No purchaser as of late 2009 Failed attempt. In July 2009 VW bought up Porsche Messy and not totally resolved by late 2009 Bailed out by US government Not bailed out by UK government

Compiled from http://www.automotiveworld.com news reports, 2007–9.

some recent attempts at industrial restructuring in the sector, where again results have been mixed. Table 1.8 details some changes to the contract vehicle assembly industry in the period 2007 to late 2009. Prior to this, early casualties had been Mayflower (UK), TWR (UK, but undertaking contract assembly for Volvo in Sweden) and Matra (France). Of the remainder, Magna (Austria) and Valmet (Finland) remained in business. A typical case for the contract manufacturers is Karmann, which previously built the Volkswagen Golf variant/wagon (previous generation), Chrysler Crossfire, Kia Sportage (previous generation), Audi A4/ S4 Cabriolet and Mercedes Benz CLK coupe. As with other contract assemblers, a combination of vehicle manufacturers putting more of the low-volume work in-house (in their increasingly flexible factories) and the loss of work on retractable roof systems has undermined its business. An early casualty was the automotive division of Matra, the company that built the earliest Renault Espace models and the ill-fated Aventine model. On the other hand, several of these contract assemblers might in the future produce electric vehicles in competition with their former customers, a point returned to later in this book. One of the main areas of benefit expected from M&A activity is that

The automotive industry in crisis

Table 1.8

Major restructuring changes in the contract assembly industry, 2007 to 2009 Problems started in mid-2006; bankrupt November 2007; bought by Argentum Motors, July 2008 Bankrupt April 2009

Heuliez (France)

Contract assembler; seat assemblies; retractable roof systems

Karmann (Germany)

Contract assembler; retractable roof systems

Bertone (Italy)

Contract assembler

Bankrupt November 2007; ‘sold’ January 2008 but sale blocked

Pininfarina (Italy)

Contract assembler

Net loss of €115m (US$176.68m) in 2007; rescued January 2009

Source:

19

In administration again, April 2009; two bids received; medium-term focus on own electric vehicles Concentrate on components; cut 1340 jobs; medium-term focus on own electric vehicles Interest expressed by First Auto Works (China) and Mahindra & Mahindra (India). Exited. Interest still expressed by Fiat Stopped contract assembly; sought to develop electric vehicle; net loss in 2008 €204.1m (US$275.4m)

Compiled from http://www.automotiveworld.com news reports, 2007–9.

of purchasing components and materials, though again this takes time to materialize. For example, the Renault Nissan Purchasing Organization (RNPO) was founded in 2001 as part of the more general partial merger of the two companies. In the 2002–03 fiscal year, RNPO purchased components worth US$21.5 billion (or 43 per cent of the total bought by Nissan and Renault). By January 2004 RNPO had increased the scope of its joint purchasing to include manufacturing equipment, such as press machinery and welding equipment, distribution, front-end modules, interior materials such as trim, and car audio equipment such that joint purchases increased by US$11.5 billion to US$33 billion (AutomotiveWorld, 2003). Such moves give greater purchase volumes on commodity items (tyres, glass, steel, etc.) and also allow the gradual removal of duplication in purchasing management staff.

20

The automotive industry in an era of eco-austerity

Multi-brand Platforms It is often claimed by vehicle manufacturers that one of the key areas for cost saving arising out of M&A activity is that multiple brands and models can be derived from a single ‘platform’, thereby saving resources in R&D and in tooling. This approach, often reduced to putting a different badge on essentially similar cars, has somewhat fallen out of favour to be replaced by so-called architecture strategies. With architectures, the common components are hidden from view for the consumer. The GM GMT-800 model, for example, is the blueprint for the company’s fullsize truck. This versatile architecture has spawned 63 variants of pickups and sport-utility vehicles, including the Chevy Suburban and Silverado, the Cadillac Escalade and the Hummer H2. The model list included (in 2008): ● ● ● ● ● ● ● ● ● ●

Cadillac Escalade/Escalade ESV; Cadillac Escalade EXT; Chevrolet Avalanche; Chevrolet Silverado, HD, hybrid; Chevrolet Suburban; Chevrolet Tahoe; GMC Sierra, HD, hybrid; GMC Yukon Denali, Yukon Denali XL; GMC Yukon, Yukon XL; Hummer H2.

The engineering logic was quite compelling, with major aspects of development (such as integration of the powertrain with the chassis) effectively by-passed for new models derived from the same architecture. As a result development times are compressed, more products can be created and development costs per model are reduced. On the other hand, to take just one instance, the Hummer H2 was a poor pastiche of a car with only some superficial resemblance to the iconic Hummer military vehicle. It gained incremental sales for the Hummer brand while simultaneously destroying its integrity. In 2009 GM had to put the Hummer brand up for sale as part of the process of creating the New GM business. Rationalization and Cost Reduction Cost reduction to expand the market has been an industry staple strategy since the days of the Model T Ford. There is a clear danger that rationalization to achieve cost reduction might conflict with other elements of

The automotive industry in crisis

21

strategy, notably the expansion into new markets and extending the reach of a brand (by adding more models in more market segments to the brand range). Equally, however, it could be that rationalization is required in a mature (saturated) market while simultaneously new capacity is required in a new (expanding) market – indeed this has been a long-running problem for the industry over the last 20 years or more. In the context of the spirals of decline, however, rationalization may not be sufficient. For example, in mid-2002 GM announced plans to reduce the number of mid-size cars on sale in North America from 15 to 10 in a bid to reduce costs and focus marketing efforts. The company had already announced plans to drop the Oldsmobile brand by 2004. As with Chrysler dropping the Eagle brand in 1998 and the Plymouth brand in 2001, the measure did little to halt the decline in market share. In 2009, as part of the prebankruptcy reconstruction of GM, it was announced that GM was to sell the Saab, Saturn, Hummer and Pontiac brands (Isaiah, 2008b). In practice it is probably fair to say that the bulk of the effort in terms of cost reduction has been via increasingly aggressive procurement regimes, holistic purchasing strategies intended to off-load a greater share of development costs onto suppliers while simultaneously achieving year on year price reductions in per-unit bought in components and materials. Expansion into New Markets Russia is a typical example of a country into which the global automotive industry has sought to expand and capture market growth as economic liberalization proceeds. The Russian government put in place in 2007 a three-stage plan for the development of the automotive industry, but it is unclear how this plan has been affected by changes in the global macroeconomic environment. Under this plan the period 2008–10 was seen as one of consolidation in the industrial base for vehicle assembly and components serving domestic demand, leading to phase two (2011–15), which would be characterized by export-oriented facilities, and ultimately resulting in the third phase, where 70 per cent of production would be for domestic demand and 30 per cent for export. Up to 2008 the market in Russia had shown clear trends towards strong growth, and the replacement of ‘domestic’ brands with imported cars or sales of non-domestic brands manufactured in Russia. In 2004, out of total sales of 1 268 000, domestic brands accounted for 865 000 (68 per cent); by 2008 sales had been estimated to grow to 2 750 000 with domestic brands accounting for 700 000 (25 per cent). The expectation of market growth fuelled an investment boom in Russia as in other markets such as China, India, Thailand, Brazil and

22

Table 1.9

The automotive industry in an era of eco-austerity

The estimated market in Russia, Q1 2008 and Q1 2009 (cars and light commercial vehicles)

Group Avtovaz GM Group Opel Chevrolet Cadillac Hummer Saab Ford Group Ford Volvo VW Group VW cars VW vans Audi Seat Skoda Nissan Group Infiniti Nissan Hyundai Toyota Group Toyota Lexus Renault Mazda PSA Peugeot-Citroen Peugeot Citroen Kia GAZ Group GAZ cars GAZ vans Sollers Group Fiat Isuzu Ssangyong UAZ Daewoo Honda Mitsubishi Suzuki

Q1 2009

Q1 2008

% change

88 720 43 102 11 945 30 268 472 309 108 32 697 29 956 2 741 25 761 10 935 1 406 3 302 292 9 826 24 804 1 877 22 927 21 391 20 816 19 356 1 460 15 011 13 176 13 175 9 981 3 194 13 710 12 987 2 339 9 748 11 720 3 915 22 2 063 5 720 11 692 9 218 6 042 4 407

144 777 83 157 23 479 58 594 308 191 681 45 737 41 499 4 238 22 455 7 507 1 754 3 880 232 9 082 38 355 1 102 37 253 44 054 38 530 35 825 2 705 24 303 17 094 10 403 8 403 2 000 21 101 32 298 5 297 27 001 19 534 4 515 0 3 000 12 019 23 941 15 445 21 296 9 890

−39.0 −48.0 −49.0 −48.0 53.0 62.0 −84.0 −29.0 −28.0 −35.0 15.0 46.0 −20.0 −15.0 26.0 8.0 −35.0 70.0 −38.0 −51.0 −46.0 −46.0 −46.0 −38.0 −23.0 27.0 19.0 60.0 −35.0 −60.0 −56.0 −64.0 −40.0 −13.0 0.0 −31.0 −52.0 −51.0 −40.0 −72.0 −55.0

The automotive industry in crisis

Table 1.9

(continued)

Group

Q1 2009

BMW Group BMW Mini Jaguar Land Rover Land Rover Subaru Mercedes Benz Mercedes Benz cars Mercedes Benz vans IZH Chery Geely Great Wall Lifan BYD Chrysler Group Chrysler Jeep Dodge Porsche Iran Khodro Alfa Romeo Source:

23

4 184 4 011 173 3 397 3 031 2 990 2 795 2 360 435 2 166 957 915 833 618 606 417 70 161 186 299 108 37

Q1 2008 4 211 4 009 202 4 897 4 612 4 296 4 118 3 388 730 5 628 5 361 0 2 607 662 920 2 139 406 795 938 390 681 74

% change −1.0 0.0 −14.0 −31.0 −34.0 −30.0 −32.0 −30.0 −40.0 −62.0 −82.0 0.0 −68.0 −7.0 −34.0 −81.0 −83.0 −80.0 −80.0 −23.0 −84.0 −50.0

Derived from AEB, 2009.

elsewhere. As Table 1.9 clearly shows, however, the market in Russia experienced precisely the same sort of collapse as other global markets. As a consequence the investments detailed in Table 1.10 appeared in 2009 to be surplus to requirements, with excess capacity once again the main structural problem faced by the vehicle manufacturers. As can be seen from Table 1.10, the years up to 2009 have been witness to a significant flow of inward investment from vehicle manufacturers eager to capture a share of the booming market in Russia. These plans were, however, in some cases put on hold in 2009, with for example Suzuki reportedly halting construction of its plant in St Petersburg. Nissan officially launched its new plant in June 2009, but with only one shift and 750 workers. Several plants had closures or production slowdowns announced in 2009 including Avtoframos, GAZ Siber production, Ford St Petersburg, IzhAvto, Toyota St Petersburg and Geely (Ural). In March 2009 Putin pledged more than US$1 billion in aid for the automotive industry in Russia.

24

Moscow Vsevolozhsk Togliatti Taganrog Izhevsk Nab. Chelni St Petersburg St Petersburg Kaluga St Petersburg Kaluga St Petersburg St Petersburg

Avtoframos Ford GM AVTOVAZ TagAz IzhAvto Sollers Toyota GM Volkswagen Nissan PSA–Mitsubishi Hyundai Suzuki Others

Source:

Kia, BMW, Hummer, Chevrolet, Others Renault Ford Chevrolet Hyundai Kia Ssangyong, Fiat Toyota Chevrolet, Opel VW, Skoda Nissan Mitsubishi, Peugeot Hyundai Suzuki

Brands

Derived from AEB, 2009; Bonchev, 2008.

Kaliningrad

Avtotor

Total

Location

1999 2002 2001 1997 2003 2006 2008 2007 2008 2009 2010 2010 2009

1994

Start date

Production facilities of non-domestic brands in Russia, 2009

Factory

Table 1.10

4 908

380 330 338 320 90 180 220 300 1 200 200 400 400 120

250

Capital cost (US$m)

459 000

70 000 70 000 55 000 80 000 50 000 21 000 0 6 000 2 000 0 0 0 0 1 000

106 000

Production 2007

1 645 000

160 000 150 000 60 000 155 000 120 000 90 000 100 000 180 000 140 000 80 000 60 000 80 000 30 000 60 000

130 000

Capacity 2012

The automotive industry in crisis

Table 1.11

25

Brand names, models, body styles and variants on the UK market, 1994 to 2009

Year

Brand names

Models

Body styles

Variants

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

54 56 57 53 54 52 57 58 57 56 62 54 63 64 59 57

205 211 218 225 231 240 262 260 263 257 351 323 356 344 304 310

300 309 321 318 382 332 357 351 387 370 397 376 415 397 366 376

1 303 1 580 1 624 1 611 1 637 1 759 1 931 2 042 2 472 2 743 3 042 3 155 3 219 3 323 3 291 3 637

Source:

Wells and Morreau, 2009.

Extending the Brand Reach Vehicle manufacturers have sought to capture or retain market share by increasing the number and variety of models and brands on offer in any one market, thereby hoping to align their product offering more closely with customer demand. Table 1.11 gives an indication of how this has resulted in market fragmentation, taking the UK as an example. Extending the brand, or indeed adding new brands, can both be means by which vehicle manufacturers are able to cover more of the market segments and potentially increase revenues per vehicle. Table 1.12 presents some data that show clearly that the market share of the top ten models in a number of European countries declined in the ten years between 1996 and 2006 – again indicative of market fragmentation. As Table 1.12 shows, in all cases the market share of the top ten models has fallen significantly no matter what the starting point. The rate at which that share has declined varies from case to case, with perhaps France and Sweden showing the most enduring reliance on the top ten models. Perhaps this is no accident, as in both cases the domestic manufacturers have retained a degree of competitiveness. Neutral markets, those with no

26

The automotive industry in an era of eco-austerity

Table 1.12

Market share of the top ten models, selected markets, 1996 and 2006

Market

1996 share (%)

2006 share (%)

38.30 33.58 41.45 35.32 42.90 48.88 57.11 40.50 44.23 45.54 49.90 50.84 41.93

27.51 27.74 28.84 21.83 32.76 41.69 36.05 30.90 34.07 37.39 34.70 41.86 31.89

Austria Belgium Denmark Netherlands Finland France Portugal Germany Spain Irish Republic Italy Sweden UK Source:

Derived from SMMT, 2007a.

domestic manufacturer, tend to highlight these trends even more strongly – perhaps because there is less residual loyalty to a domestic manufacturer. The consequences for vehicle manufacturers can be profound. In those core domestic markets critical volumes are lost. An example is the VW Golf. In 1996 VW sold 337 550 Golf/Vento models in the domestic German market, or 8.55 per cent of the total market of 3 946 320. In 2006 VW sold 236 980 Golf/Jetta models to claim 6.83 per cent of the total market of 3 467 961 (Society of Motor Manufactures and Trades (SMMT), 2007a). Put another way, it is a real challenge for the volume vehicle manufacturers to retain their domestic market share. Hence between 1996 and 2006 Renault domestic market share fell from 26.5 per cent to 23.6 per cent, while over the same time period Fiat domestic market share fell from 33.6 per cent to 23.3 per cent. The trend is not entirely universal, with for example VW managing to increase domestic market share in the same time period from 18.9 per cent to 19.8 per cent, but the overall thrust of these market developments is clear.

1.5

THE ENVIRONMENTAL DIMENSION

Not all of the ills of the world can be laid at the door of the automotive industry, but it is certainly worth considering the many and varied

The automotive industry in crisis

27

environmental challenges of the contemporary era if only as an antidote to the often myopic institutional focus on carbon emissions and climate change. Put in another way, a car with zero carbon emissions in use is not necessarily going to provide sustainable mobility. Not least, the automotive industry is again symptomatic of a broader problem: that as hitherto underdeveloped economies seek to emulate and indeed overtake the material wealth of the previously industrialized nations, so the latent unsustainability of the industrial nations is made apparent. The work of the ‘Factor X’ school of thought (Weiszacker et al., 1997) made this abundantly clear, building on the worthy tradition of the still influential and inspirational Brundtland Report (World Commission on Environment and Development (WCED), 1987) and the now neglected ‘limits to growth’ theories (Meadows et al., 1972). As the Factor X theorists eloquently put it, resource consumption (and the pollution that in turn ‘consumes’ fresh resources) is a function of population, technology and level of economic development, and all three are changing at a frightening rate. More recently the more populist concept of the ecological footprint (Wackernagel and Rees, 1998) has gained political purchase and provided us all with a graphic metaphor of the burdens we are placing on the planet. As Giddens (2009) argues, there is no cohesive politics of climate change and green parties are mostly marginal, while resurgent nation states in the wake of the failure of globalization may fatally undermine the ability to achieve collective action at the international level. Those burdens are many and varied (Brown and Starke, 1998; Millennium Ecological Assessment (MEA), 2005), and include crucial issues such as deforestation (Binswanger, 1991), habitat loss (Hoekstra et al., 2004), desertification (Schlesinger et al., 1990; Geist and Lambin, 2004), species extinction (International Union for Conservation of Nature (IUCN), 2009) and loss of species diversity, water shortages (Ward, 2002; World Wildlife Fund (WWF), 2008), over-fishing (Scheffer et al., 2005), and the looming exhaustion of many important organic and inorganic materials with extraction rates exceeding discovery rates or the ability of reserves to be renewed (Tilton, 2002). The automotive industry cannot reasonably be blamed for the problems associated with over-fishing in any direct manner, but the industry has long been seen by national governments as an engine of economic growth and an indicator of national prosperity and to that extent the automotive industry is very much part of the entire social project of modernism that has propelled us all along the path of increased material consumption. Moreover, some of the planetary burdens imposed by humanity can be attributed directly to the automotive industry and its products, in manufacture, use or disposal.

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The automotive industry in an era of eco-austerity

Table 1.13

Total world materials consumption for all cars adjusted for material yield (mtpa)

Material

2010

2015

81.86 11.179 12.211 11.139 4.888 3.110 1.504 1.852 3.956

81.544 11.629 13.595 11.376 3.954 3.474 1.622 2.010 4.899

Steel Iron Aluminium Plastic Elastomer Glass Copper Zinc, etc. Other Source:

Change Change 2010–15 2010–15 (kg) (%) −0.241 −0.150 1.385 0.236 −0.935 0.364 0.118 0.157 0.943

−0.3 −1.3 10.2 2.1 −23.6 10.5 7.3 7.8 19.3

2020

93.321 12.372 18.381 14.492 4.612 4.111 1.982 6.396 7.185

Change Change 2015–20 2015–20 (kg) (%) 11.776 0.743 4.786 3.116 0.659 0.637 0.361 4.387 2.286

12.619 6.004 26.037 21.502 14.279 15.504 18.201 68.583 31.822

Wells, 2008a.

The construction of roads, for example, is itself contributory to the fragmentation of ecosystems and hence to the decline of biodiversity and ecological vitality. Roads create barriers to the movement of many living things, and bigger roads create bigger barriers. With roads come traffic, cars and trucks and other motorized transport that connect previously remote locations to other centres of population. Roads and vehicles are the instruments through which humanity is often able to extend its dominion over the land. The manufacture of cars demands vast quantities of materials, as Table 1.13 clearly illustrates. The automotive industry is heavily implicated in carbon emissions. In 2004 US cars and light trucks contributed an estimated 314 million metric tons carbon-equivalent. The USA has 5 per cent of the world population, 30 per cent of the world’s automobiles and contributes 45 per cent of the world’s automotive CO2 emissions (DeCicco et al., 2006). Greater understanding of anthropometric climate change (Lynas, 2007; World Energy Council (WEC), 2007) provides potent arguments for developing innovations that can reduce carbon emissions in vehicles for example, while the looming scarcity and uneven geographical distribution of oil provides an international context for developing alternatives to hydrocarbon fuels (International Energy Agency (IEA), 2008). In those nations that are particularly dependent on imported oil such as the United States the problem is viewed as acute and of national strategic importance (Aleklett, 2007), and for some is the basis for further global conflict (Heinberg, 2005). Of course the environmental and the economic

The automotive industry in crisis

Table 1.14

Sources of CO2 emissions in the UK, 2006

Source

Proportion (%)

Power generation Land transport Air/sea transport Business Other Source:

29

35.0 22.0 7.0 17.0 6.0

Adapted from SMMT, 2007b.

problems are frequently inter-twined. Becker (2009) forecasts that by 2030 electric vehicles could account for 64 per cent of US light vehicle sales and 24 per cent of the fleet in circulation. If this were to happen Becker further calculates: ●

●

● ● ●

US oil imports will be 18–38 per cent lower by volume by 2030 than would be expected if internal combustion engine cars took all the sales (even allowing for improvements in fuel efficiency); similarly, the annual US trade deficit attributable to importing oil could be between US$94 billion and US$266 billion lower by 2030; there would be a net employment gain of between 130 000 and 350 000 jobs by 2030; health care cost savings (due to reduced air pollution) of between US$105 billion and US$210 billion; greenhouse gas emissions of between 20 per cent and 69 per cent by 2030 when non-polluting sources of electricity are used compared with 2005 US light vehicle emissions.

The position in a country such as the UK shows that the automotive industry is somewhat less implicated in the overall picture on CO2 emissions, but still significant, as shown in Table 1.14. The SMMT (2007b) estimates that cars account for some 40 per cent of transport CO2 emissions in the UK, though this figure includes air travel and the UK has a particularly high CO2 emissions figure from air travel due to the disproportionate share of long haul flights. The science behind many of these issues is less than certain, as is the relative contribution of direct human agency or indirect feedback loops such as the impact of (probably anthropogenic) climate change on fish stocks that have already suffered from over-fishing. An almost universal

30

The automotive industry in an era of eco-austerity

awakening among politicians globally has produced a newfound zeal to tackle these issues, imbuing legislators with a revolutionary ardour to, among other things, embrace new vehicle technologies and provide incentives for their introduction into the market. Petroleum, Carbon Emissions and Peak Oil The mainstream ‘Reference Scenario’ for the IEA forecast to 2030 (IEA, 2008) is typical of the mainstream of scientific opinion with respect to future trends on energy consumption, and concludes that: ‘The Reference Scenario, characterized by rising energy prices, increased import dependence, and rising greenhouse-gas emissions, is unsustainable: environmentally, economically, and socially.’ This is worrying news for the automotive industry because the Reference Scenario takes as its starting point government policies obtaining in mid-2008, along with petroleum prices that were somewhat higher than they became in the post-crisis era. In the view of the IEA, world primary energy demand will grow by an average of 1.6 per cent per annum, or 45 per cent between 2006 and 2030. Fossil fuels of all types will continue to retain an approximate 80 per cent share of primary energy demand, though within this the share of coal is expected to increase significantly. Under this scenario the expectation is that by the end of the twenty-first century there will be an approximate doubling of CO2 concentration levels in the atmosphere to about 1000 parts per million, which in turn may be expected to result in global temperature increases of around 6°C. While the area of global climate change remains an inexact science, these are indeed alarming figures. Obviously not all of the increase in CO2 emissions can be laid at the door of the automotive industry, but equally the implication is that huge changes are needed in all aspects of land transport and the impact it has on climate change (Ryan and Turton, 2007; Sperling and Cannon, 2007; Staley, 2008). Politically, the forecast poses a considerable challenge. Collectively the non-OECD countries account for 87 per cent of the anticipated growth in consumption to 2030. At the same time, power generation and transport are seen as the two key sectors driving growth in energy consumption. World oil demand is expected to grow at 1 per cent per annum to 2030, with net consumption rising from 85 million barrels per day (mbd) in 2007 to 106 mbd by 2030. Crucially the forecast on oil consumption assumes that currently prevailing subsidies in key markets such as China and India are removed, with the resulting price rises helping to curtail demand. About 75 per cent of the growth in oil demand worldwide is expected to derive from the use of cars and trucks, with the global population of cars expected to rise from 650 million (2005) to about 1.4 billion by 2030. Cars

The automotive industry in crisis

31

Table 1.15

Aluminium penetration in vehicle body applications, 2007 (%)

Application

Europe

North America

Asia

18 4 2 2