Surviving The Storm
The auto industry has seen its ups and downs over the years but only now, with the current financial and environmental concerns, is it facing its greatest trial. Malcolm Xavier Crasta delves into the industry to find out where it stands at this point in time

Since the invention of the automobile in 1885, at the hands of Karl Benz, the automotive industry has grown well beyond what Benz himself would have imagined. In 2008, more than 70mn motor vehicles were produced worldwide. At the end of 2007 there were about 806mn cars and light trucks on the roads worldwide, burning over 260bn gallons of gasoline and diesel fuel annually. These numbers are increasing rapidly, especially in markets such as India and China. In fact China became the largest automobile market in the world in 2009. Unfortunately, an industry of such size and scale, that is so heavily dependent on oil, has a major Achilles heel.

The global financial crisis that began in September 2007 has taken its toll on the fortunes of the automotive industry. To be honest it wasn’t just the recession that affected the industry, it was a combination of factors working in tandem that brought it to its knees. Factors like the rise in oil prices, increasing cost of raw materials, changes in buying patterns and growing environmental concerns have been playing havoc with the automotive industry during the last few years and the current crisis proved to be the proverbial final nail in the coffin. The high expectations that manufacturers had, following the relatively good sales figures of previous years, didn’t help matters either. “Prior to the global market slump, a lot of businesses, including automobile manufacturing, was mostly about national pride and emotion, now though it is all a question of sustainability and not really economic patriotism,” says Annurag Chawla, head of marketing and communications – Mazda, Towell Auto Centre. Despite this the automotive sector worldwide seems to be pulling through, although not completely unscathed.

The worst hit
Detroit, the hub of automobile manufacturing in the US took a beating. Out of the ‘Big Three’, which include Ford, General Motors (or GM as it is more commonly known) and Chrysler, only Ford Motor Company has managed to relatively hold itself together, despite a significant slump in global sales in 2008. GM filed for Chapter 11 bankruptcy protection on June 1, 2009. It was, in terms of assets, the fourth-largest bankruptcy in US history. But, at the same time, it was also one of the largest successful reorganisations in US history. The “new GM,” is formed from the purchase of the desirable assets of “old GM” by an entity called “NGMCO Inc.” via the bankruptcy process. NGMCO Inc. was renamed “General Motors Company” upon purchase of the assets and trade name from “old GM,” with the claims of former stakeholders to be handled by the “Motors Liquidation Company.” Originally GM was the owner of Buick, Cadillac, Chevrolet, Daewoo, GMC, Holden, Hummer, Opel, Pontiac, Saab, Saturn and Vauxhall. Following the restructuring GM will take control of eight brands but would primarily focus on its four core brands – Chevrolet, Cadillac, Buick and GMC. The Pontiac brand and all of its models will be phased out by the end of 2010. On June 16, 2009 it was confirmed that Koenigsegg, a Swedish super-car maker named after its founder Christian von Koenigsegg, and a group of Norwegian financers were chosen by GM as the buyers of the Saab brand. On June 5, 2009, GM announced that they would be selling Saturn and Saturn Distribution Corporation to the Penske Automotive Group, the world’s second largest automotive dealership group and a member of the Fortune 500 and Russell 2000.

As for Hummer, on June 2, 2009, it was confirmed that a Chinese company, Sichuan Tengzhong Heavy Industrial Machinery Company, would be buying the iconic US brand. But, it seems that Hummer for the most part will remain based in the US due to environment and other concerns. “GM has 100 years of experience and leadership in the automobile business and is well on its way to the next 100 years of growth. GM has taken very decisive steps to shed the unprofitable parts of their business, to cut overheads and to streamline processes, after which it is emerging a more lean, efficient and profitable company,” says Satbir Singh, general manager – GMC, Moosa Abdul Rahman Hassan & Co.

Just over one month prior to GM’s bankruptcy filing, Chrysler also filed for Chapter 11, on April 30. Later it was announced that Chrysler was selling some assets and operations to the newly formed company ‘Chrysler Group’ and that Fiat will hold a 20 per cent stake in the new company, with an option to increase this to 35 per cent and eventually to 51 per cent. According to Chris Edwards, general manager – Chrysler, Shanfari Automotive

Company, “The two companies would seem very well suited for each other, in that they have vertically opposed product line-ups. Chrysler has, for many years, catered to the American market and other potential international markets such as the Middle East, while Fiat has perfected small-engine technology and efficiency. This will obviously suit the transformation of Chrysler into a more modern and efficient company.” Keith Dotson, general manager – Chrysler, Dodge and Jeep, Zubair Automotive says, “All things considered Chrysler is in good shape. They came out of the reorganisation with the partnership of Fiat and are currently reviewing their strategies.” Regardless of their current standing, both Chrysler and GM have somehow recovered from their losses and are now much stronger than they were before.

And the malaise is not just limited to US automakers. Toyota Motor Corporation (TMC) reported a loss of $4.4bn for the year ending March 2009. But so far it is holding its ground by taking some firm steps to reduce its losses in the coming year. TMC’s president Katsuaki Watanabe commented on the outlook in a press release: “In the 2010 fiscal year, we plan to accelerate our profit improvement activities including the expansion of our hybrid vehicle line-up such as the next generation Prius in May and the Lexus’ HS250h in July. All totalled, we plan to launch four hybrid models in Japan and three models overseas within this fiscal year.”

Unfortunately for Tata Motors, India, it was soon after their takeover of Jaguar and Land Rover that the subprime crisis hit, leaving them seeking financial aid. But it seems that this has been sorted out – according to David Aziz, director automotive products – Jaguar, Land Rover and Volvo, MHD, “Tata has remained committed towards sustaining the two brands despite the slump. Both the brands are investing on facelifts on existing models and also on new models, such as the new Jaguar XJ. Tata has also managed to secure long-term funding for the two brands from the European Investment Bank, totaling about $560mn, without necessitating guarantees from the UK government.”

Honda’s decision to withdraw it’s participation from the F1 scene was a direct result of the global economic crisis. “Honda was spending in excess of $300mn a year just to compete. Given the crisis in the auto sector, Honda recognised the need to urgently rationalise their business in order to protect their automobile operations” says Paul Turner, national sales manager – Honda, OMASCO. Aside from Honda’s withdrawal from F1, the business has been relatively unharmed. The only real change in their operations is the focus towards the development of new mainstream volume models and next generation fuel technologies.

Ssangyong is another company that has posted a significantly large loss of $75.42mn. The company has temporary halted production and is now in the process of restructuring itself. Aside from the brands mentioned above, others have also had a rough year but are confident of bouncing back as the global economic sentiment improves.

A few manufacturers, such as Audi and Suzuki, have been relatively unharmed by the current situation. In fact, in 2008, Audi achieved the 13th record year in a row passing the one million unit mark with 1,003,400 units sold. Suzuki announced that their worldwide sales have passed the 40mn units mark. “Suzuki is one among the very few Japanese car manufacturers which was not as hard hit as compared to some of its counterparts. It survived tough business conditions to end the financial year in the black, as it reacted early to the economic crisis, adjusting production to match demand. Also, an upsurge in sales, in the domestic Japanese market and Indian markets, helped balance the situation,” says Anil Sethi, general manager – Suzuki, Moosa Abdul Rahman Hassan & Co.

Also, China’s automotive industry has been in rapid development since the year 2000 despite the slump in the economy. In 2008, 9.34mn motor vehicles were manufactured in China. This has enabled it to surpass the US as the second largest automobile maker, after Japan. A number of Chinese brands like Geely and Great Wall have opened outlets in Oman. So, although things are challenging for now the industry is confident about the future.

Battle for control
Not all movement within the industry is actually related to the current crisis. Companies have been changing hands all the time and for the most part customers will be relatively unaffected by these deals. This is because as a standard operating practice the existing dealer network and all general assets of a company get transferred as part of the deal.

This should calm any anxiety that customers watching the ongoing negotiations between Porsche and Volkswagen (VW) may be having. It started with Porsche’s announcement in September 2005, that it would increase its five per cent stake in VW to 20 per cent at a cost of three billion Euros. This was supposedly done to ward off any hostile takeover from foreign investors. Porsche gradually increased its stake in the company to 25.1 per cent in July 2006 and then to 30.9 per cent on March 2007. But it was not until October 26, 2008 that Porsche finally revealed its plan to assume control of VW. As of that day, it held 42.6 per cent of VW’s ordinary shares and stock options on another 31.5 per cent. However, at an extraordinary meeting held on August 13, 2009, the Volkswagen group’s supervisory board approved the comprehensive agreement to create an integrated automotive group with Porsche led by Volkswagen by 2011. One day later Qatar bought 10 per cent of the Porsche SE holding company as well as the options that Porsche held on 20 per cent of VW shares.

Under this agreement, Volkswagen will initially take a 42 per cent stake in Porsche AG by the end of 2009 and it will also see the family shareholders selling the automobile trading business of Porsche Holding Salzburg to Volkswagen. Porsche will remain an independent company headquartered in Zuffenhausen with the joint group owning ten strong brands. “At the end of the day, they are treated as individual businesses but behind the scenes they have shared components for many years. This can only be a positive for customers because the bigger and broader a companies capabilities, the more efficient it’s going to be in terms of R&D and production” says Andrew Potts, dealer principal – Volkswagen, Audi, Skoda etc; Wattayah Motors.

Expanding to newer segments
Some years back it would have been impossible to picture legendary sports car manufacturers like Porsche and Aston Martin producing luxury sedans and SUVs. Porsche was a trendsetter of sorts with the Cayenne and now with the eagerly awaited Panamera. And Aston Martin is following suite with the upcoming Rapide. Even Lamborghini recently delved into the concept with the Estoque. If you are a dedicated fan of these companies it is sometimes hard to accept these changes, but the fact remains that it is not necessarily a bad move to expand your range. Claudio Piretti, general manager – Ferrari and Maserati, Shanfari Automotive Company, says “Aside from being a part of the expansions strategy, the current market situation dictates a need to reduce costs by getting volumes.”

To keep the price of future cars at a level that is acceptable, erstwhile niche market manufacturers realise that they need to play the volume game. There are two ways of doing this – one, by selling their technology to another company for a monetary value or introducing a model in a segment that was not their forte initially. And the latter is what most established players are opting for. As an added advantage the company retains control over its proprietary technology. There is also another key advantage to doing so – What happens to a man who drives a Aston Martin DB9 when he has a family? In all likelihood he stops being an Aston Martin customer due of space constraints. This is the hassle that most manufacturers of this type face. Now they have given him an option to stay within the brand but still have a vehicle to take his family around in.

The green zone

In lieu of the growing fuel prices and environmental concerns, the need for more fuel efficient and greener vehicles is on the rise. Given these facts a number of manufacturers are well on their way to developing these technologies. But, the biggest question is – Which technology will take over as the primary source of power for the vehicles of tomorrow?

Unfortunately, the answer for this question at this point in time is shrouded in uncertainty. It is a well known fact that the various R&D divisions of the manufacturers analyse and predict the markets for as far as 15 years into the future. Despite this no one has come to a conclusive answer as to what will be the next generation fuel that will power the vehicles of the future. Audi for one, believes it to be electric power while Bentley thinks in the way of flexfuels and Honda is placing its bets on Hydrogen fuel cells. But what is certain is that the change to these fuels will not be a quick one. Mark Tomlinson, general manager – Mitsubishi, General Automotive Company believes so, “What we will see is, rather than a direct shift from petrol engines, is a transitional period with more fuel efficient vehicles and hybrids. But the ultimate shift is going to take quite a long time.” One of the primary reasons for this is the time required to setup the infrastructure needed to make these vehicles a viable commercial alternative. The cost of producing and purchasing such vehicles still remains prohibitive, limiting their appeal.

Fuelling the future
Not all sources are as clean as they seem. Hydrogen for one is considered a zero emissions fuel but in truth, the amount of energy needed to produce it and the material used to make the cells are far from environment friendly at present. And electric cars are also in need of power which in turn is not always produced using the most eco friendly methods. With time comes improvement in technology and efficiency, and what may not be a feasible option today may be the one that motorists of tomorrow may end up using. “Different manufacturers are embarking on different initiatives, in the race to be ready for what will eventually be accepted as the standard. Under its umbrellas of Clean Energy and Efficient Dynamics, BMW is presently working on at least two – the Hydrogen-fuelled car and the Electric car. Today, no one can predict which will be the winning solution. It is all a matter of which manufacturer does it best first, both from a customer standpoint as well as what is embraced by governments in most of the developed world,” says Johnny Oommen, head of operations – Rolls-Royce, BMW and MINI, Al Jenaibi Int’l Automobiles. As of now it seems that hybrid vehicles are the way to go as they are the perfect mediator till a more viable source is found.

As for these hybrid vehicles coming to this region, it seems that there is still time. S Serdar Toktamis, acting group general manager, Zubair Automotive Group, says “The global situation today is very unpredictable and you really can’t tell what will happen tomorrow. As long as we have oil here in the GCC and fuel prices remain as reasonable as they are, I don’t see any of them making it here in the short term to be honest.” James Oliver, dealer principal – Citroen, Great Wall and Peugeot, European Motors, adds, “The GCC market alone cannot dictate what needs to be built. The choice will rest on the major companies themselves. Around the world manufacturers are building more economical and efficient vehicles based on the demand. Eventually the choice of the big V8’s will disappear altogether.” But what will this hold in store for muscle cars and high-performace sports coupes? Only time will tell.

For now it is important to remain positive. Keeping this in mind, VR Dilip, chief operating officer – Hummer, Chevrolet, Hyundai etc; OTE, concludes, “A lot of churn is taking place which will benefit customers and keep companies healthy. And if the result of all this is greener vehicles which consume less energy and lead to a cleaner environment then it is fantastic. This crisis has accelerated the development of green cars and this is the silver lining.” We could not agree more and from what one can see, the industry will come out of this crisis stronger than ever before.



 

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