Oct 24, 2008

Business - Car companies look beyond recession

Jorn Madslien
Business reporter, BBC News

The car industry, which is often seen as a barometer of the world economy, is storming headfirst into a deep recession, with sales and profits tumbling.

Manufacturing plants are closing, production is being cut back, jobs are being axed and car company share prices are tumbling as a consequence.

"We didn't really expect the market to go down so quickly," says Toyota Motor Europe's head of sales and marketing, Thierry Dombreval. "The market has become increasingly competitive."

Nevertheless, while top executives at the top carmakers admit times are tough, they have told the BBC that they expect to emerge from the recession stronger than ever.

"To use motorcycling terminology, when you enter a corner you don't look into the corner, you look at where you want to be when you get out of that corner," says BMW's board member in charge of sales and marketing, Ian Robertson.

Immediate pain

But first, the automotive sector must prepare for 2009, which is expected to be even tougher than this year.

"Customers are relying on financing, so the credit squeeze is affecting all markets," adds John Fleming, president and chief executive of Ford Europe. "Sales are going down and markets are softening".

In the US, Detroit's Big Three - General Motors (GM), Ford and Chrysler - recently secured a $25bn government cash injection into the industry and may soon return for more.

European policy makers are considering similar action to help an industry in crisis.

Prepared for a slump

But when in a more contemplative mood, many of the industry's top executives are looking beyond the recession, and there they see gold.

Leaning confidently back in his chair, Bentley Motors chief Franz-Josef Paefgen says he is "very optimistic", even though the Crewe-based luxury car maker has seen sales drop by about a third since spring.

"Although we are having difficult times and the market is in a terrible condition, we are prepared for it," he says, pointing out that, even following the sales slump, Bentley is producing many more cars than it did five years ago.

Bentley sales rose from about 1,000 cars a year to about 10,000 cars between 2003 and last year, and there is no telling when demand will be revived, Mr Paefgen points out.

"It will come back one way or another," he declares. "We continue to invest in new product. We are investing at the highest level since Volkswagen bought Bentley a decade ago."

Jim Wright, vice president of Nissan's luxury-subsidiary Infiniti, which has just entered Europe, is also eagerly looking beyond the recession.

Brand-building during a downturn should lead to strong sales growth once the economy recovers, he believes.

American bounce?

Weaker oil prices should help, according to both economists and industry officials.

Oil prices should average $60 a barrel in 2009 and slip towards $50 by the end of the year, Deutsche Bank's energy analysts predict.

This could provide some short-term relief for US automotive firms as lower prices at the pump might slow down the shift towards smaller, more fuel-efficient cars.

In the short-run, this might make it easier for companies such as GM, Chrysler and Ford to get rid of their backlog of gas-guzzling models, and thus give them more time to change both the way they make cars and the way they are structured.

Rolls-Royce Motor Cars' new chief executive Tom Purves, who headed up BMW's North America division for almost a decade, predicts that the world's largest car market could bounce back quickly.

"The US is a much more immediately responsive market," he says.

"It goes down and up simply faster and people react more instantaneously. The systems and structures are more organised."

Fast-growing demand

Mitsuo Kinoshita, executive vice-president of Toyota Motor Corporation, is also confident that demand will pick up in the medium- to long-term.
"Cars are indispensible anywhere in the world for people to move, and the current financial situation does not change that," he grins.

Dieter Zetsche, chairman of the management board at Daimler and head of Mercedes Cars, agrees.

"There are many studies that say it took 120 years to get to 800 million cars around the globe, and that it will take only another 30 years to double that volume," he says.

"If that is true, the best is still ahead of us."

Even Fritz Henderson, chief operating officer of loss-making GM, is optimistic.

"We certainly still think the long-term prospects are very attractive," he says.

Adds BMW's Mr Robertson: "This industry is very resilient. This industry has seen difficult times before.

"The change has occurred unbelievably quickly. What was seen as a one way track - 'you'd better get in quick' - has gone down," he observes.

"But we need to keep reminding ourselves that things can turn quickly once again."

New markets

Hence, rather than shrink, the global car industry is still expected to grow dramatically in the long-run - though this is unlikely to happen in an orderly fashion.
In the future, the strongest sales growth is unlikely to come in the US and Europe, where manufacturing is currently strong. Instead sales growth will come from the Middle East, Russia, China and India.

"Our basic philosophy is to manufacture where demand is and the major demand now is in emerging markets," says Toyota's Mr Kinoshita.

Hence, although the future may be bright for the car industry at large, it looks gloomier for those working in factories, for suppliers or in dealerships in the US and Western Europe.

Here, job cuts may well pick up pace and temporary closures of factories may become permanent.

In turn, some companies - and certainly some brands owned by large automotive groups - may fail and disappear during the downturn, with others being acquired by rivals.

But this, says Mr Zetsche, should not boost anyone's overall market power.

"Even though there might be more consolidation, and potentially even the demise of one or two companies of today, those will be replaced by new players from China and India," he says.

And in a decade or two, he predicts, there will be a "a relatively similar automotive landscape to today's".

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