One of the first things you learn in the auto industry is that if you run your plant at less than 80 percent of capacity, your plant and your career are in deep trouble. If that adage holds true, then the world is in for a world of hurt.
At the moment, most automakers are believed to be running their plants at less than half capacity in an effort to reduce inventories, which have been piling up since last fall, says the Nikkei [sub]. They either get used to it; or close a lot of plants.
U.S. research firm CSM Worldwide sees worldwide automobile sales falling 12.5 percent to 53.8 million units this year. According to CSM’s report which was released today, global automobile output is expected to drop 18 percent to 53 million units in 2009, but production capacity will grow about 5 percent to 94.32 million units through past investments. Capacity utilization will plunge from around 80 percent over the past few years to 56 percent this year.
What’s worse, CSM believes that global production will not surpass the 2007 level and that the operating rate will not reach 70 percent until 2012 or later. Despite robust demand in China and other emerging economies, the U.S. and European markets are not expected to return to 2007 levels until around 2015.
Other industries are also facing excess production capacity. The operating rate of global steel mills is likely to drop to around 70 percent in 2009 from roughly 85 percent over the past few years. Operating rates at chipmaking facilities have declined considerably. According to data on thirty-two key chipmakers across the world, the operating rate for the October-December quarter was 69.3 percent, down sharply from 87.1 percent in the previous quarter. These facilities have been running at around 90 percent capacity over the past few years, and the last time the figure dipped below 70 percent was seven years ago.
Shwing.
Actually using common sense and allowing the weaker automakers worldwide to die, would actually allow the stronger ones to survive.
Weak sisters like
General Motors
Chrysler
About 1/2 of the Chinese companies now operating
Ssangyong (South Korea)
Samsung-Renault (South Korea)
FIAT group
Daimler Benz (there, I said it)
Nissan
Renault
Saab (OK it’s part of GM)
Volvo
Seat (part of Volkswagen group/Spain)
When natural market forces are “tinkered with” the end result is a build-up of forces beneath the surface, kind of like the economic equivalent of an active volcano.
Eventually, it erupts and all hell literally breaks loose.
We’ll see what happens when the socialists / communists / fascists in charge finish trying to save their cronies in all of these countries’ automaking operations, with taxpayer monies.
menno:
Don’t think so.
You’re far too pessimistic on Renault-Nissan and Fiat. And PSA. The French went as far as to nationalize Renault to save it from failing in the late 70s and 80s. The result: A lot of saved jobs and a productive industry generating and putting wealth into the French economy throughout the 90s and up until last year. So they’ll have a couple of bad years? Going under in not in option in France. So keep Renault and PSA in your forecast, pls. Renault actually is better than many, as they have strong positions in Europe, Latin America, the Middle East, Africa. Where they’re weak they have little brother Nissan to cover their ass (asia and North America). What they need to do though is probably rationalize the alliance even more (i.e. keep Nissan out of Latin America and Europe and let them concentrate on Asia and North America, and keep Renault out of Asia and NA). Samsung though I agree, it has to go.
Now on to Fiat. It has survived. It has the survival mentality. It is a car company driven by engineers. After the fiasco in the 70s and early 80s they have come back strong. So strong in fact they regularly beat VW in European reliability surveys. They’re growing again and may soon get a foothold in NA. If they don’t, they can count on Europe and emerging markets to keep them afloat (strong in Brazil, India, Russia, Eastern Europe). Not to mention the government. The Agnelli family is out. Now it’s run by pros (kinda like Billy did w/Mullaly, except it’s Marchionne now, Canadian by the way). They have a chance. Specially as the world is downsizing and you can’t beat them in knowledge of how to wring a profit out of small cars. They’re small engines are state of the art. I dunno, but I give them a fighting chance.
The governments are taking the money from the successful and giving it to the unsuccessful under the guise of to big to fail. This National Socialism is going to destroy the economy.
The stimulus packages are exactly the wrong thing as time will prove. The only way out of this is hard work. Use the German Economic Miracle as an example.
Menno,
I agree with you on all points, although I’m not sure Nissan/Renault belongs on a death list. Further M&A perhaps, but not death.
The free market is not a bad thing or a good thing… it is just the way the world works. When politicians try to intervene in the hope of gaining favour with voters, the best they can possibly do is delay the inevitable.
I don’t buy the “5-global-carmaker-by-2012” doctrine at all. I’ve heard the exact same thing 10 years ago, and nothing has happened…
Some car makers will fail, some will merge, but those will be the exceptions, and most will have to shrink.
What we’ll see is an increase of project based cooperation in order to bring the costs down. For example, BMW can work with Mercedes on one project and with PSA on another. This will bring down costs just as much as within a giant car dinosaur, but at the same time, it’s more flexible and the different brands can keep their distinct identities.
sweet muffin top!
Think of another industry where plant operating at 80% or less is a death nail. Refineries.
Sometimes even winners lose a little. It is good long term policy to help your fellow man.
That being said, I would rather give my money to Chrysler than to the Cattle industry.
tom :
March 13th, 2009 at 11:36 am
I don’t buy the “5-global-carmaker-by-2012″ doctrine at all. I’ve heard the exact same thing 10 years ago, and nothing has happened…
Had there been no bailouts, we are there today. Even with the bailouts, it will still come. Only a bit slower.
Why do companies like CSM even make these kind of forecasts? They are never right. They cannot be right. No one can reliably tell the future of something like car sales. It’s not possible.
Just look at the numbers for 2008. Did CSM predict those numbers in advance? Especially five years in advance?
Yet they still make their forecasts. And people pay them for their forecasts and discuss them (as here) as though they are meaningful. Strange.
As Warren Buffett said about stock forecasters, the only value of companies like CSM is to make fortune tellers look good.
I don’t buy the “5-global-carmaker-by-2012″ doctrine at all. I’ve heard the exact same thing 10 years ago, and nothing has happened…
I’d say that lots has happened, most notably the bursting of the credit bubble. All of a sudden carmakers must make profits today – not in 15 years when their bonds come due – and consumers must limit themselves to vehicles they can actually afford.
@ FromBrazil
The French went as far as to nationalize Renault to save it from failing in the late 70s and 80s.
French people are really crazy: they felt the need to nationalize in the 70’s or 80’s an industry the governement owned since 1944/45, when they seized it because of some (alledged ?) “collaborative work” between the nazis and Louis Renault during WW2.
Renault went back to private ownership in 1996 when the french governement partcipation in the corporation went under 50%
Edit: about the job losses: Georges Besse, Renault’s (then) CEO, got murdered by the french terrorist group Action Directe in 1986 precisely because of the massive lay-offs that he launched
@7
Can’t argue against but the again the French might be doing something right. As I read in an article in Newsweek some time ago the French vis-à-vis Americans now live longer, die less at birth, have more teeth, and might even be getting taller.
All I’m sayin’ is different strokes for different folks.
Cheers!
@ FromBrazil
To tell truth I agree with you – I also think the french won’t let their car makers go down. It was just a matter of getting history right.
Cheers ! Yeah, c’est l’heure de l’apéro (it’s 8PM here)