Bleeding to death

Industry executives have warned president elect Barack Obama that up to three million jobs could be lost unless the Big Three — General Motors, Ford and Chrysler — are bailed out with fresh loans of up to $50-billion.

The US industry is bleeding to death. It is haemorrhaging sales, cash and jobs. With sales at a 25-year low, GM and Chrysler could run out of cash within months. If the Big Three “simply” halved output, 2,5-million jobs would be lost and government coffers would lose $100-billion over three years, analysts said this week.

GM shares dropped on Monday to their lowest in 60 years. The company, announced last week it would shed 3 600 jobs and on Monday said a further 1 900 would go.

The cuts come on top of US unemployment figures released this month that were the worst for 14 years.

The impact of the credit crunch and demise of consumer confidence is so marked that the new leader’s traditionally critical 100 days began on election night, rather than starting from Obama’s inauguration on January 20.

The first African-American president of the US, burdened with excessive expectations that he can solve the global financial crisis, has to decide whether to raid the $700-billion troubled asset relief programme (Tarp) set aside for banks and insurers to rescue Detroit.

But the American industry is not alone. No carmaker — European, Japanese or Asian — is immune to the contagion of frozen credit. Toyota, the world’s biggest and most profitable auto group, reported this week a 69% plunge in second-quarter earnings and warned that its full-year profits were on course for their biggest fall in 13 years.

In Europe BMW — the world’s leading premium carmaker– scrapped its target of reaching a new sales record this year after October deliveries fell 8%. Daimler, which owns Mercedes, said global sales had dropped 18%. The German industry expects exports this year to be at their lowest for five years.

Anticipating an even worse market in 2009, with sales at their lowest for more than a decade, European carmakers such as Peugeot-Citroen are shutting down plants and preparing to axe thousands of jobs. Only Volkswagen, now the world’s third-largest group by sales, is sticking to its targets of surpassing last year’s historic highs for sales and profits in 2008. But even it is wary of promising a repeat in 2009. And Porsche, the ultra-profitable sports carmaker, is expected this month to give a bleak outlook for next year.

In Britain, where sales last month fell by the greatest amount in 17 years, the industry reckons that output will fall below two million in 2009. There is a glimmer of hope that the pound’s fall against the dollar will help exports. But Jaguar Land Rover, owned by India’s Tata, is introducing short-time working hours and seeking 600 voluntary redundancies. Others, including GM’s Vauxhall, BMW, Nissan and Honda, are curbing production through short-time working hours or temporary shutdowns of plants.

The UK’s 1,5% cut in interest rates was welcomed by the industry but, as Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders, points out, the issue is whether the Bank of England’s decision is reflected in rates charged to consumers.

Eric Wallbank, UK head of automotive at accountants Ernst & Young, said: “As the UK economy contracts and both corporate and consumer confidence weakens further, the effects will be felt on the forecourts of car dealerships and on the factory floors of vehicle manufacturers and suppliers.”

There are two main reasons for the global industry to be in such dire straits. First the myth that emerging economies could be “decoupled” from the downturn in the developed world has exploded. US and European carmakers that flocked to the “Bric” countries — Brazil, Russia, India and China — to offset problems at home know that at first hand.

Sales in Russia, where GM opened its first wholly owned, $300-million plant in St Petersburg, have this year halved from 2007 as banks kept afloat by state loans stop lending to consumers. Russia was due to leapfrog Germany and become Europe’s biggest car market next year. Undaunted, Carl-Peter Forster, head of GM Europe, said that Russia would still be its biggest European market in 2009.

China’s once overheated market, growing at 25% a year, has now slowed to a crawl as consumer confidence follows stock and property markets into freefall. Growth will be, at best, below 10% this year and probably flat next year. Sales in neighbouring Vietnam plunged 37% in October.

A second reason for the global crisis is that, as credit has frozen, consumers are no longer as tempted to pay more for the smaller, more fuel-efficient models built by the Europeans and Japanese and, belatedly, being developed by Detroit’s Big Three with the help of the first $25-billion “soft” federal government loan package.

Sales in France, kept up by the government’s “bonus/malus” scheme that cuts the cost of “green” cars and raises that of gas-guzzlers, have begun to plummet.

The German government, as part of its overall €50-billion economic stimulus package, is offering licence-free holidays to boost demand. But the European industry, already lobbying to relax tough new EU carbon emissions limits, now wants a more comprehensive package: a €40-billion bail-out.

A year ago, in Detroit, Obama assailed the US industry for failing to meet global demand for fuel-efficient cars. “The need to drastically change our energy policy is no longer a debatable proposition,” he said. “It’s not a question of whether, but how; not a question of if, but when.”

As the Big Three reported billions of dollars of losses, the immediate question facing the man whose rallying call to the nation on election night was “Yes, we can” was: “Will you put that long-term perspective to one side and save us now?”–

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