The economic downturn that hit the global economy in 2008 caused huge convulsions in the automobile industry, especially in North America and Europe. Demand slumped, and many US manufacturers such as General Motors (GM) and Chrysler filed for bankruptcy and had to be rescued by the government. In Europe, the period also saw the introduction of incentive schemes for consumers to sell old cars and go in for new, more fuel-efficient ones. That led to some recovery of demand, though once the schemes were discontinued, demand again went down. Asia did relatively better, particularly China, which saw car sales zooming like never before. Eric Wallbank, auto practice leader for EMIEA (Europe, Middle-East, India and Africa) at consulting firm Ernst & Young, observed all the goings-on from close quarters. On a recent visit to India, he shared with BW’s Alokesh Bhattacharyya his thoughts on what transpired and what lies ahead for the global automobile industry. Excerpts:
Is the worst over for the global auto industry?
The underlying demand in Europe and in North America looks like it is coming back. The restoration of underlying demand was due to scrappage schemes in many countries, where you could sell cars that were 8-10 years old or more, and buy a new car. That was done partly to address the trough in demand, and partly because new cars are more fuel efficient and environmentally friendly. So, there was a temporary stimulation of many markets last year. But demand was also pulled ahead from 2010 to 2009 by scrappage schemes. Therefore, absolute sales in Western Europe will be lower this year than last year. The segment that benefited most from the scrappage schemes in Europe was small, cheap cars so, volume predictions for small, cheap cars are much lower for 2010 than in 2009.
Could that result in lower exports from Asia?
There may well be a reduction in exports to Western Europe this year. At the same time, we are seeing an increase in the types of vehicles being sourced and exported. For example, Nissan launched the Micra, a small car that will be produced in India and exported to Western Europe.
Nissan has set up a huge manufacturing capacity in India and wants to export around 55 per cent of its production. What do you think of this strategy?
It’s a bold move. Almost 85 per cent of the components of Micra will be sourced out of India. So not only do they get the benefits of lower labour costs of people who are doing the final assembly, but also the lower costs of sourcing the components. Most car companies that make small cars in Western Europe struggle to make a profit on those cars. A number of them think India is an attractive place to produce those cars. A number of other manufacturers have already put plants down in Eastern Europe.
Which companies have been hit really hard by the slowdown?
GM and Chrysler. Those two – and Ford – were losing money even before the downturn. Pretty much everybody else in the US was making profit before the downturn. So when the downturn hit, they started at a much lower position in terms of financial strength. Two of the three needed US government bailouts to help them through the downturn. Taking a much stronger position now than before the downturn is Hyundai.
GM also decided to do away with a lot of its brands…
GM needed to get out of some brands that weren’t profitable, which is what it’s doing. Some of them it has disposed of, such as Saab, which was a fairly recent acquisition. The important thing is that they now have a clear strategy. But they needed to close a plant in Europe; they have too much capacity. Financially, GM is now a stronger company. (But) what hasn’t yet happened is that they haven’t invigorated the model line. And it’s the model line that will determine whether they succeed or fail. That’s what they have got to fix.
Will GM be No. 1 again?
I’d be very surprised.
Can Toyota – after the recall – ever get back its halo of quality?
There have been other big recalls in the industry, but the issue with this one is it cuts right to the core of the Toyota brand. The perception of the brand will change. How quickly it will come back is unclear. That recall, if it had happened at any other time, nobody would have mentioned it, because there were always recalls in this industry. I think there will be greater scrutiny of Toyota, different things are being highlighted. It would be interesting to know how they will be positioned in two years’ time.
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