Car industry money scam

Sure enough, Bush offered Detroit’s big three $17.4 billion (£12 billion) in loans in December, just to get them through to the end of March, when President Obama is expected to fill ’em up at taxpayers’ expense. Car-loving Germany has advanced €2 billion (£1.8 billion) to its industry, plus a (decidedly un-green) boost to buyers who scrap their cars early.

Just last week France offered up to €6 billion in assistance for Renault and Peugeot-Citroen. Britain’s industry minister Peter Mandelson prepared loans of £2 billion for what is left of Britain’s car industry last month.In Italy Fiat group bought 35% of the Chrysler group shares but at the same time blackmailed the government threatening 60,000 joblosses if the italian government didn`t help the Turin group with public money.

“A billion here, a billion there, soon we’ll be talking about real money,” in the immortal quote attributed to Senator Everett Dirksen (1896-1969). History shows that however much taxpayers’ money is thrown at loss-making industries, their ultimate destiny is unchanged. With the US car industry alone having lost $65 billion in the last three years, the question remains, what do governments expect to achieve?

More than a fair share
Like a tantrum-prone child, car manufacture has always got more than its fair share of government attention and largesse. When big brother banking got help with problem mortgages, the screams of the car industry demanding its own sweeties got even louder.

After all this was a great opportunity. Needing “only” tens of billions, to supposedly guarantee hundreds of thousands of jobs looks less profligate that the mighty bill for saving the over-fed banks which dragged us to the edge of the abyss.

We want more
The industry wants more, much more. Carlos Ghosn, chief executive of Renault and head of the European industry association ACEA wants €40 billion to avoid the loss of as many as 200,000 jobs across Europe. “The industry faces a crisis that is brutal, global and exceptionally large. We can even talk of the Great Depression of 1929,” he told a Paris summit two weeks ago.

The history of the British car industry, half tragedy, half farce, richly illustrates the theme that government cash barely slows the power of market forces. What were seen as political imperatives at the time was with hindsight economic folly. It merely served to insulate rigidities and inefficiencies, bulwark workforce feelings of entitlement and crowd out capital and skilled labour from nascent industries.

Bad memories are made of this: British Leyland
You only have to say the words “British Leyland” to have it all come flooding back. This Frankenstein’s monster was brought to life in 1968, stitched together from almost 100 different motor companies, the living and the dead.

It devoured £3.1 billion in taxpayer subsidies (equal to £11 billion now) over two decades without ever showing signs of health. It had 40 different manufacturing plants and dozens of similar marques and models which competed with each other while undercutting economies of scale. No-one even knew which brands made money, according to Michael Edwardes, who was installed to run the behemoth in 1977.

Austin Morris, Triumph, Rover…all gone now, the game is over
Over the years management improved dramatically, but did not alter the fact of life that Britain wasn’t a big enough market to support a national volume carmaker. In March 2008 Ford sold Jaguar and Land Rover, the last mortal remains of a UK industry with a lengthy heritage, to India’s Tata Group for £700 million, having bought it for twice as much and invested £7 billion in it. The timing was great for Ford, but not so for Tata, which is now left holding the baby as demand plunges.

The trouble is that the automotive industry has been financially irresponsible for decades. It has long been obvious that producing 20% more vehicles than the market can absorb even during the good years, that it was going to come a cropper when demand really turned down.

With an annual return on sales of 2%, compared with the 7% that is actually needed for long-term health, there was always going to be a problem. Global car output, as estimated by PwC, was 68.9 million in 2007, fell to 66.2 million last year and is destined to drop to 59.3 million in 2009. It won’t nearly be enough to clear the backlog of unsold vehicles.

Plunging sales
In a typical year US car sales would run at 16 million to 17 million, but are now running at around 10 million a year. This matches the lows of recession-hit 1982, when the US population was also tens of millions lower than it is today.

Cars are more reliable that they used to be, and consumers want to hang on to them for longer. That isn’t surprising when we realise that depreciation, which materialises alarmingly on trade-in, is still the biggest cost of motoring.

In the US, the average age of cars at trade in was five years and two months at the end of 2006. Now it is six years and three months. Add in the difficulties of getting credit and no wonder sales are down.

Car Wars: The Emperor strikes back
In Asia things are a little different. Sales are weak too, and many carmakers are loss-making. Japan does not directly subsidise its car industry, but detractors in Detroit claim that the “artificially low” yen adds up to a $4,000 per vehicle subsidy on each one imported into the US.

They don’t mention, but perhaps should, that the very low interest rates which help keep the yen so low are themselves a source of very cheap capital which western carmakers cannot match.

The real issue here, and the main reason that so many governments have stumped up so much cash is a beggar-my-neighbour policy of trade subsidies. “Europe cannot just look on if someone offers subsidies and market forces are dispensed with,” German Chancellor Angela Merkel said of American subsidies in a recent radio interview.

“The future of the auto industry cannot, in the long run, rely on a state subsidy,” she added. If only she heeded those words.

Why no fuss about other job losses?
While millions of jobs have been “offshored” in western banking, insurance and (very quietly) in software in the last decade, it is the travails of the car industry that still tugs at the heart and purse strings of politicians.

Günther Oettinger, premier of the German state of Baden Württemburg, readily helped with a state bail-out of debt-ridden auto component-maker Schaeffler, even though it was owned by a billionaire family, the Financial Times reported.

Earlier he had refused the same help to Merckle, a cement and pharmaceutical firm which had got into difficulties because of the banking crisis.

As both Gutierrez and Merkel both acknowledge, subsidising industries postpones needed adjustments, is unsustainable, and leads to me-too demands.

Naked greed?
Sure enough, America’s pornography industry, which has apparently seen a 20% fall in sales in the last year, in January asked for a $5 billion government subsidy.

Morals aside, it has better prospects than Detroit. It has a dominant global market share, a fabulous export record and was a pioneer of many internet payment technologies which are now widely used.

As Joe Francis, chief executive of Girls Gone Wild, told CNN: “It’s not that we are under the impression that the porn industry needs a bailout but we thought that we would get in line with everyone else.”


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