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Mattel Federal Credit Union

Mattel Federal Credit Union

Automobile industry : Disruptive technologies are the need of the hour !

Automobile industry : Disruptive technologies are the need of the hour !

                                           SUNIL KEWALRAMANI                  April 28, 2009

Hearing the new, more aggressive restructuring plan offered by General Motors reminds one of the scenario for mankind jokingly foreseen by Woody Allen. “One path leads to despair and utter hopelessness. The other, to total extinction. Let us hope we have the wisdom to choose correctly.” If – and it is a big if – the plan is accepted by debtholders, they will be taking a disproportionate hit compared with other principals. Only shareholders will fare worse – although unbelievably GM’s shares soared 20 per cent.

Under the plan, the union-run healthcare trust would exchange half the cash owed to it for shares, making it a substantial shareholder in a restructured enterprise. GM’s scheme also assumes another $11.6bn in cash from the Treasury. In addition to the $15.4bn of loans received, part of this would be retired in exchange for half the carmaker’s equity. These two steps would give unions and Treasury about 89 per cent of the company, even before private debtholders are taken into account. GM envisions some $27.2bn of that debt being converted to equity, giving holders another 10 per cent of the company.

Whatever happens, shareholders will be either wiped out or nearly so. Even a minimal recovery depends on debt-holders taking a bigger financial hit than the union. Assuming unsecured lenders accept, the restructuring plan would create a much less indebted but also far smaller GM with about 40,000, or a third fewer, US workers, and four core brands with a little over half today’s number of dealerships. This makes sense, as do shedding Pontiac and plans to axe Saturn and Hummer. Someone has to pay. More government cash may be needed to avoid Chapter 11. A bankruptcy restructuring may be messier and less pleasant for dealers, workers and suppliers – but more equitable

Detroit Three have their back against the wall

The market capitalisation of General Motors is now below that of Mattel, the maker of Match-box toy cars.  Once industry leader, GM, now finds Toyota’s market value, at $ 145 Billion, now 25 times greater than GM. 

As a poor strategy, the Detroit Three focused on high-margin gas-guzzling sports-utility vehicles and pick-up trucks, which have now lost charm as oil prices have ventured, however temporarily, into unchartered territory. The Three also failed to control labour costs and have not built flexible assembly lines. As a desperate move, Ford has sold its flagship brands Jaguar and Land Rover to the TATAS.  Credit is the automobile industry’s lifeblood and today, the drying up of credit has hit carmakers’ financing arms such as General Motors’ GMAC and Ford Credit hard.   Detroit’s producers are seeking to tap into federal bail-out funds for their financial arms, alongside a $ 25 Billion low-cost credit line to retool old factories.

Germany’s Big 3 also face significant  headwinds; devise counter-strategy :

Volkswagen, Daimler and BMW have acquired a reputation for offering cars with cutting-edge technology.  They are however heavy gas-guzzlers and heavy emitters of carbon dioxide. The trio have now decided to launch electric cars, to desist demand destruction due to high oil prices impacting revenues.  Daimler plans to offer Mercedes-Benz S400 hybrid in 2009. However, the luxury sedan will be out of reach but for the more affluent.

Europe too catches the slowdown flu :

Sales in the European union HAVE fall 8.3 % compared with last year. Italy was down 20 %, Spain by 31 % and Ireland 49 %. The Italian group Fiat is to stop production at most of its domestic factories in late 2008 for 3 weeks with hundreds of workers laid off temporarily.  Renault is already cutting 6000 jobs round Europe and Peugeot is cutting fourth-quarter production by at least 20 per cent in France.

China’s automobile industry too hits a slippery path :

After stunningly rapid growth in the domestic car market—34 per cent in 2006 and 24 per cent in 2007, year-to-year passenger car sales rose an anemic 14 % in the six months to June 2008.  Possible reasons include the almost 70 % decline in Shanghai’s stock market since its peak in 2007, reducing car buyers’ disposable income. Tight government monetary policy has meant fewer purchases of high-end business vehicles.  According to auto consultancy JD Power, China “could be on the brink of a significant pause in demand growth”.  Only the government’s $ 600 Billion stimulus packaged has saved the scene in 2009, and somewhat restored in China’s automobile market. With the world economic outlook still uncertain, it may be quite some time before the third largest world economy returns to more solid growth.

Although fuel prices are subsidized in China, sometime back China did hike fuel prices to reflect market reality but this had only a marginal impact on sales : for the average consumer, it added only Rmb100 ($ 15) to monthly operating expense. This, when weighed against the Rmb150,000 average cost of mid-sized vehicle, was not termed demand-destructive in China.  Yet, faltering world economic growth is beginning to hit hard as China is essentially an export-driven economy. This, coupled with uncertainty over whether oil prices will remain at the levels they are at present, could cause some buyers of sub-compacts to defer purchases and compel consumers to look for more fuel-efficient cars.

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