DOC

Anthony Black paperdoc - 400 Bad Request

By Greg Franklin,2014-06-16 22:57
14 views 0
Anthony Black paperdoc - 400 Bad Request ...

    Revised 24 June 2009

The economic crisis, competition and the auto Industry: A view

    from the south

    Paper presented at the Pre-ICN Competition and Development Forum

    Zurich, June 2009

    Anthony Black

    School of Economics, University of Cape Town

    anthony.black@uct.ac.za

    1

Revised 24 June 2009

Introduction

    “By the time we finish with this in the next 24 months, as far as mass

    producers are concerned, we’re going to end up with one American house;

    one German of size; one FrenchJapanese, maybe with an extension in the

    US; one in Japan (Toyota), one in China and one potential European player”.

    Sergio Marchionne, Chief Executive, Fiat

    “What the US is doing right now is highly problematic in terms of

    competition. One day we in Europe will wake up with a big headache

    because of it…….Under normal circumstances we would heavily attack

    what they are doing as competitive distortions. If Daimler for instance had

    received anywhere near the amount of money General Motors is getting

    1we would have a car war in Europe and overseas”

    Hans-Peter Keitel, head of Germany’s BDI industry federation

    The onset of the very sharp downturn in the world economy is having a number of effects which

    have major implications for competition in the global automotive industry. The first is a

    reconfiguration in the structure of the industry as major firms get taken over or broken up. A key

    question is whether this will lead to greater consolidation in already concentrated industry or to the

    emergence of new players, which are able to establish critical mass by taking over the assets of ailing

    western firms. The second arises out of the response of governments as they scramble to respond

    the threat of major bankruptcies and plant closures with sectoral initiatives to ameliorate the worst

    impacts of deepening recession. The concern is that these subsidies will distort competition and lead

    to countervailing measures by other countries.

    After the financial sector itself, the auto industry has been next in line for government assistance in

    nearly all countries where vehicle production is significant. Very substantial support has been made

    available to prop up ailing automotive firms particularly in the advanced countries. According to a

    1 German industry chief hits out at US stimulus (Financial Times, 31 March 2009).

    2

Revised 24 June 2009

Financial Times report this now exceeds $100 billion, “in nominal terms the biggest ever short term

    2intervention in manufacturing”.

    Government support to sectors or to individual firms, raises complex questions. Failures of major financial firms can be potentially catastrophic effects in terms of the restriction of credit and knock on effects. These external impacts make for a strong theoretical and practical case for intervention. Given that a collapsing auto industry does not pose the same level of systemic risk, one could ask why bailing out the auto industry has been so high on the agenda of governments in the US and other countries.

    There are a number of reasons that the automotive industry has been so prominent. Firstly, the industry and its major firms are very large (and visible); secondly, the sector is highly cyclical in that a severe recession is magnified in this durable goods sector. Third, the workforce and the firms themselves tend to be highly organised; fourth, production tends to be regionally concentrated; fifth, the sector in many countries has a long history of state support, probably greater than any other sector outside of those which are traditionally run by governments or with very strong government regulation, such as telecommunications. Finally, there are important structural considerations as well. Production is shifting to middle and lower income countries and technology changes and environmental concerns have added to the instability which was evident before the onset of the recent crisis. Global recession has come, therefore, at a time when the auto industry in the world’s

    traditional production locations was in any event entering a long period of wrenching adjustment. The external costs of a major failure may not be as devastating as in the financial sector but they are nevertheless high and would impact on suppliers, dealers, employees and lenders. The effects would tend to be particularly severe in certain regions. In addition, of course there would be a huge impact on business confidence. Efficient and viable suppliers may fail as a direct result of the closure of a major firm or assembly plant. There would also be winners because plant closures or the bankruptcy of a particular firm improves sales prospects for competitor firms and their respective supply chains. Depressed market conditions and stressed firms also create opportunities for competitors to buy up cheap capacity. Major new players may emerge from the debris, a recent example being Magna International, the Canadian car parts maker, which has together with a Russian bank taken control of Opel.

2 See “Back on the road” (Financial Times, 18 June 2009).

    3

Revised 24 June 2009

International developments: the depression in the auto industry

    There is no doubt that the global automotive industry has been hit very hard by the financial crisis.

    This is clearly visible in terms of light vehicle production which will fall below 60 million units this

    year, a 14.3 % decline on the 2007 peak (Figure 1). But the declines in some countries have been

    much more severe. In the US sales have fallen from a peak of 16 million to 10 million units. The

    impact at the global level has to some degree been cushioned by continuing growth in the more

    dynamic developing countries most notably China and India, where sales have continued to grow

    albeit at a much lower rate.

    Even under the previous buoyant market conditions, there was over capacity in the global industry

    and some major firms, notably the US Big Three, were either making large losses or operating at very

    low levels of profitability (Table 1). The level of over capacity has now dramatically increased to in

    3excess of 30 million vehicles this year. Figure 1

    Global light vehicle production:

    1998 to 2007 actual & 2008 to 2012 projected

    90

    82.781.580.2

    77.080

    71.769.27066.265.564.863.061.059.3Units (Million)57.96056.255.654.254.151.6

    50

    '98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15

     Year

    OICA (1998-2007)PwC (2008-2015)Source: Barnes and Hartogh (2009)

Table 1: Global vehicle assembler net profitability levels, expressed as a % of sales

3 This is a PwC estimate. See “Back on the road” (Financial Times, 18 June 2009).

    4

Revised 24 June 2009

    Company 2005 2006 2007 2008 Toyota 6.31% 6.52% 6.86% 6.53% General Motors 1.45% (5.49%) (0.95%) (21.38%) Ford 2.03% 1.14% (7.88%) (1.58%) Volkswagen 0.81% 1.18% 2.62% 3.78% DaimlerChrysler 1.74% 1.65% 2.13% Daimler 4.01% Honda 5.62% 6.03% 5.29% 5.00% Nissan 5.97% 5.50% 4.41% 4.45% Peugeot 3.06% 1.76% 0.12% 1.36% Fiat (3.40%) 3.05% 2.22% 3.51% BMW 5.01% 4.80% 5.81% 5.59% Hyundai 3.09% 3.91% 1.95% 2.30% Renault 8.89% 8.14% 7.09% 6.72% Mazda 1.70% 2.29% 2.27% 2.64% Suzuki 2.56% 2.40% 2.37% 2.29% Mitsubishi (22.37%) (4.35%) 0.40% 1.29% Source: Barnes and Hartogh (2009)

The contraction in world trade has been even more severe. Total world trade is set to decline very

    4sharply this year, by 9% according to a recent WTO estimate. This is the first decline since 1982. In the automotive industry, trade will fall by over 20% in 2009.

    But the crisis has exacerbated a potentially even more serious adjustment issue facing the traditional

    production centres of the automotive industry. Until 2008, the boom in the global industry had

    partially obscured the major shift taking place in the share of global production away from the US,

    Western Europe and Japan. Although global production grew rapidly from 2001 to 2007, nearly all of

    this expansion took place in emerging markets. There was very little growth in the traditional

    production centres of North America, Western Europe and Japan (Figure 2). In the US, for instance,

    employment in vehicle manufacturing is in long term decline and is not only a function of the current

    slump. By September 2008 employment had fallen by 30% to 857,000 from 1,201,000 in 2001

    (Cooney, 2008:16). Some have argued that major new car plants will not be built in Western Europe

    5because production costs are now too high.

4 See “Nuts and bolts come apart” (The Economist, 28 March 2009)

    5 See “Peugeot packs its bags” (The Economist, 22 April 2006). This view was supported by interviews with

    industry analysts in the UK (June 2006, with senior staff in the Verband der Automobilindustrie in February,

    2007 and Garel Rhys of Cardiff Business School in May 2007.

    5

Revised 24 June 2009

Figure 2

    Major automotive markets and their % production growth 2001 to 2007

    3520012002200330

    20042005200625

    202007

    15

    10% Change5

    0NorthEUJapanAsia-SouthEast &EUAfricaAmericaOceaniaAmericaCentralAccession-5EuropeStates

    -10

    -15

    Region

Source: Barnes and Hartogh (2009)

The South African industry

    The South African industry has not been immune to these pressures. Domestic sales, exports and

    employment have fallen rapidly. Domestic vehicle sales in the last quarter of 2008 were nearly 30%

    below the last quarter of 2007. Exports of motor vehicles are expected to decline this year by 36%

    6from last year’s record of 284,000 units. To date there have been no assembly plant closures and

    the fall in employment has been cushioned by short time working. While there have been only been

    a handful of plant closures in the component sector, employment fell from 81,000 in October last

    year to 64,000 in February this year. Since then the position has stabilised but unless production

    recovers the fear is that further major retrenchments will be inevitable.

    Figure 3

6 NAAMSA Quarterly Review of Business Conditions, March 2009

    6

Revised 24 June 2009

    Total South African vehicles sales: 1995 to 2008 actual

    & 2009 projection

    800,000

    700,000

    600,000

    500,000

    400,000Units

    300,000

    200,000

    100,000

    0

    199519961997199819992000200120022003200420052006200720082009*

    Year

    PassengerLCVMed. & Heavy

    Source: Barnes and Hartogh (2009)

The response of governments

    The global slowdown has heightened concerns of growing protectionism in the global economy.

    According to the World Bank, despite pledges by G20 members to avoid protectionism, 17 out of 20

    have introduced no less than 47 measures which limit trade at the expense of other countries

    Gamberoni and Newfarmer (2009). The Bank has identified 57 varieties of protectionism in

    operation across all sectors and countries. A striking difference with past practice is that higher

    tariffs have been much less used, at least in the developed world, where support has been in the

    form of subsidies and other support packages. In developing countries, trade barriers have been

    much more frequently used. Of 35 trade restricting measures implemented by developing countries,

    69% involved import duties, import bans or non-tariff border measures.

    As mentioned above, the automotive industry has been particularly hard hit leading to large scale

    job losses and a severe deterioration in the financial position of some of the world’s largest

    automotive firms. Governments have reacted by pledging large amounts to support the industry.

    According to a World Bank publication released in early 2009, actual or proposed subsidies to the

    auto industry amounted to $48 billion (Gamberoni and Newfarmer; 2009:1). The Financial Times

    7

Revised 24 June 2009

    7recently reported that this had grown to over $100 billion. In the developed world, apart from the

    US; countries which are providing support in one form or another include France, Germany, Sweden,

    the UK, Spain, Australia, Italy, Portugal and Korea (Table 2). These support measures have come in

    the form of subsidies, procurement provisions, licensing requirements, import bans and anti-

    dumping and market support measures. Subsidies have taken the form of cheap loans and loan

    guarantees as well as direct transfers to firms. Of particular significance is the support to the

    troubled US firms as well as loan guarantees to assist in the possible sale of the firm or certain

    divisions.

    Table 2: Automotive support measures

    Country Forms of support Level of support Source(s) United States Direct subsidy to three national companies $60 billion Gamberoni and

    Scrapping scheme under discussion Newfarmer (2009);

    Financial Times Canada Plan to support subsidiaries of Detroit’s Big $2.5 billion Detroit News

    Three

    France Support for PeugeotCitroen, Renault and other $8.2 billion Business Day

    auto firms.

    Germany Loan guarantees for Opel $5 billion Financial Times

    Scrapping scheme

    United Kingdom Scrapping scheme $4 billion Financial Times Spain Auto industry support as part of larger package $1 billion Detroit News Russia Part of state aid package to be used for auto Over $1billion Detroit News; Financial

    industry with support mainly going to Avtovaz, Times

    the largest car maker which is 25% owned by

    Renault.

    Has raised tariffs on autos

    China Tax cuts on cars NA Business Report

    Subsidies for rural purchases of light trucks and $730 million

    motor cycles

    Argentina Non automatic licensing requirements on auto NA Gamberoni and

    parts Newfarmer(2009) Brazil Package to fund banks to boost amount of $3.5 billion Various

    credit available for car loans

    Sweden Aid for Saab and Volvo NA Detroit News Australia Support for car dealers NA Gamberoni and

    Newfarmer(2009) Korea Support for component suppliers NA Gamberoni and

    Newfarmer(2009) Portugal Support for component suppliers NA Gamberoni and

    Newfarmer (2009) Serbia Low interest loans for buyers of locally built NA Financial Times, 24 April

    vehicles 2009 South Africa Concessionary lending via state industrial bank NA Various

A number of developing countries including China, India, Argentina, Brazil and Russia have

    announced automotive support measures. In China, where the market is expected to grow by 5-10%

    this year, the state has sought to boost domestic demand by providing nationwide tax cuts on

7 “Back on the road” (Financial Times, 18 June 2009).

    8

Revised 24 June 2009

consumer durables including vehicles as well as direct subsidies for rural purchases of light trucks

    8and motor cycles. Even tiny producer countries like Serbia have joined this bandwagon. Its ?1.3

    9billion rescue package includes low interest bank loans for buyers of the locally built Punto.

    But developing countries simply lack the funds for large scale support and in any event funding large,

    foreign owned firms is hardly an attractive proposition.

    So where does this leave South Africa? Both domestic sales and exports have fallen dramatically with

    associated job losses. The Department of Trade and Industry established a Task Team late last year

    and there has been much talk of support measures but little concrete so far. National Treasury

    remains wary. The prospect of an automotive industry bail out was strongly opposed in March by

    the then Finance Minister, Trevor Manuel, who referred to it as a “lottery where those with the

    loudest voices receive the most money.” Since the election in April, the likelihood of sectoral support

    has increased given that the new economic leadership is more disposed to industrial policy measures.

    Political pressures for maintaining high levels of support for the industry have been apparent for

    some time. South Africa’s automotive industry already receives a high level of support via the Motor Industry Development Programme MIDP), which will continue albeit at slightly lower levels under

    the Automotive Production and Development Programme (APDP). This latter policy was announced

    in 2008 with significant last minute concessions to the industry. Slowing global markets, the financial

    pressures on major firms, and powerful industry lobbying all played a role. On the government side

    there were clear divisions between the National Treasury which favoured ongoing liberalisation

    regardless of the consequences and the Department of Trade and Industry, which reflected a

    growing wariness in the ruling party towards further trade liberalisation. It should be noted,

    however, that South Africa remains one of very few countries which is still dropping automotive

    tariffs year by year, albeit very gradually.

    It is not at all clear what government could sensibly do to boost the industry in the short term. Most

    of the damage is already done and a slow improvement in sales is likely in the second half of this

    year. Of course, the best policy is to continue to aggressively cut interest rates and stimulate

    economy wide domestic demand through countercyclical government expenditure, for example, in

    infrastructure. If the availability of credit to firms and car buyers has become a problem, then action

    to restore normal market conditions is essential. As is the case in many other countries, firms in the

8 ‘Chinese subsidies to lift vehicle demand’ (Business Report, 17 March 2009)

    9 ‘Serbia’s motor city shifts into overdrive after deal with Fiat (Financial Times, 24 April 2009)

    9

Revised 24 June 2009

    auto sector have become tainted by association and it has become extremely difficult to access credit even for normal business operations.

    What is on offer is short term assistance to all sectors by the state owned Industrial Development Corporation. This support, correctly, is being made available to firms affected by facing problems as a result of cyclical weakness in the economy rather than which have more deep seated structural

    problems. The interest rates are not low but it does mean that credit is available to ‘viable’ firms.

    The local subsidiaries of multinational vehicle producers are among the potential beneficiaries. Demand stimulation via the reduction in purchase taxes has also been considered but is unlikely to be adopted on two grounds. First, the Treasury, which already holds the view that support to the automotive industry is overly generous, is unlikely to acquiesce and, secondly, there is a sense in the industry that this measure would simply bring forward sales rather than generating new sales - deferring the pain to when the measures ended.

    Given that South Africa’s automotive tariffs are well below WTO bound levels, it is perhaps

    surprising that higher tariffs are not being pursued with more vigour by producers. This step is not supported by the National Association of Automobile Manufacturers of South Africa (NAAMSA) because of worries of retaliation by the EU with whom South Africa currently has a free trade agreement. The asymmetric terms of the agreement which allow for duty free access to the EU while maintaining some domestic protection are fairly favourable to South Africa. Higher tariffs would certainly meet resistance from European importers and would threaten the terms of the agreement. One protectionist measure which is on the agenda is procurement policy which would require state entities to favour locally produced products. This is permissible under WTO rules for designated sectors which are suffering difficulties. The auto sector certainly falls into this category. The National Union of Metalworkers (NUMSA), which is now part of the task team favours much higher tariffs. They have recommended that tariffs be raised to 80%, citing the case of Thailand as example which should be followed. But given the industry concerns regarding retaliation mentioned above such views are unlikely to prevail. NUMSA has also argued for assistance to be tied to employment guarantees, a policy which would be strongly resisted by NAAMSA as well as the component federation, NAACAM.

The impacts of industry support

    10

Report this document

For any questions or suggestions please email
cust-service@docsford.com