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Anthony Black paperdoc - 400 Bad Request

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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%